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USTaxAdvising
USTaxAdvising, Accountant
Category: Finance
Satisfied Customers: 1084
Experience:  Professional with finance related questions.
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I purchased some notes at a discount. How would i record these

Resolved Question:

I purchased some notes at a discount. How would i record these into quickbooks for tax purposes? I am trying to make sure we are ready for taxes. I want to make sure we record each payment correctly, i suspect that part of the payment goes towards the principle and part of it goes towards the discount.
Submitted: 9 months ago.
Category: Finance
Expert:  USTaxAdvising replied 9 months ago.

USTaxAdvising :

Hello

USTaxAdvising :

Yes you are correct, part of the payments goes to principle and to discount.

Customer:

how do i record that?

Customer:

i was told on here earlier that the purchase should be recorded as
Note Receivable - AR (full amount due)
Discount - (Negetive) AR (discount amount)
Cash - Cash (after discount or actual amount paid)

Customer:

but if i do it this way, then i have a Full Amount due in the a/r

Customer:

now if i go to place the payment...there is not extra money to place elsewhere

USTaxAdvising :

hang on one moment. thanks

USTaxAdvising :

The entry above is correct.

Customer:

ty for confirming

Customer:

so...how would i record the actual payment received?

USTaxAdvising :

You don't have a full amount due in AR, the contra (negative) discount account reduces the note down to cost value.

USTaxAdvising :

You would then amortize the discount monthly to reduce the discount and essentially increase the face value.

Customer:

so the discount is a Sub Account?

Customer:

thus effecting the Total Note Due?

USTaxAdvising :

So the payment received would be recorded as: DR Cash and Credit AR note receivable and also CR Capital gain if the bond was sold at a gain.

USTaxAdvising :

yes correct the discount is a sub account.

Customer:

oh...

Customer:

i think that makes more sense now

Customer:

Capital Gain would be only if the item is sold

USTaxAdvising :

Good deal, glad I could help

Customer:

was your statement correct above?

USTaxAdvising :

right capital gain would be the only item if sold

Customer:

DR Cash and Credit AR note receivable and also CR Capital gain if the bond was sold at a gain.

USTaxAdvising :

Yes

Customer:

Is this more accurate then for a note with a discount??

DR Cash
CR AR note receivable (% of the note purchase price)
DR Discount (% of the note purchase price)

Customer:

DR Cash
CR AR note receivable (% of the note purchase price)
DR Discount (% of the note discount or 1-% of the note purchase price)

Customer:

second one might be more of what i am understanding...

Customer:

but is that still 100% accurate?

Customer:

or did i miss something?

Customer:

assuming NO SALE OF THE NOTE...just collecting payments

USTaxAdvising :

assuming no sale of of the note, just collecting the payments. You would record the interest payments as DR Cash CR interest income.

USTaxAdvising :

But you also have to record the amortization on the discount. DR Discount CR Note Discount (Revenue Account) This is what is considered "OID" (original issue discount) under U.S. federal income tax principles.

Customer:

when do we do that like annually??

USTaxAdvising :

note that the discount entry is purely accounting, no cash is involved. You merely recognize the discount as an income or expense item and inrease/decrease the discount to bring the total value of the note up to face value.

USTaxAdvising :

yes annually works but if you sold it you would have to do it up to the date of sale. note that to the extent you have OID on the books still any gain you have would be OID to the extent OID is leftover.

USTaxAdvising :

OID meaning the discount.

Customer:

okay...so this makes a little more sense

USTaxAdvising :

Excellent :)

Customer:

so we want to record the payments as usual...ignore the discount

Customer:

then we want to show the discount recovered in a single entry at the end of a period (like a month or year)

USTaxAdvising :

yes

USTaxAdvising :

exactly

Customer:

okay

Customer:

perfect...thx for clarifying

USTaxAdvising :

No problem, have a great day! :)


 

Customer:

u2

USTaxAdvising, Accountant
Category: Finance
Satisfied Customers: 1084
Experience: Professional with finance related questions.
USTaxAdvising and 3 other Finance Specialists are ready to help you

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