ASC 360-20: Real Estate Sales Profit Recognition & Journal Entries
Posted In | ASC Education | Gridlex AcademyReal estate transactions are significant events for both buyers and sellers, often involving large sums of money and long-term commitments. ASC 360-20, Property, Plant, and Equipment - Real Estate Sales, provides guidance on accounting for real estate sales and the recognition of profit in such transactions. This article explains profit recognition under ASC 360-20, along with illustrative journal entries.
Understanding Profit Recognition in Real Estate Sales
ASC 360-20 outlines specific criteria that must be met for profit recognition in real estate sales. These criteria ensure that the seller has transferred the risks and rewards of ownership to the buyer and that the transaction is genuine. The main criteria include:
1. A legally enforceable sales agreement is in place.
2. The buyer has provided an initial and continuing investment in the property.
3. The seller's receivables, if any, are not subject to future subordination.
4. The seller has transferred possession and control of the property to the buyer.
Once these criteria are met, the seller can recognize profit using one of the following methods
1. Full accrual method: If all criteria are met, and the seller has no further significant obligations, the profit is recognized in full at the time of sale.
2. Installment method: If all criteria are met, but the collection of the sales price is uncertain, profit is recognized proportionally as cash is collected.
3. Cost recovery method: If all criteria are met, but the seller has significant continuing involvement or the collection of the sales price is highly uncertain, profit is recognized only after all costs have been recovered.
Journal Entries for Profit Recognition in Real Estate Sales
To illustrate the journal entries for profit recognition in real estate sales, let's assume a company sells a property for $1,000,000. The carrying value of the property is $700,000, and the company receives a 20% down payment ($200,000) with the remaining balance to be paid over the next five years.
1. Record the sale of the property using the full accrual method:
Dr. Cash $200,000
Dr. Notes Receivable $800,000
Cr. Property $700,000
Cr. Gain on Sale of Property $300,000
2. Record the sale of the property using the installment method:
Dr. Cash $200,000
Dr. Installment Sales Receivable $800,000
Cr. Property $700,000
Cr. Deferred Gross Profit $300,000
Dr. Deferred Gross Profit $60,000 (20% of $300,000)
Cr. Realized Gross Profit $60,000 (Recognize proportionally as cash is collected)
3. Record the sale of the property using the cost recovery method:
Dr. Cash $200,000
Dr. Cost Recovery Receivable $800,000
Cr. Property $700,000
Cr. Deferred Gross Profit $300,000
Dr. Cost Recovery Receivable $200,000
Cr. Cash $200,000 (Recognize profit only after all costs have been recovered)
ASC 360-20 provides guidance on profit recognition in real estate sales, ensuring that the seller has genuinely transferred the risks and rewards of ownership. By understanding the criteria for profit recognition and the various methods for recognizing profit, companies can accurately account for real estate transactions and maintain transparent financial reporting. Proper accounting for real estate sales is crucial for both buyers and sellers, as it affects their financial position and performance, and can influence future business decisions.