Other noncash consideration received by the seller, such as notes from the buyer without in Visual Studio .NET

Drawer QR in Visual Studio .NET Other noncash consideration received by the seller, such as notes from the buyer without
Other noncash consideration received by the seller, such as notes from the buyer without
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letters of credit or marketable securities Noncash consideration constitutes down payment only at the time it is converted into cash
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REAL ESTATE AND CONSTRUCTION
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Funds that have been or will be loaned to the buyer builder/developer for acquisition, con-
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struction, or development purposes or otherwise provided directly or indirectly by the seller Such amounts must rst be deducted from the down payment in determining whether the down payment test has been met An exemption from this requirement was provided in paragraph 115 of SFAS No 66, which states that if a future loan on normal terms from a seller who is also an established lending institution bears a fair market interest rate and the proceeds of the loan are conditional on use for speci c development of or construction on the property, the loan need not be subtracted in determining the buyer s investment Funds received from the buyer from proceeds of priority loans on the property Such funds have not come from the buyer and therefore do not provide assurance of collectibility of the remaining receivable; such amounts should be excluded in determining the adequacy of the down payment In addition, EITF Consensus No 88-24 provides guidelines on the impact that the source and nature of the buyer s initial investment can have on pro t recognition Marketable securities or other assets received as down payment will constitute down payment only at the time they are converted to cash Cash payments for prepaid interest that are not in substance additional sales proceeds Cash payments by the buyer to others for development or construction of improvements to the property
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(iii) Inadequate Down Payment If the buyer s down payment is inadequate, the accrual method of accounting is not appropriate, and the deposit, installment, or cost recovery method of accounting should be used When the sole consideration (in addition to cash) received by the seller is the buyer s assumption of existing nonrecourse indebtedness, a sale could be recorded and pro t recognized if all other conditions for recognizing a sale were met If, however, the buyer assumes recourse debt and the seller remains liable on the debt, he has a risk of loss comparable to the risk involved in holding a receivable from the buyer, and the accrual method would not be appropriate EITF Consensus No 88-24 states that the initial and continuing investment requirements for the full accrual method of pro t recognition of SFAS No 66 are applicable unless the seller receives one of the following as the full sales value of the property:
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Cash, without any seller contingent liability on any debt on the property incurred or assumed
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by the buyer
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The buyer s assumption of the seller s existing nonrecourse debt on the property The buyer s assumption of all recourse debt on the property with the complete release of the
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seller from those obligations
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Any combination of such cash and debt assumption
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(e) RECEIVABLE FROM THE BUYER Even if the required down payment is made, a number of factors must be considered by the seller in connection with a receivable from the buyer They include:
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Collectibility of the receivable Buyer s continuing investment amortization of receivable Future subordination Release provisions Imputation of interest
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(i) Assessment of Collectibility of Receivable Collectibility of the receivable must be reasonably assured and should be assessed in light of factors such as the credit standing of the buyer (if recourse), cash ow from the property, and the property s size and geographical location This
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302 SALES OF REAL ESTATE
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requirement may be particularly important when the receivable is relatively short term and collectibility is questionable because the buyer will be required to obtain nancing Furthermore, a basic principle of real estate sales on credit is that the receivable must be adequately secured by the property sold (ii) Amortization of Receivable Continuing investment requirements for full pro t recognition require that the buyer s payments on its total debt for the purchase price must be at least equal to level annual payments (including principal and interest) based on amortization of the full amount over a maximum term of 20 years for land and over the customary term of a rst mortgage by an independent established lending institution for other property The annual payments must begin within one year of recording the sale and, to be acceptable, must meet the same composition test as used in determining adequacy of down payments The customary term of a rst mortgage loan is usually considered to be the term of a new loan (or the term of an existing loan placed in recent years) from an independent nancial lending institution All indebtedness on the property need not be reduced proportionately However, if the seller s receivable is not being amortized, realization may be in question and the collectibility must be more carefully assessed Lump-sum (balloon) payments do not affect the amortization requirement as long as the scheduled amortization is within the maximum period and the minimum annual amortization tests are met For example, if the customary term of the mortgage by an independent lender required amortizing payments over a period of 25 years, then the continuing investment requirement would be based on such an amortization schedule If the terms of the receivable required principal and interest payments on such a schedule only for the rst ve years with a balloon at the end of year 5, the continuing investment requirements are met In such cases, however, the collectibility of the balloon payment should be carefully assessed If the amortization requirements for full pro t recognition as set forth above are not met, a reduced pro t may be recognized by the seller if the annual payments are at least equal to the total of:
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Annual level payments of principal and interest on a maximum available rst mortgage Interest at an appropriate rate on the remaining amount payable by the buyer
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The reduced pro t is determined by discounting the receivable from the buyer to the present value of the lowest level of annual payments required by the sales contract excluding requirements to pay lump sums The present value is calculated using an appropriate interest rate, but not less than the rate stated in the sales contract The amount calculated would be used as the value of the receivable for the purpose of determining the reduced pro t The calculation of reduced pro t is illustrated in Exhibit 303 The requirements for amortization of the receivable are applied cumulatively at the closing date (date of recording the sale for accounting purposes) and annually thereafter Any excess of down payment received over the minimum required is applied toward the amortization requirements (iii) Receivable Subject to Future Subordination If the receivable is subject to future subordination to a future loan available to the buyer, pro t recognition cannot exceed the amount determined under the cost recovery method (see Subsection 302(j)(iii)) unless proceeds of the loan are rst used to reduce the seller s receivable Although this accounting treatment is controversial, the cost recovery method is required because collectibility of the sales price is not reasonably assured The future subordination would permit the primary lender to obtain a prior lien on the property, leaving only a secondary residual value for the seller, and future loans could indirectly nance the buyer s initial cash investment Future loans would include funds received by the buyer arising from a permanent loan commitment existing at the time of the transaction unless such funds were rst applied to reduce the seller s receivable as provided for in the terms of the sale
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