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2013 and earlier-Honda Accord Lease Questions

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Comments

  • gmanusmcgmanusmc SoCalPosts: 436
    You see - that's what I thought and that's one reason this whole discussion started - my perception of a simplified formula that included the residual led me to believe there is interest charged on the residual. John's spreadsheet indicates differently. It shows amortization similar to a home mortgage where the interest is greater and the reduction of the remaining balance smaller at the beginning of the lease. A monthly interest charge is applied to a continually decreasing lease balance until the end of the lease term leaving only the residual as the remaining balance. I've never had a reason to look beyond the old mf(cap cost + res) formula so this is all new to me. And after looking at John's background and website, I've been enlightened.
  • gmanusmcgmanusmc SoCalPosts: 436
    Thanks John - I did look at the amortization sample earlier today and it was very helpful - I think it cleared up my misperception of how the interest is applied. I say "think" because in kyfdx's post just prior to yours, he states the application of the interest and reduction of the balance owed is straight line. The spreadsheet sample seems to show that's not the case. I guess maybe that's what many of us believe because of the way lease agreements are structured.

    Your spreadsheet is a neat little tool - we "regular" guys can probably still negotiate good lease deals without the detailed breakdown, but it sure is nice to have it available if needed. I will come looking for you if I need some help and I will refer folks to your website if they are looking for help.

    Thanks John

    Bill
  • delta737hdelta737h Posts: 603
    edited August 2013
    kyfdx,

    With all due respect, I have to disagree. A lease does not use straight-line amortization. It is amortized in the very same way that a loan is amortized. If you examine almost any lease contract, it will always reference the method of amortization. Many compute the lease balance (often called the adjusted lease balance) using the actuarial or constant yield method which equates to the interest rate implicit in the lease. It's not just used for early termination. It's actually used to compute the outstanding lease balance at any point in time.

    I'm currently leasing a Honda CR-V and the balance that appears on my monthly AHFS statement coincides, to the penny, with the balance in my lease amortization schedule. I've evaluated many lease contracts and I haven't come across one yet that doesn't apply the constant yield or actuarial rate against the unpaid lease balance to compute the monthly lease finance charge. It then deducts this charge from the base payment (payment without surcharges like tax) to determine the amount of the depreciation charge to be deducted from the previous lease balance to determine the current lease balance. This iterative process continues throughout the term of the lease so that at lease end, the lease balance is exactly equal to the residual value. The lease finance charge does decline every month while the lease depreciation charge rises similar to what happens with a loan. The depreciation is analogous to principle paid on a loan while the lease finance charge corresponds to the interest paid on a loan.

    The depreciation and rent charges disclosed in a lease contract simply reflect the total of these charges. When divided by the term in months, you get the monthly average as I'm sure you know. The money factor formula gives only the monthly average of these charges. It is not meant to imply or suggest that the monthly finance charge (i.e. rent charge) or monthly depreciation charge are constant amounts or remain fixed throughout the duration of the lease. This can be confusing as Bill suggested when he stated in the previous post...

    "I guess maybe that's what many of us believe because of the way lease agreements are structured."

    Regards,

    John
  • delta737hdelta737h Posts: 603
    Thank you, Bill. A lease is amortized just like a loan. Please see my post to kyfdx. There is no question that it can be very confusing based on itemized disclosures made in lease agreements.

    Best,

    John
  • kyfdx@Edmundskyfdx@Edmunds Posts: 25,965
    Well.. gee... now, I'm going to have get my last lease paperwork out of the closet and look..

    Every lease I've paid off early, has had straight line amortization (as you say, down to the penny).. Granted, I haven't paid one off early since about 2001....

    I believe you, though...

    Moderator - Prices Paid, Lease Questions, SUVs

  • huskerfan5huskerfan5 Posts: 163
    Using the interest method of amortization is certainly more consistent with generally accepted accounting principles. The rules haven't changed in years so my guess was that your leases were with privately held companies that didn't issue financial statements.
  • delta737hdelta737h Posts: 603
    husker...

    You nailed it! Accounting for consumer retail leases falling under FRBB Reg. M should comply with GAAP & FASB criteria. Never seen a lease amortized any other way and I've been analyzing them since 1986. There may be institutions, though, that are exempt from complying with these standards but I'm not aware of any.

    John
  • Are you sure about that? In the section titled "Dealer Financing of the Sales Tax" it says:

    In some instances, the lessee may want to finance the tax due at the time of entering into the lease. In this case, the lessee may ask the dealer/lessor to lend the lessee an amount equal to the tax due on the lease and to add the amount of that loan into the total to be paid under the lease. In effect, the lessor would lend the lessee an amount equal to the tax due and then build repayment of this loan into the lease payments due under the lease.

