Detailed Answer
(c) The problem states that the sale has been consummated
and that Kame’s initial and continuing investments are
adequate to demonstrate a commitment to pay for the property.
However, the fact that Esker’s receivable is subject to future subordination
precludes recognition of the profit in full. Instead, the
cost recovery method must be used to account for the sale. The
deposit method is to be used
1. Until the sale is consummated, when all activities
necessary for closing have been performed.
2. If the buyer’s initial and continuing investments are not
adequate to demonstrate a commitment to pay for the
property and the seller is not reasonably assured of recovering
the cost of the property if the buyer defaults.
The problem states that the sale has been consummated and that
Kame’s initial and continuing investments are adequate. Therefore,
the deposit method will not be used to account for the sale.
The reduced profit method is used only when the initial investment
is adequate to demonstrate a commitment to pay for the
property but the continuing investments are not. The continuing
investments must also meet certain additional requirements for
the reduced profit method to be used. Since Kame’s continuing
investments are adequate, the reduced profit method will not be
used to account for the sale. The full accrual method may be
used only if profit on the sale is determinable, the earning process
is virtually complete, and all of the following:
1. A sale is consummated.
2. The buyer’s initial and continuing investments are adequate
to demonstrate a commitment to pay for the
property.
3. The seller’s receivable is not subject to future subordination.
4. The seller has transferred to the buyer the usual risks
and rewards of ownership in a transaction that is, in
substance, a sale and does not have a substantial continuing
involvement in the property.