We own the inventory and have it on our books. Each time a part sells we relive the inventory through COGS and replenish that part from the sale proceeds, effectively tuning the inventory six times a year while keeping the balance stable. (Approx $5MM) .
If we acquire inventory to support an outsourced supply chain contract using a capital lease, do we need to recognize depreciation on the inventory like we would if the asset was a machine
Answers
Treat the inventory as you would any inventory that you hold. Based on your replenishments, you can make entries to charge this to COGS. I would attempt to never depreciate inventory
I'm not sure how you acquired inventory through a capital lease in the first place, but inventory is inventory and fixed assets are fixed assets and ne'er the twain shall meet.
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How would a company convey title to what they sold, if it were leased?
For that reason, I agree with Damon, that it would be quite impossible to find a lessor (but never say totally impossible, stranger things can happen).
It sounds like you're borrowing money via a "lease" and using it to buy inventory. They should each be treated accordingly. Borrowing is liability and inventory is a current asset (in most cases).
Forget why you acquired the inventory. The capital lease has no role in the treatment of the inventory. Depreciation, Impairment, Depletion are not used for inventory...so that's out. However, you do have the option when the value of your inventory falls below market value to make an adjustment, i.e. Lower of Cost or Market (LCM). This can be performed by either a write down to ending inventory or record adjustment to market in a contra asset account. But if you are turning your inventory six times a year, marking it down does not seem logical, as it is not sitting.
Sorry, I am very confused with the question.
The "lease" rules, capital or otherwise, do not apply to inventory. You have an installment purchase agreement, which may or may not be non-cancellable [take or pay], Record inventory as you would if acquired under any other arrangement.
Regardless of the form of the deal, proper
For a simple example: Capital lease on a medical lab chemical analyzer has a monthly payment of say 11,000, after asking the lessor to value the cost of the supplies included in the deal, 9,200 per month is related to lab supplies, 1,800 is related to the value of the capital lease obligation liability. Therefore the chemical analyzer asset will be determined using the 1,800 portion of the lease payment. The 9200 is free standing expense.
For the part of your deal that is related to the acquisition of Inventory, you will have to work with the deal maker and determine the cost stream for inventory amounts and this amount will land outside the capital lease asset value.
It is best to obtain written documentation from the deal maker or capital lessor that itemizes all the values. This way, you will have less to substantiate for the IRS when it comes knocking.
Multiple element deals are fun. After you carve out all the elements you might find you are sitting on an operating lease for your facility after all.
Best.
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