204: Lease Purchase

Property Management Policy & Procedure Manual
Section 200: Equipment Acquisition
Effective: 07/01/1996
Revised: 05/22/2006

Purpose

To allow the purchase of lease/purchase equipment.

Background Information

Lease-Purchases may be desirable to extend the payout of capital Purchases over time instead of lump sum purchasing. However, lease-purchases are avoided because of the additional costs incurred in the form of interest.

Definition

A lease/purchase or capital lease has at least one of the following characteristics:

  1. Ownership of the property passes to OSU at the end of the lease;
  2. The lease contains a lease/purchase option;
  3. The lease lasts for 75 percent or more of the useful life of the equipment;
  4. The total of all lease payments (excluding insurance and maintenance costs) is greater than or equal to 90 percent of the fair market value of the equipment.

Policy

Lease/purchase equipment may be purchased using installment payments over a period of five years or less. Lease/purchase agreements must be approved by the OSU Contracts Office. Lease/purchase equipment is "conditionally owned" (title code CI) until the final payment is made and the department exercises the option to purchase.

When the final payment is made, the department notifies Property Management. The inventory record is then corrected to show "purchase" rather than "lease purchase" for the acquisition method, and the title code is corrected to SI. If the option to buy is not executed, the asset is returned to the vendor and a PDR should be submitted to remove it from inventory

Acquisitions Involving Federal Funds
If federal funds are involved in the acquisition of equipment for lease/purchase, the principal investigator must first determine that the source of funding allows for leasing.

Procedure

Lease Purchases (General)

Responsible Party Action
Department
  1. Complete and submit a requisition for the proposed lease purchase of equipment to Purchasing.
Purchasing
  1. Ensure requisition is properly completed.
  2. Solicit bids or quotes on the item from vendors.
  3. Send a copy of the signed leased agreement to Business Affairs.
  4. Initiate purchase order in FIS Banner.
Department
  1. Department receives equipment and invoice.
  2. Process FIS Banner invoice:
  1. Code the initial payment as 40101 to initiate the inventory record, exclusive of any interest.
  2. Add text: (1) providing the inventory information for the creation of the asset record, and (2) noting the market value of the purchased asset.
  3. Code the subsequent payments as 40113: Installment-Purchase, with the interest portion coded 28810: Interest Expense.
  4. Each payment should reference the inventory number assigned to the asset, either on the description line or in the text field (e.g., Monthly payment on copier, FA#315062.)
  1. After final payment is made, the department notifies Property Management and Business Affairs.
Property Management
  1. Correct the inventory record to reflect, "purchase" rather than "lease purchase" for the acquisition method, and the title code is changed from CI to SI. If the option to buy is not executed, the asset is returned to the vendor and a PDR should be submitted to remove it from inventory.

Lease Purchases (Service Centers and Auxiliary)

Responsible Party Action
Department
  1. Complete and submit a requisition for the proposed installment purchase of equipment to PaCS.
Purchasing Department
  1. Ensure requisition is properly completed.
  2. Solicit bids or quotes on the item from vendors.
  3. Send a copy of the signed leased agreement to Business Affairs.
  4. Initiate purchase order in FIS Banner using operating index and account code 40199 for the asset and 28810 for the interest expense.
Department
  1. Department receives equipment and invoice.
  2. <!--[endif]--> Process FIS Banner invoice for initial payment using operating index and account code 40199 for asset portion and 28810 for interest. Then liquidate balance of PO.
  3. <!--[endif]--> Simultaneously process a FIS Banner Journal Voucher to book the asset and the liability incurred:
  • Debit A8011 for the full value of the asset,
  • Credit operating index and account code 40199 for portion paid on initial invoice,
  • Credit B2102 for the balance of the principal,
  • Add appropriate text (See PRO-Ex2: Completing a Journal Voucher)

Example: PO processed for $20,000 asset paid over 24 months with 5% interest. Total PO equals $21,000.

Initial invoice pays:
Index/40199 $833.33
Index/28810 41.67

Journal voucher is processed:
Dr: Fund/A8011 $20,000.00
Cr: Index/40199 833.33
Cr: Fund/B2102 19,166.67
  1. Process remaining payments to vendor (to reduce liability) on department fund and account code B2102. Interest expense should be processed against unit's index and account code 28810. Each payment should reference the inventory number assigned to the asset, either on the description line or in the text field (e.g. Monthly payment on copier, FA#315062.)
  2. 10. After final payment is made, notifies Property Management and Business Affairs whether or not equipment will be retained or returned to vendor.
Property Management
  1. Correct the inventory record to reflect, "purchase" rather than "lease purchase" for the acquisition method, and the title code is changed from CI to SI. If the option to buy is not executed, the asset is returned to the vendor and a PDR should be submitted to remove it from inventory.

Cross Reference

For information on buying or leasing capital equipment, see the Procurement and Contract Services (PaCS) Website.