loan rec?

USA Discussion in 'Technical Queries' started by ACCTNERDALERT, Dec 7, 2018 at 2:26 AM.

  1. ACCTNERDALERT

    ACCTNERDALERT

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    Riddle me this!

    We give a customer a piece of equipment under a five year note. No interest. We ship the equipment right from the manufacturing.

    Equipment cost us 2,000
    Amount of loan is 2,500

    What are the journal entries for the purchase of equipment and related loan? Do I need to input interest ?

    Thanks!
     
    ACCTNERDALERT, Dec 7, 2018 at 2:26 AM
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  2. ACCTNERDALERT

    kirby VIP Member

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    Yes, you need to impute interest for both book and tax accounting. (IRS requires this.) So, start by selecting the imputed interest rate. Make sure it is at least equal to or MORE than the IRS Applicable Federal Rate, which is a table the IRS puts out on the web. Since you have a 5 year note use the MEDIUM term Applicable Federal Rate. Given the interest rate from AFR, figure out the present value of the note. The Present value is the selling price of the equipment and the difference from the PV to the loan is the interest you will accrue over the term of the loan. SO if you figured a PV of $2,300, then journal entries are:

    DR Note Receivable $2,500
    CR Sales of Equipment $2,300
    CR Unearned Interest (Liability acct) $200

    DR Cost of Goods Sold $2,000
    CR Equipment Inventory $2,000

    Then amortize the unearned interest to income monthly
    DR Unearned Interest (liability acct)
    CR Interest income
    The monthly amount should use the interest method but if you can't figure that then at least use straight line amortization

    Good luck.
     
    kirby, Dec 8, 2018 at 2:48 AM
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