Journal Entry to post a loan inherited from previous owner
What is the journal entry to post an SBA loan that was inherited from the previous owner?
The business was recently purchased and the loan is payable to the previous owner because they had no luck switching the loan to the current biz owner's name.
A previous bookkeeper recorded it as below, is this correct?
Was the purchase price of the assets $450K? If so, then your JE is correct - debit the appropriate asset account(s), credit SBA loan payable. The "assumed" SBA loan should be included in the basis of the assets purchased: $300K loan payable + $150K SBA loan payable = $450K asset basis.
Unless you're able to contact the buyer's CPA/tax accountant and let them advice you on how to record it, I would assign the $150K debit to 'Ask My Accountant'. The issue is that the seller will need to recognize the SBA loan assumed by the buyer as income so the buyer should be able to expense it somehow.
IMO, the loan should have offset the rest of the purchased assets, assuming it was an asset sale. For example, a very basic business asset purchase journal entry (JE) would look something like this:
Debit
Credit
Assets purchased (various asset accounts)
XXX
Cash (down payment)
XXX
Loan payable (SBA loan)
XXX
If the asset sale was recorded with a credit to the Owner Investments equity account for the amount of the SBA loan, then your JE makes sense because it will create the loan payable and reduce the equity that was overstated.
Journal Entry to post a loan inherited from previous owner
Thanks for your reply.
The purchase was recorded as follows:
Debit
Credit
xyz company fixed asset
300k
xyz mortgage payable
300k
The SBA loan is separate and addition to the purchase loan, recorded as below, but this entry makes the owner investment equity account negative. I'm wondering if it should debit the fixed asset account instead, increasing it to 450k, instead of creating negative equity?
Was the purchase price of the assets $450K? If so, then your JE is correct - debit the appropriate asset account(s), credit SBA loan payable. The "assumed" SBA loan should be included in the basis of the assets purchased: $300K loan payable + $150K SBA loan payable = $450K asset basis.
The total purchase price on the sale documents was $300k, and what you're saying makes sense, that the $300k is essentially the discounted sale price since the buyer was assuming the SBA loan. I'll add a correcting entry to adjust the asset basis to $450k to include the SBA loan.
If the sale price was $300K, then the basis of the assets is only $300K. Why is there a loan payable for $300K and an additional SBA loan payable for $150K? Who pays $450K for $300K in assets. What am I missing?
The business was offered for sale at $300k, and the buyer took out a $300k business loan to purchase it. The sale documents included that the buyer would assume the existing $150k SBA loan.
Unless you're able to contact the buyer's CPA/tax accountant and let them advice you on how to record it, I would assign the $150K debit to 'Ask My Accountant'. The issue is that the seller will need to recognize the SBA loan assumed by the buyer as income so the buyer should be able to expense it somehow.
Thanks, the owner just advised me that he forgot that it was originally valued at $450k on the sale document, so your original answer solves this. Appreciate the help!
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