Expert: Ed McFarland - 10/7/2004

Question
The purchase was of a sole proprietership and my client is a sole proprieter.  I showed the money in the bank 1st, as it was a check written for the amount to satisfy the assets listed in the buy sell agreement. I am fairly sure this money was the proceeds from a 2nd on his house, therefore the loan would be in his name only.  Does this make it a business loan to be shown on the B/S or an additional personal debt thus being an owner contribution?
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Followup To
Question -
I have a client who took a 2nd in order to buy a chiropractic practice form someone with whom he had worked for a couple of years. They were not partners.  I suggested making separate payments, the 2nd being paid from the business checking account so as to tie the interest to his Sched C. My Q is should the loan be booked on his balance sheet or are the loan proceeds, which were used to buy the business, an owner contribution? Here are the scenarios I have worked out:

For owner cont:
         DR          CR
Cash          100,000   
     Owner Cont          100,000

When practice is bot:
 Fixed Assets etc   100,000
     Cash          100,000

For loan:

 Cash          100,000
     Loan Payable          100,000

When practice bot:
 Fixed Assets etc   100,000
     Cash          100,000

Thanks for your time.
Answer -
I'm assuming that this isn't a C or S Corp.

The loan is an obligation of the business.

Is the 100k for operations? Otherwise if it is the purchase it would be equity, not cash. The way you are doing it here, it would show 100k in the bank. I think that's want is going on here.

Answer
To separate the business from the personal, I would say the loan belongs to the owner and money is paid in capital.

If the business was sold tommorrow, the loan would be left with the owner, not an obligation of the company. It would get paid off out of sales proceeds ideally.