USA Recording Mid Period Dirty Interest on Sale of Note


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Company LLC was set up to own $10,000,000 worth of Income Notes from an outside entity which earn 8.5% interest that is paid in quarterly installments of 2.125%.

Company has issued out participation to investors in the form of membership units in the LLC. It retains a stock of un-participated Income Notes as an asset.

Mid accrual period, $500,000 worth of notes on hand are then sold to an investor. The investor pays face value for the notes and also pays to the Company interest that has accrued within the period up to that point, so that when the quarter ends the entire interest distribution can flow directly to the holder of the note. Let's say the total paid in was $503,541.66 ($500k in principle and the rest in interest).

Entry 1:
Cash: $503,541.66 (Debit)
Income Notes: $500,000 (Credit)
Note Interest Income: $3,541.66 (Credit)​

When the income generated off of the note arrives at the end of the accrual period, the interest on the $500k is distributed to the investor in full, $10,625.00.

Entry 2:
Cash: $10,625.00 (Debit)
Note Interest Income: $10,625.00 (Credit)

Entry 3:
Cash: $10,625 (Credit)
LLC Membership Unit Distribution (Equity Account): $10,625 (Debit)
Where I am running into trouble is in recording the income. The $3,541.66 of "dirty" interest is being counted on the income statement twice- when the investor pays it mid period, and when the Income Note Pays it at the accrual period end.

How do I adjust for this? The income statement should only be recording income generated off of the interest on the notes with everything being passed through to the members of the LLC. The "dirty" interest is coming in and is being held in cash.

Thank you for your help!
 
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kirby

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Try this:
Sell Note with $3,541.66 accrued interest
DR Cash $503,541.66
CR Notes $500,000
CR Accrued Interest Payable $3,541.66

Record the interest coming to you from the outside entity
DR Accrued interest receivable $10,625.00
CR Interest Income $10,625.00

Record the receipt of the cash from the outside entity
DR Cash $10,625
CR Accrued interest receivable $10,625

Pay the interest to the new investor
DR Interest Income $7,083.34
DR Accrued Interest Payable $3,541.66
CR Cash $10,625.00

So after all this - your company LLC earned $3,541.66 interest. The new investor earned the rest = $7,083.34
 

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