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Ernest9
November 23, 2022
Question

Purchasing Vehicle with Negative Equity Loan Liability

  • November 23, 2022
  • 1 reply
  • 0 views

So I work for a car dealership using QuickBooks Online. We purchased a vehicle for our inventory from an individual with negative equity in the vehicle. We valued the vehicle at $7,740 but there was a loan on the vehicle for $11,169.59. The customer paid us the difference on the loan of $3,398.46 (they actually should have paid us $3,429.59 but, we plan to just write off the difference of $31.13). We used a floor plan company to pay off the loan, so we would credit our floor plan account instead of our bank account. How would I go about entering this transaction into QuickBooks Online? Would I use an Expense to show that we purchased the vehicle, use an Invoice since we took payment, or use a combination? I'm thinking that I could use an invoice, make the loan-payoff a service, and credit the customer for the purchase price of the vehicle the same way we would for a vehicle trade-in. That or a Journal Entry might make things a little easier.

1 reply

Rainflurry
Rainflurry
November 27, 2022

@Ernest9 

 

You wouldn't use an expense since no asset (cash) was reduced.  You can use an invoice, but a sales receipt is better since you received payment at the time of the transaction.  Although you could use either a sales receipt or an invoice, neither really makes the most sense since you didn't sell anything.  IMO, a journal entry is the best for this transaction.  It would look like this:

 

 DebitCredit
Inventory (vehicle trade-in)$7,740.00 
Cash (from customer)$3,398.46 
Expense (loss of $31.13)$31.13 
   Floor Plan Lender Payable $11,169.59

  

I'm not very familiar with floor plan lending but I assume you need to book a liability for what you owe the floor plan lender, correct?  If that's the case, then this journal entry books the liability to the floor plan lender that can be assigned to their payment.

E
Ernest9Author
November 28, 2022

I appreciate the reply Rainflurry.

 

I would like to have an invoice/sales receipt for customers to also retain a record of the transaction going forward, so I'm not sure if just a journal entry would be right for me. I am curious on your opinion of the solution I made to instead achieve this:

 

I bill the loan payoff as a service(tax exempt) for collection/invoicing purposes, and use a journal entry to expense the paying of the loan with the floor plan to the COGS account for the service. In the same journal entry, I would also move the vehicle trade-in to our inventory from the clearing account.

 

 DebitCredit
Loan Payoff Service Revenue 11,138.46
Trade-In Allowance / Clearing Account $7,740.00 
Cash (from customer)$3,398.46 
Loan Payoff Expense (COGS)$11,169.59 
Floor Plan Lender Payable $11,169.59
Inventory$7,740 
Trade-In Allowance/ Clearing Account $7,740

 

Rainflurry
Rainflurry
November 28, 2022

@Ernest9 

 

A few things:

 

1)  Cash collected for a loan payoff is not revenue, it's a liability since you owe it to the floor plan lender.

2)  When you pay the floor plan lender it's not an expense, it's a reduction of the liability.  You don't record the COGS expense until you resell the vehicle to your customer.

3) There is no need to use a clearing account for this type of transaction. Use a liability account. In your chart of accounts, set up an other current liability account called 'Due to Floor Plan Lender'.  This is what serves as the clearing account - it holds the amount due to the floor plan lender until you pay them.  After that, set up a service item called 'Loan Payoff' (or something that will make sense on a sales receipt). 

 

After thinking this through, I think the best route to go is to use a sales receipt.  You just need to set up an inventory product for the vehicle, the 'Due to Floor Plan Lender' liability account described above and the 'Loan Payoff' service item described above.  Then, create a sales receipt.  On the sales receipt, add the trade-in vehicle inventory item you just created and list the quantity as -1, the rate ($7,740) as a positive amount, and make sure the amount is negative.  This puts the trade-in into inventory at the trade-in value.  Then, add the 'Loan Payoff' service item as a positive amount ($11,169.59).  This books the liability that is due to the floor plan lender.  What's left on the sales receipt is what the customer owes you ($3.398.46).  That's it. 

 

Now you have the trade-in vehicle in inventory, the payment from the customer as a deposit, and the amount due to the floor plan lender as a liability.  When you pay the floor plan lender, write a check or use an expense and select the 'Due to Floor Plan Lender' liability account under Category details.  That reduces your cash as well as the amount owed to the floor plan lender.  Now, you're ready to sell the trade-in vehicle to a happy new owner.

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