ASC 972: Investment Property Acquisition Journal Entries for REITs

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ASC 972 is a part of the Accounting Standards Codification issued by the Financial Accounting Standards Board (FASB) in the United States. This standard provides guidance on the recognition, measurement, presentation, and disclosure requirements for REITs. It outlines the specific accounting treatment for transactions related to investment properties, including acquisition, depreciation, and disposal.

 

Acquisition of Investment Property

When a REIT acquires an investment property, the property's cost is capitalized and recorded as an asset on the balance sheet. The cost includes the purchase price, closing costs, and any other directly attributable costs incurred in bringing the property to its intended use.
 

Journal Entries for Acquisition of Investment Property Transactions

To illustrate the application of ASC 972, let's consider a hypothetical example of a REIT that acquires an investment property for $1,000,000 with closing costs of $50,000.
 

1. Recording the acquisition of the investment property:
 

Debit: Investment Property - $1,050,000 ($1,000,000 purchase price + $50,000 closing costs)

Credit: Cash - $1,050,000

This journal entry records the acquisition of the investment property and the corresponding decrease in cash.

 

2. Recording depreciation on the investment property:

Assuming the investment property has a useful life of 30 years and no residual value, the annual depreciation expense would be:
 

Depreciation expense = $1,050,000 / 30 years = $35,000 per year

Debit: Depreciation Expense - $35,000

Credit: Accumulated Depreciation - Investment Property - $35,000

 

This journal entry records the annual depreciation expense for the investment property, with the credit entry to the accumulated depreciation account.

 

3. Recording the disposal of the investment property:

Assuming the REIT sells the investment property after five years for $1,200,000, the journal entries would be as follows:

 

a. Remove the investment property and related accumulated depreciation from the balance sheet:
 

Debit: Accumulated Depreciation - Investment Property - $175,000 (5 years * $35,000 per year)

Credit: Investment Property - $1,050,000

 

b. Record the cash received and gain on the sale of the investment property:
 

Debit: Cash - $1,200,000

Credit: Gain on Sale of Investment Property - $325,000 ($1,200,000 - $875,000)

Credit: Investment Property - $875,000 ($1,050,000 - $175,000)
 

Understanding and applying ASC 972 is essential for REITs to ensure accurate financial reporting and provide transparency to stakeholders. By following the guidance provided in this standard and recording transactions using journal entries, REITs can comply with accounting requirements and maintain accurate records of their investment property transactions. The appropriate accounting for the acquisition, depreciation, and disposal of investment properties allows for a more accurate reflection of a REIT's financial performance and the potential returns for investors. By adhering to ASC 972, REITs can instill confidence in their investors, promote accountability, and ultimately support the success and growth of their organization.