First year in note investing and looking forward to end of year accounting. I trying to find a CPA, preferably, in Gainesville, FL area and trying to have some screening questions to ask them.
Background: l purchase a note for 50% of UPB and a payment is made.
Question: Is the principal that is collected 100% principal repayment, or, is it 50% principal repayment and 50% capital gain?
When you purchase the note, it is accounted for as follows:
Note Receivable - debit $300.00
Unrecognized Gain (Discount) on Note Receivable - credit - $150.00
Cash - credit - $150.00
Then when the payments comes in, you record it as follows:
Cash - debit - $20.00
Interest Income - credit - $8.00
Unrecognized Gain (Discount) on Note Receivable - debit - $6.00
Recognized Gain on Note Receivable - credit - $6.00
Note Receivable - credit - $6.00
This assumes a note purchased for 50% of face value. Different discount amounts recorded differently, of course.
The gain and the note payoff are recognized a little at a time as payments come in, in their distributive proportions.
@Basit Siddiqi was kind enough to let me know I had an error in my Payment Received journal entry and that my debits and credits don't equal. How Embarrassing!
The Note Receivable should be a credit of $12.00, not $6.00
Thanks for finding that and asking me to correct it!
@John Newsom Are you going to explain this to our group?
Thanks @Linda Weygant for the response to my question.
@Linda Weygant is mistaken. Treatment of discounted notes is very different from installment sale - which is what Linda described.
For performing notes purchased at discount, the "market discount" treatment applies - see Sec. 1276/1278. The entire principal portion is recognized as interest income until the note discount is exhausted. Only then it starts going towards principal.
And since Linda is likely to disagree - here is a highly technical article on this issue.
@Michael Plaks - I am certainly willing to consider that I am wrong. Not sure why you come out swinging like that, but to each their own, I suppose. Ever since you started contributing to the forum posts in November, you've been highly aggressive with other tax professionals and I'm not sure why.
It would appear that I gave the accounting for governmental notes purchased at a discount, rather than the accounting for private party notes purchased at a discount. There is definitely a distinction between the two. I apologize to @John Newsom for the error.
I'm sorry if my posts appeared aggressive to you. I see nothing aggressive or disrespectful in a simple statement that you were mistaken. Unlike you, I did not get personal, until now. My goal is to ensure that people get correct answers. Isn't yours the same?
Join the Largest Real Estate Investing Community
Basic membership is free, forever.