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Category: Finance
Satisfied Customers: 4514
Experience:  Tax professional and business consultant for 35 years.
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It is not a tax question. The company bought a tool to

Customer Question

It is not a tax question. The company bought a tool to produce some very unique goods for customer. Customer agrees to pay for the tool and at the end they owes it but right now the tool stays with us and we use it in production. We bill the customer for the tool and it was recorded on our Sales account. Should I reclass the tool as our inventory item (previously it was recorded as Fixed Asset) or I need to create the additional liability account "Customer's Tools" and record this item there?
JA: The accountant will know how to help. Is there anything else the accountant should be aware of?
Customer: No
Submitted: 8 months ago.
Category: Finance
Expert:  PDtax replied 8 months ago.

Hi from just answer. I'mCustomer I'll assist.

Customer: replied 8 months ago.
what is your advise on this matter?
Expert:  PDtax replied 8 months ago.

The customer paid for the tool and is allowing you to use it to make parts for them, and perhaps for others. The customer owns the tooling now.

It comes out of inventory when sold. I would create a "Customer Tools - Jones" account for the tooling and a liability account to offset the tooling, x such as "Jones Tooling 2016" since you have to deliver the tooling at production end.

It's not depreciable, but both the asset and matching liability get reported on financial reports.

Expert:  PDtax replied 8 months ago.

Thanks for asking at just answer. If you need additional support, please ask. If this covers the subject, please close out your request by leaving positive feedback. I'mCustomer

Customer: replied 8 months ago.
In my understanding you propose to create one Asset account and one Liability account and record the cost of this tool there. What if the customer was billed only for 80% of the tool cost? How to record the difference?
Expert:  PDtax replied 8 months ago.

That changes things a bit.

When you bought the tooling, you would debit an asset for 50 and credit cash for 50. And this is depreciable.

When you sold 80%, you credited sales and set up an account receivable for 40. That overstates sales and the tooling account by 40.

Debit sales for 40, credit tooling for 40. There is no profit in the tooling sale, and you get to depreciate the 10.

I would still set up the tooling - Jones and corresponding offset liability for 40 each to keep track.

Customer: replied 8 months ago.
Here is my example:DT Tools (Asset Account)- Jones 1,517.39
CR Accounts Payable 1,517.39
CR Sales 1,000.00
DT Accounts Receivable 1,000.00
DT Sales 1,000.00
CR Tools (Asset)-Jones 1,000.00
CR Accumulated Depreciation on Tools 14.37 - monthly depreciation for the difference (1537-1000)
DT Depreciation Expense 14.37
What transaction I need to make to reflect a liability to a customer at $1,000.00 for a tool?
Expert:  PDtax replied 8 months ago.

Debit customer tooling 1000

Credit liability - Jones 1000