UNIVERSITY OF MISSISSIPPI MEDICAL CENTER. Office of the Comptroller. Lease Purchase Procedures. Table of Contents 1.0 PURPOSE SCOPE...

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1 UNIVERSITY OF MISSISSIPPI MEDICAL CENTER Office of the Comptroller Lease Purchase Procedures Table of Contents 1.0 PURPOSE SCOPE WHO SHOULD KNOW THIS POLICY CONTACTS STANDARDS AND PROCEDURES Installment Leases (Lease Purchase) Request Review Funding Bank Statement Accounting Journal entries Lease file UMA Lease file update Operational Leases (Building Rent) Posting to LEA LEA02 Report HISTORY OF REVISIONS 3 Page 1 of 6

2 1.0 PURPOSE The purpose of these procedures is to establish guidelines for the proper recording of leases in the UMC accounting system. 2.0 SCOPE These procedures pertain only to installment and operational leases (rentals). 3.0 WHO SHOULD KNOW THIS POLICY All accounting personnel who are involved in the process of recording leases in the accounting system should be aware of these procedures. 4.0 CONTACTS Any questions about these procedures should be directed to the following personnel: Ruth (Ann) Jones Manager, Accounting Phone: (601) Fax: (601) STANDARDS AND PROCEDURES 5.1 Installment Lease (Lease Purchase) The State Institutions of Higher Learning and Carlyle Capital Markets work together to provide bonds to the University of Mississippi Medical Center (UMC). The bonds maybe used for the purchase of capital equipment via a lease purchase agreement Request The following procedures are to be followed when requesting the purchase of equipment through a capital lease arrangement: The department should prepare a requisition in accordance with purchasing guidelines. Note on the requisition capital lease purchase. Route for appropriate approvals including the records manager. The budget office will give final approval for a lease purchase. The records manager will work with the purchasing department to insure the correct process is followed in issuing a master order for a lease purchase. Lease purchase orders are issued with an L prefix. Page 2 of 6

3 5.1.2 Review The following should be reviewed before further processing of a lease purchase order: The records manager will review the requisition to insure only equipment and allowable costs are on the order. Maintenance and training should not be included in the request for a lease purchase. When funding is requested, the finance company requires a questionnaire be completed and included in the package. When the records manager is made aware of the request for a lease purchase, the questionnaire will be forwarded to the appropriate departmental person for completion Funding Once the purchase orders are issued, the following steps should be followed for funding: The request for funding is sent to the finance company. The finance company will give a cutoff date and take the bond to market. The purchase is funded for 60 months or the useful life of the equipment, whichever is less. If the bonds are issued before the equipment has been received, the records manager will prepare a payment request for IHL to release payment to the vendor. The payment will be issued through the trustee bank designated in the contract. If the bonds are issued after the equipment has been received, the records manager will pay the vendor and request the finance company reimburse UMC. The payments will be charged to the accounts receivable account designated for lease purchases. These entries should be reversed when UMC is reimbursed Bank Statement The monthly bank statement is reconciled and kept on file three years after the audit period of the last payment on the lease Accounting The purchase order is issued on a master lease to Carlyle Capital Markets. The first release is to the supplying vendor. Each fiscal year a new release is issued and encumbered against departmental funds for the payment of the lease purchase. The principal is encumbered on the departmental account with a 695 object code and the interest is encumbered to a 506 object code. The records manager will process monthly payments for the lease purchase charging the expenditure to account 77922, and to object codes 695 and 506. A copy of the purchase order and amortization schedule from Carlyle is sent to Property Accounting for adding to the UMC property inventory for depreciation purposes. Page 3 of 6

4 5.1.6 Journal entries Journal entries are entered to capitalize each lease for the principal amount as follows: Account Debit Credit (assets under capital lease) XXXX(principal amt) (obligation under capital lease) XXX(principal amt) Prepare monthly journal entries for each payment and release on the 5 th of each month. The departmental accounts are charged the principal and interest using transfer object codes, with the offsetting transfer made to the budgetary account (Capital Leases). Below is an example of a monthly journal entry to record an installment lease payment: Account Description PO OBJ Expenditure Budget cas po corr L cas po corr L cas po corr L cas po corr L In addition the following encumbrance entry is made liquidating the encumbrance from the departmental: Account Description PO OBJ Encumbrance cas po corr L (6,903.50) cas po corr L (427.64) cas po corr L , cas po corr L For each principal payment made, the general ledger account (obligations under capital lease) is reduced, and (net invested in plant) is increased as follows: Account Debit Credit , , Page 4 of 6

5 When the lease purchase is complete and all payments have been made, the following entry is made to transfer the principal amount from (Assets Under Capital Lease) to (Equipment) as follows: Account Debit Credit (Equipment) XXXX(principal amt) (Assets Under Capital Lease) XXXX(principal amt) On a monthly basis, balance account and The account should have a zero balance. From overall totals in report LEA 01505, the outstanding principal should balance with the ending balance of (obligations under capital lease). Accounts and must be reduced whenever any principal amount is issued on an installment lease purchase in order to balance with the lease purchase file. If any amount is updated after the entries are capitalized then these changes must be reflected on the lease purchase file, in and accounts Lease File in UMA7 This file contains the history of the lease and all the payments. It is used for yearend reporting and preparing budgets as well as tracking the lease. When the records manager receives the purchase order, contract and amortization schedule, the LEA01 file, UPDMST, must be completed for the payments to post accurately. Checks are created through the CAS system and systematically posted to the LEA01, lease file Lease file update The lease file should be updated when a new order is issued. The lease number is the master purchase order number without a letter prefix on the UPDMSTR screen. Department number, vendor name, number and address come from the purchase order. Give a brief description of the equipment and its location. Status is C for complete or A for active. Complete the monthly payment amount. Lease type is I for installment or O for operational (rent). The amortization schedule provides the interest rate, total interest and principal, beginning and ending dates, and total number of payments to be made. For an installment lease, go to the UPDFYR screen and update the total to pay in each fiscal year for the life of the contract for the principal and interest. This total should balance with the total to pay on the UPDMSTR screen. Payments are automatically fed into the lease file, UPDPAY, from CAS records. Page 5 of 6

6 Report LEA02 is issued after the checks process. The total payment amount should balance with the expenditures on journal entry for installment leases. LEA01505 report is issued on the 10 th of each month after payments have been made and all files are updated. 5.2 Operational leases (Building Rent) Posting to LEA01 Processing payment and tracking are as explained in lease purchase procedures with these exceptions: Operational leases do not have interest. A C order with 142 object code is used. The purchase order should give a complete description of the square footage, cost per square foot, and the length of the lease. The account on the purchase order is encumbered and expensed. The records manager releases payment on the first day of the month according to contract terms. No journal entries are required LEA02 Report This report should be reviewed for payment information and compared to the payment schedule prepared for rental property. 6.0 HISTORY OF REVISIONS This procedure document was last updated on June 22, Page 6 of 6