    If the dealer/lessor is willing to lend the amount of tax due to the lessee, it
    will have to re-compute the total amount of the monthly lease payments and thus the total amount due under the lease, in order to recover the principal amount of the loan, plus any interest on that principal. As a consequence of the dealer/lessor increasing the amount of the monthly lease payments to recover the money loaned (plus any interest), the dealer/lessor will also have to increase the amount of sales tax due on the increased lease payments. This will result in a higher tax due than if the lessee paid the tax in full at the time of entering into the lease.
  • delta737hdelta737h Posts: 603
    edited August 2013
    I don't mean to steal husker's thunder but I'm very sure. It doesn't matter whether taxes or widgets are financed in the lease, the lessor must still recover all amounts advanced or capitalized in the lease. In the case of taxes, the dealer simply writes a check to the State for the amount of tax and the fund provider reimburses the dealership accordingly when funding the lease. No need to re-compute lease payments. The total amount due under the lease includes taxes and any other items financed in the lease like dealer doc fees, acquisition fees, or negative equity on a traded vehicle.

    There are different methods used to compute sales tax used by States. You made the following statement...

    "As a consequence of the dealer/lessor increasing the amount of the monthly lease payments to recover the money loaned (plus any interest), the dealer/lessor will also have to increase the amount of sales tax due on the increased lease payments. This will result in a higher tax due than if the lessee paid the tax in full at the time of entering into the lease."

    This is simply not true if taxes are computed correctly. In fact, this issue is addressed at...

    https://autoleasegeek.com/1182/evidence-that-the-lease-ledger-doesn’t-al- - ways-balance-disclosure-reform-needed-in-the-vehicle-leasing-industry

    Hope this helps.

    John
  • Hi John,

    The quote that you pulled out from my post wasn't my own statement; it was taken directly from the NY State Dept. of Taxing and Finance document here: http://www.tax.ny.gov/pdf/publications/sales/pub839.pdf (page 15)
  • delta737hdelta737h Posts: 603
    edited August 2013
    Hi cartime,

    Many thanks for clarifying and I apologize for the confusion. NY levies sales tax on the sum of the payments and so, a "taxable payment" is computed first, then, tax is computed on the sum of the taxable payments. Tax should never be levied on payments that include financed taxes as that would be computing tax on tax but NY has found a way to do it as you'll see in the following article...

    https://autoleasegeek.com/457/457

    I don't know whether this has ever been challenged in a NY tax court but, if it hasn't, it darn well should be.

    Hope this helps.

    John
  • huskerfan5huskerfan5 Posts: 163
    John, I noted this at your site "Adding tax, T, to the total payments, K, and then multiplying the sum by the sales tax rate, t, we have the formula…"

    Well, if you do this calculation, you are taxing tax, but it appears that is your opinion of the necessary formula. I disagree. Now that you came up with a new payment, is there more tax on that?

    I wouldn't bet my CPA license though I will never need to use it and it wouldn't surprise me if dealers calculate it your way, but I do not believe your interpretation is correct. Would have loved to talk to my college tax professor/tennis buddy whose accounting firm had most of the Long Island dealerships as clients but he passed away several years ago :(
  • delta737hdelta737h Posts: 603
    edited August 2013
    Hi Husker,

    You stated....

    "I noted this at your site "Adding tax, T, to the total payments, K, and then multiplying the sum by the sales tax rate, t, we have the formula…" ... Well, if you do this calculation, you are taxing tax, but it appears that is your opinion of the necessary formula. I disagree."

    Nope, not my opinion. Moreover, I would never consciously publish an article giving my opinion. I'm a math guy and was an Actuary for several years... so, you and I are kind of like cousins. There is no doubt that NY State computes tax on tax just by looking at the formula's derivation...

    Plugging in the assigned values, we get total payments, excluding tax, of K = $17,444.81. Adding tax, T, to the total payments, K, and then multiplying the sum by the sales tax rate, t, we have the formula…

    T = (K + T)t = Kt + Tt …. The term Tt reflects sales tax levied on sales tax

    Solving for T, we get

    T = K x t/(1-t)

    This formula uses the same method that the NY State's Dealer's Guide to Sales & Use Tax on Long Term Vehicle Leases does described on P.16. Additionally, I have constructed several leases in NY and the dealerships all computed tax the same way I did which is part of the reason why I never pursued the methodology on P.17. Furthermore, the method described on P.17 is not only wrong but it's total non-sense and is why I chose to exclude this in my article as I have no proof that this is actually being used in practice. Of course the lessee is going to pay interest on capitalized tax. I also vehemently disagree that NY is entitled to tax interest on tax. That's beyond despicable. Anyway you slice it, I'm betting that NY methodologies are unconstitutional. I'm also betting that its never been challenged. There you go, Husker, sue 'em for me!!!

