Let me start by disclosing two things:
- I am not an accountant by trade and have little-to-none formal training; thus, my apologies for any incorrect terminology; and
- The described scenario will require a certain "suspension of disbelief." However, it is a representation (not literal) of an arrangement, accounting for which has raised questions for me.
So, here goes the scenario:
Company A is entering the cash-delivery (a.k.a. armored-truck) business for three years. Unaffiliated Company B is willing to get Company A going by selling it start-up assets: an armored truck (valued at $20,000) and a certain amount of cash ($80,000). Company A is not putting up any cash, and finances the $100,000 asset purchase via a note payable to Company B. The note matures in three years. Upon maturity, the whole principal of $100,000 is due. However, if Company A returns the armored truck to Company B in a functioning condition, then the cash amount of the principal due on the note is discounted to $80,000.
I am looking at this strictly from the Company A's perspective. The basics seem straightforward: there is a cash asset of $80,000 and a non-cash asset (truck) recorded at $20,000; on the liability side, there is a note payable in the amount of $100,000. However, what -- if anything -- needs to be recorded to reflect the "return-the-truck" arrangement? The truck will be depreciated over three years -- and then "magically" be worth the original $20,000 at the end of the term in the form of a discount on the $100,000 note. What is the correct interpretation of this arrangement? A forward contract for the sale of the truck? But the truck doesn't have be "sold" back -- it just makes economic sense to do so. A hedge? But the truck is not a financial asset and the arrangement does not fall under the definition of a derivative.
Am I completely overthinking this and Company A should just disregard the "return-the-truck" arrangement in its financials (at least in the numbers)? Just depreciate the truck and book a gain on the sale when exercising the condition of the discount on the note?