Real estate sale accounting.REAL ESTATE SALE ACCOUNTING ISSUE NO. 89-14 This accounting issue deals with a sale of real estate accounted for under the installment or cost recovery methods. Because the initial investment by the buyer was inadequate for full accrual accrual, n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest. , the sale was financed by the seller. The buyer subsequently defaulted on the mortgage and the seller foreclosed on the property. The fair value of the property at the time of foreclosure foreclosure Legal proceeding by which a borrower's rights to a mortgaged property may be extinguished if the borrower fails to live up to the obligations agreed to in the loan contract. was less than the seller's gross receivable but greater than his net receivable. The net receivable is defined as the gross receivable less the deferred profit on the sale. Accounting issue. At what amount should the foreclosed property be recorded? This issue is important because the FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). staff received many inquiries on this matter and practice appears diverse. Background. FASB Statement FASB Statement A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting no. 66, Accounting for Sales of Real Estate, specifies the accounting for sales of real estate. Under certain conditions, a seller may record the full gain on the sale (full accrual method). If the conditions for full accrual are not satisfied, only partial gain may be recorded (installment or cost recovery methods). FASB Statement no. 15, Accounting for Debtors and Creditors for Troubled Debt Restructurings troubled debt restructuring See debt restructuring. , establishes the accounting for troubled debt restructurings. A troubled debt restructuring includes the transfer of real estate from a debtor One who owes a debt or the performance of an obligation to another, who is called the creditor; one who may be compelled to pay a claim or demand; anyone liable on a claim, whether due or to become due. to a creditor An individual to whom an obligation is owed because he or she has given something of value in exchange. One who may legally demand and receive money, either through the fulfillment of a contract or due to injury sustained as a result of another's Negligence to satisfy a debt (foreclosure or repossession The taking back of an item that has been sold on credit and delivered to the purchaser because the payments have not been made on it. For example, if an individual fails to render prompt payments on a new car, the car might be subject to repossession by the finance company, ). However, not all troubled debt restructurings are covered under Statement no. 15. If the creditor receives foreclosed property with a fair value at least equal to his recorded investment in the receivable, Statement no. 15 won't won't Contraction of will not. won't will not won't will apply. The recorded investment in the receivable is its face amount adjusted for interest, unamortized premium, discount and other charges. It does not include an allowance for uncollectible amounts or other valuation accounts. Furthermore, under the installment or cost recovery methods, a deferred gain is recognized when the sale is recorded. If the deferred gain is not considered a valuation account, Statement no. 15 also won't apply. Consensus. The task force decided the foreclosed property should be recorded at the net amount of the receivable or fair value of the property, whichever is lower. An example of the application of this consensus is given in exhibit 1 on page 102. Some task force members questioned whether it is appropriate to accrue To increase; to augment; to come to by way of increase; to be added as an increase, profit, or damage. Acquired; falling due; made or executed; matured; occurred; received; vested; was created; was incurred. interest for real estate sales accounted for under the installment or cost recovery methods. The EITF EITF Emerging Issues Task Force EITF Edinburgh International Television Festival EITF Europe International Taekwon-Do Federation therefore emphasized the consensus assumes the accrual of interest income on the financing is appropriate under the circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . The task force further noted the deferred profit in the transaction illustrated in exhibit 1 wouldn't be considered a valuation account under Statement no. 15. Accordingly, Statement no. 15 doesn't apply. However, it would apply to a foreclosure involving the sale of real estate accounted for under the full accrual method. In that case, the repossessed property would be recorded at its fair value, if appropriate. EXHIBIT 1 EITF example of application of issue no. 89-14
Installment Cost recovery
method method
Original sale Seller financing $ 90 $ 90 Buyer's initial investment(1) 10 10 Sales value $100 $100 Sales value $100 $100 Cost (60) (60) Gain 40 40 Amount recognized (4) 0 Deferred gain $ 36 $ 40 Foreclosure at the end of year one Original note principal balance $ 90 $ 90 Interest accrued for year one at 10% 9 0(2) Gross receivable at foreclosure 99 90 Less deferred profit (36) (40) Net receivable $ 63 $ 50 Fair value of property at foreclosure $ 80 $ 80 Consensus: The foreclosed property would be recorded at the amounts of the net receivable of $63 and $50, respectively. (1)Initial investment is inadequate for full accrual method. (2)For purposes of this example, assume that accrual of interest is not appropriate. |
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