USA Recording Sale of Auto Loans - Participation Loan

[wheeler459]

I have a Credit Union that just sold a pool of auto loans.
Total loan balance outstanding is $1,400,945.22 and they are selling 90% (retaining 10%). Here is the info.

This is the calc they used:
1,400,945.22 x 90% = 1,260,850.70
purchase price 99.05 (11,978,08) Discount
Accrued interest bough 3,023.15
Purchase price total 1,251,895.77 Cash received by CU for sale

What is the journal entry to record the transaction? The credit union proposed the following entry:

DR Cash 1,251,895.77
DR Discount on loan 11,978.08
CR Loans 1,260,895.70
CR Interest Income 3,023.15

How do you amortize the discount on the loans? Over the life of each loan? Do I need to worry about anything else in this transaction? I have never dealt with a participation loan.

 

[DrStrangeLove]

Unless the credit union is collateralizing the loan pool or issuing tranches with different payment schedules/periods, it looks to me like your investment buys a pro rata share of the loan pool's underlying loans. That makes me think you'd amortize the discount on your investment like on any amortizing loan, just one with an irregular periodic payment in this case. I'm spitballing here, so I may have that wrong.

For risk management purposes, you'd want to think about a prepayment rate assumption and the risk of slow payment/nonpayment. Without some credit rating information on the underlying loans, it's hard to tell what an adequate credit risk spread would be.

Are you looking at this from an investor perspective or from the credit union's perspective?

 

[kirby]

Your credit union is trying to record this as a sale. But because the deal is with recourse this may just be a secured borrowing. Read ASC 860-10-40-5 or consult with your auditors (after getting mgmt approval to consult with your auditors ----to keep you out of trouble)