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Knapp Case Assignment 1.7 Lincoln Savings and Loan Associations

Autor:   •  December 8, 2017  •  1,109 Words (5 Pages)  •  391 Views

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For retail land sales, this Statement requires that the seller's receivables from the land sales be collectible and that the seller have no significant remaining obligations for construction or development before profits are recognized by the full accrual method. Other sales in retail land sales projects are to be reported under either the percentage-of-completion or the installment method, for which the Statement establishes criteria based on the collectability of the seller's receivables from the land sales and the seller's remaining obligations.

For other sales of real estate, this Statement provides for profit recognition by the full accrual and several other methods, depending on whether a sale has been consummated, the extent of the buyer's investment in the property being sold, whether the seller's receivable is subject to future subordination, and the degree of the seller's continuing involvement with the property after the sale. Paragraphs 3-5 set forth the general requirements for recognition of all the profit at the date of sale. Paragraphs 6-18 elaborate on those general rules. Paragraphs 19-43 provide more detailed guidance for a variety of more complicated circumstances if the criteria for immediate profit recognition are not met.

Certain provisions of this Statement that relate to accounting for sales of real estate are summarized in decision trees.

The auditor should have investigated Lincoln’s book to ascertain whether the purchaser is going to pay the whole balance of non-recourse note. In many case, it would look very difficult to assume such related party transactions, the auditor should use his or her professional skepticism to conduct more testing and substantive procedure verify such evidences. In this case, the auditor should determine whether the purchaser actually has the intention of completing the transaction, which is often difficult to determine. This would allow Lincoln to recognize such profit on his books.

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