Estimated Liability for Repossession Purchase Loss

Liabilities and Net Worth

ESTIMATED LIABILITY FOR REPOSSESSION PURCHASE LOSS	LIABILITY ACCOUNT
	2600

ACCOUNT EXPLANATION
TRANSACTIONS
COMMENTS

ACCOUNT EXPLANATION

Allowance for losses anticipated from purchase of repossessed vehicles.

TRANSACTIONS

			Jrnl.	Dr.	Cr.

Monthly provision for estimated repossession purchase loss			SE
	Repossession Purchase Loss—New			6070
	Repossession Purchase Loss—Used			6170
		Estimated Liability for Repossession Purchase Loss			2600

Repossessed vehicle (originally sold as a new car) purchased from financing institution—purchase cost in excess of inventory value			CD
	Inventory—Used Cars			1350
	Estimated Liability for Repossession Purchase Loss			2600
	or
	Repossession Purchase Loss—New (excess of purchase cost)			6070
		Cash in Bank—General			1001

COMMENTS

There are two methods of accounting for repossession purchases losses:

The allowance method, utilizing Account 2600, recognizes anticipated future losses from repossessions. This estimated provision should be based on prior experience, and supplemented with judgment as to probable future experience. The estimated losses from units originally sold as new cars and those originally sold as used cars should be considered separately in determining the total estimated liability. Actual losses are then charged to the allowance. This method is recommended because it facilitates control of costs and provides closer matching of expense with income. Since special handling of this expense may be required for income tax purposes, dealers should obtain tax advice regarding the use of this account.

The direct write-off method does not recognize losses until specific repossessions occur, at which time they are charged to Account 6070, Repossession Purchase Loss—New, or Account 6170, Repossession Purchase Loss—Used, depending on whether the sale that led to the repossession was a new vehicle sale or a used vehicle sale. Under this method, Account 2600 is not used.

After a method has been selected, it should be used consistently. Legal and tax counsel should be consulted before any change is made in the method of accounting for repossession purchase loss.

Finance income charged back due to repossessions should be handled as a charge to Account 5000, Finance Income—New, or Account 5100, Finance Income—Used, as appropriate.
After purchase of repossessed vehicles, further write-downs to estimated wholesale value and sales of the vehicles should be handled as normal used vehicle transactions.