Pre-computed interest?

[[email protected]]

Hello. I handle the books for my husband who is an owner/operator truck driver. I use cash basis accounting for everything. I am unsure how to record a loan for a trailer that he purchased. My issue is that the loan is a pre-computeed interest loan. How do I record the interest that I have not yet paid - the loan is a 60 month loan - without all of the interest showing as an expense for this year? In order to keep my payable account accurate I need to open it at the current loan balance $32694.00 but how do I deal with the interest? The principle is $24784.50. Wuld I use a deferrment account and expense the appropriate amount after each payment? Not sure how to proceed.

 

[kirby]

Hi
Easiest way is to get an amortization schedule from the financing company. They have this but they typically hate to give it to you. So you may have to badger them.
Once you get that you can see how much of each payment goes to interest and how much to principal. There's more to do on this but start with getting that schedule and then post here again.

Meanwhile your entry to book the truck and the debt looks like

DR Truck 24,784.50
CR Note payable $32,694.00
DR Note Payable- deferred interest 7,909.50

And that last account goes UNDER the Note Payable acct on your balance sheet. It acts to reduce the note payable down. The amortization schedule will show how each payment will affect those two accounts.

 

[[email protected]]

Kirby, I now have the amortization schedule. I am assuming that when I make a payment I will have a couple of steps to go through.

I will apply the entire amount of the payment to the note payable account and them make a journal entry for the interest amount on the amortization schedule:

DR Deferred Interest
CR Interest Expense

Am I missing anything?

Thanks.
Julie

 

[kirby]

Can you post the first two months of the schedule so we can stay on the same page?
(beginning Principal balance, payment, interest, principal, ending principal balance -for example but just post (just type) the first two months of the statement. Cause it is easier to go over the entries using the real numbers.

 

[kirby]

or - just fix your entry
the expense should get a debit
and the deferred interest gets a credit