Purchasing Vehicle with Negative Equity Loan Liability

@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:

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.

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.

@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.

I did not know you could map the "income account" for a service to a liability account. I have gone ahead and completed that change, however, I am currently keeping it as a separate liability account "Vehicle Payoff Liability" due to the possibility of us paying for the liability with our own capital rather than through the floor plan (this is something we have done previously). When/if the floor plan lender pays the liability instead, I will make a journal entry to debit the Vehicle Payoff Liability account & credit my existing Floor Plan Payable Liability account to show the transfer of liability.

I think for my case I should keep the clearing account workflow because our inventory is "living" in the sense that we continuously add expenses to it in the form of reconditioning. I have not found a better alternative to increase the inventory valuation while not changing the number of items in inventory without having them as separate accounts on the COA & expensing additional reconditioning to these accounts. 

https://www.youtube.com/watch?v=zlK20syHqBA

In this video, the first method goes over the method of tracking multiple expenses to single inventory items that I have been using. I then convert it to an inventory item later for invoicing/sales receipts & COGS tracking purposes. (It's not perfect or easy, but it works. QuickBooks Assemblies could potentially make my workflow better/easier but it is not an available feature on QBO.) If I instead followed the second method from the video, it seems like your method would work with our inventory.

My next question is how should I handle us originally charging the incorrect amount of $11,138.46 for the loan payoff, when it was actually $11,169.59? I would need to debit *some* account for the $31.13 difference. In this scenario, the floor plan lender paid the entire amount of $11,169.59. Maybe when I'm making the journal entry debiting the Vehicle Payoff Liability Account, I could debit the inventory expense account? Alternatively, I could retroactively change the amount on the sales receipt to be correct and add a discount for the $31.13 but I feel like this will not accurately reflect the transaction.

I appreciate the replies. Typing this to a person rather than Microsoft Word also seems to help my thought process on the matter.

@Ernest9 

I did not know you could map the "income account" for a service to a liability account.  Yeah, the account selected as the "Income" account is the account that gets credited when you put that item (as a positive amount) on a sales receipt or invoice.  That account will be debited if the amount is negative.  It's not necessary for it to be an income account.

I think for my case I should keep the clearing account workflow because our inventory is "living" in the sense that we continuously add expenses to it in the form of reconditioning.  I just wanted to point out that your JE above has no effect on your clearing account because you entered both a debit and a credit for $7,740.  If you remove those two lines, the JE is identical. 

My next question is how should I handle us originally charging the incorrect amount of $11,138.46 for the loan payoff, when it was actually $11,169.59? I would need to debit *some* account for the $31.13 difference.  Here's a thought: If you use a sales receipt, deposit the payment to undeposited funds.  Then, when you go to make the bank deposit, you can add an expense under 'Add funds to this deposit' and enter the amount as -$31.13.  This is probably a good time to use a 'Cash Over/Short' expense account.  That will reduce the deposit, book the expense for not charging the customer the correct amount, and keep the trade-in amount and vehicle payoff liability accounts accurate.  And, your bank account will reconcile.