Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Reported as a Sale…
(What You May Find on The Dealership Books)
Gain on Sale of Vehicle
(5000-2500) $2,500
Loss of Sale of Contract
(4000-2000) (2,000)
Net Profit $ 500
I. Note
Receivable $4,000
Cash (down payment) $1,000
Sale $5,000
To record the sale of the vehicle
II. Cost of Goods Sold $2,500
Inventory $2,500
To record the cost of the vehicle sold
III. Bad Debt Expense $2,000
Cash (advance) $2,000
Note Receivable $4,000
To record the sale of the finance contract
Note that instead of assigning value to the right to receive future back-end
distributions and interest, a bad debt expense was taken to write off the dealer’s
remaining basis in the installment contract. This has a significant impact on the net
outcome of the transactions, as shown above.
19-25