    I also prove that tax on tax is being computed in NY at the very bottom of my article...

    The $1,699.01 includes the additional tax on tax which amounts to $150.79. Here’s why…

    We have the tax on the total payments of $17,444.81…

    0.08875 x 17,444.81 = 1548.22 PLUS tax on the total tax, which is…

    0.08875 x 1,699.01 = 150.79 (tax on tax)

    Adding, we get 1,699.01.

    Note, too, that (0.08875/(1-0.08875)) x 17,444.81 = 1,699.01 which complies with the P.16 methodology.

    The are two payment figures. There is the taxable payment figure whose only purpose is to compute sales tax. K reflects the sum of the taxable payments for which sales tax is levied. The second figure, which I didn't disclose in the article, is the actual lease payment that includes the sales tax as well as all other non-taxable items capitalized in the lease. This payment is not subject to sales tax. Only the taxable payment is subject to sales tax. The taxable payment is just an intermediate calculation.

    Frankly, I don;'t agree with any of this. I'm just presenting what NY actually does in terms of computing sales tax on lease vehicles. They do compute tax on tax (P.16) and, apparently, tax interest on the tax financed (P.17) which I haven't encountered with any NY dealerships that I've dealt with.

    Am I making any sense yet?

    John
  • huskerfan5huskerfan5 Posts: 163
    John, got it.
    You better believe that I'll challenge it if I move back to New York and lease some Ferrrari's.
    You're a better mathematician than I'm a CPA. Fortunately for everyone, I don't practice public accounting :)
  • delta737hdelta737h Posts: 603
    Hey Husker!

    Ah, you deserve much more credit than that! The bet here is that you're one darn good CPA. Thanks for questioning my calculations and keeping me on my toes!

    Regards,

    john
  • gmanusmcgmanusmc SoCalPosts: 436
    We can tell that both you guys are outstanding at what you do now and have done throughout your careers. And after reading your discussion of how NY handles tax on leases, I'm glad that here in CA, we only pay sales tax on each monthly payment's depreciation and finance charge. On the other hand, we have a whole host of other unpleasant issues to deal with out here.

    By the way John, a little off topic, but wanted to mention that I grew up not far from where you are, in Erie, PA.

    Bill
  • delta737hdelta737h Posts: 603
    edited August 2013
    Bill,

    Had a few friends that went to Gannon University and, my niece graduated from Mercyhurst. I fly small planes and have landed in Erie several times. It's a real nice town. My parents are from Lewistown, PA. Still have relatives in Latrobe, Hershey, York, & Philly. My aunt was a nun with the Sisters of Mercy in Pittsburgh. So, I have a good excuse to root for the Steelers & Pirates. Love PA!!!

    John
  • kyfdx@Edmundskyfdx@Edmunds Posts: 25,965
    "So, I have a good excuse to root for the Steelers & Pirates. "

    Well.. you need a good excuse, that's for sure...

    Moderator - Prices Paid, Lease Questions, SUVs

  • delta737hdelta737h Posts: 603
    If you were a promising college FB and BB player, would you want to land in CleveLAND?

    A few years before Randy Lerner sold the Browns, fans were begging him to sell the team because of his apparent lack of interest and participation. His response was "Be careful what you wish for". And now, we have Jimmy Haslem, with all of his legal problems; his trusted caddy, Joe Banner; and Banner's comical sidekick, Mike Lomdardi. It seems bad luck follows this franchise everywhere since Modell fired Paul Brown in 1963. This year's first round draft pick, Barkevious "KeKe" Mingo, may never play a regular season game as a result of coughing up blood and being winded last week against Detroit. Reminds me of the Browns first round pick, Earnie Davis, in 1962. He died of cancer in May 1963. God help KeKe. He's a class act and a fine young man.

    John
  • brian125brian125 New york / S.C. myrtle beachPosts: 2,045
    edited August 2013
    The Elmira express.

    I would of loved to see Davis and Brown in 1963 what a back field that would of been. Davis actually recruited Floyd little to come to SU he was a good player and really changed the Color barrier. Ernie set the bar took the abuse and paved the way..

    2013 Genesis 5.0 R-spec, 2013 Accord EXL V-6, 2012 BMW x-5, 2012 ML350

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