USA What would the matching entry be if i need to add an asset (property) to the balance sheet.

[Edward D.]

Hello guys,

my accounting knowledge is pretty basic, so I hope my simplistic questions don't insult you guys. I recently joined the condo association board at a property I own, and I have found some inconsistencies in the bookkeeping. A few years back a unit owner had his home foreclosed on and the association took possession of the unit. The bank will eventually take possession of the home, but the association currently has the title. The idea of the previous board was to rent out the home and attempt to recover some of the unpaid assessments. I have a couple of questions. The property is not listed on the balance sheet. How would an entry to get it on the books look like? A debit to a fixed asset account and a credit to some type of equity account? What would then have to be done when the bank takes the property back.

another question would how to handle the rent coming in. the previous board was just entering the rent as if it was a maintenance payment but this doesn't seem correct. wouldn't I have to debit the bank/cash account and credit a rental income account? how would I then move or count that towards the delinquent assessment payments on the unit?

thanks for any help guys,
I hope this was easy to understand. my grasp of accounting terminology is severely lacking.

 

[Drmdcpa]

Easy to understand; complex to fix.

When the asset is debited, a liability will need to be booked especially since the bank will eventually take the property. When the bank takes the property reverse the entry (ie. debit the liability, credit the asset) and recognize any gain or loss on disposition.

As for the rental income, sounds like the current bookkeeping is taking a short cut which is not necessarily appropriate because it is not realizing rental income.

In order to apply the rental income against passed unpaid assessments, the rental income would have to be considered as belonging to the former owner, not the association.

If the association is holding the property in trust for the prior owner until the bank can take it, the shortcut is correct and the association does not book the assets.

But if the association actually has title to the property, the shortcut is incorrect and the asset needs to be booked.

If the association actually acquired the property and is not holding it in trust, you would need to know the details of that acquisition to book it properly

 

[Edward D.]

Easy to understand; complex to fix.

When the asset is debited, a liability will need to be booked especially since the bank will eventually take the property. When the bank takes the property reverse the entry (ie. debit the liability, credit the asset) and recognize any gain or loss on disposition.

As for the rental income, sounds like the current bookkeeping is taking a short cut which is not necessarily appropriate because it is not realizing rental income.

In order to apply the rental income against passed unpaid assessments, the rental income would have to be considered as belonging to the former owner, not the association.

If the association is holding the property in trust for the prior owner until the bank can take it, the shortcut is correct and the association does not book the assets.

But if the association actually has title to the property, the shortcut is incorrect and the asset needs to be booked.

If the association actually acquired the property and is not holding it in trust, you would need to know the details of that acquisition to book it properly

Thanks for the help. So if I book the asset and then do the matching liability entry. what should I call that liability account? in regards to the rental income, do I just take in the rental income and leave the delinquent assessment as is, and write it off to bad debt expense when the bank takes it?

thanks again for all the help

 

[Edward D.]

Easy to understand; complex to fix.

When the asset is debited, a liability will need to be booked especially since the bank will eventually take the property. When the bank takes the property reverse the entry (ie. debit the liability, credit the asset) and recognize any gain or loss on disposition.

As for the rental income, sounds like the current bookkeeping is taking a short cut which is not necessarily appropriate because it is not realizing rental income.

In order to apply the rental income against passed unpaid assessments, the rental income would have to be considered as belonging to the former owner, not the association.

If the association is holding the property in trust for the prior owner until the bank can take it, the shortcut is correct and the association does not book the assets.

But if the association actually has title to the property, the shortcut is incorrect and the asset needs to be booked.

If the association actually acquired the property and is not holding it in trust, you would need to know the details of that acquisition to book it properly

they are not holding it in trust. they got the through foreclosure because the original owner never paid their maintenance. which details of the acquisition would be pertinent to know?

 

[Drmdcpa]

they are not holding it in trust. they got the through foreclosure because the original owner never paid their maintenance. which details of the acquisition would be pertinent to know?

You have to know what they recieved, what they took on and what they gave up.

What they recieved was the asset, what they gave up was past due fees. If they took on any debt that is what they took on.

Once they took the property in exchange for the past due fees, those fees are paid in full. Thus booking the rental income against past due fees is highly incorrect.

Rental income needs to be booked. Then an internal journal entry would be needed to allocate some of the net rental income to current fees.

Under these circumstances I am not sure how the bank fits into it unless the association assumed the existing mortgage. In such a case that is the debt they took on.

 

[Edward D.]

You have to know what they recieved, what they took on and what they gave up.

What they recieved was the asset, what they gave up was past due fees. If they took on any debt that is what they took on.

Once they took the property in exchange for the past due fees, those fees are paid in full. Thus booking the rental income against past due fees is highly incorrect.

Rental income needs to be booked. Then an internal journal entry would be needed to allocate some of the net rental income to current fees.

Under these circumstances I am not sure how the bank fits into it unless the association assumed the existing mortgage. In such a case that is the debt they took on.

The association lien is considered a junior lien and if and when the bank decides to foreclose themselves their claim takes precedence over the associations claim. The idea I believe was to get as much rental income to offset the hit the association will take when the bank goes through with their foreclosure and pays a fraction of the total due.

So what they received was title to the property (asset)

The association dues for the unit are still on the books till the bank eventually forecloses on the property.

The association didn’t take on any debt because they aren’t on the hook for the mortgage.

 

[Drmdcpa]

Ok. It gets even more complex. Does the rental income belong to the bank first?

Even though the association is not on the hook for the mortgage, the property is worth fair market value minus the mortgage. If that number is negative, then there is no asset to book, and the fees in arrears should remain on the books.

This does not negate the fact that the rental income needs to be recognized before it can be used to pay fees in arrears, current fees, or turned over to the bank. If the bank owns the rental income, the association is a nominee recipient. In such case they recognize the income and expense the nominee distribution when made.

If the association owns the rental income, it recognizes the revenue as rental income not maintenance fees.

Any maintenance fees in arrears not collected are not recorded as income to the association as they would be if they were paid.

They could make an internal adjustment to move net rental income to cover maintenance fees. This would be more appropriate for current fees, and not as appropriate for fees in arrears.

The fees in arrears would be part of loss on disposal assuming the foreclosure sale does not cover the mortgage, foreclosure costs, and fees in arrears.

Net income should not change in any case. We are just dealing with the types of income and expenses, thus the net does not change. This is ignoring depreciation expense if the rental activity crosses tax reporting years and the asset has positive value.

 

[Edward D.]

Ok. It gets even more complex. Does the rental income belong to the bank first?

Even though the association is not on the hook for the mortgage, the property is worth fair market value minus the mortgage. If that number is negative, then there is no asset to book, and the fees in arrears should remain on the books.

This does not negate the fact that the rental income needs to be recognized before it can be used to pay fees in arrears, current fees, or turned over to the bank. If the bank owns the rental income, the association is a nominee recipient. In such case they recognize the income and expense the nominee distribution when made.

If the association owns the rental income, it recognizes the revenue as rental income not maintenance fees.

Any maintenance fees in arrears not collected are not recorded as income to the association as they would be if they were paid.

They could make an internal adjustment to move net rental income to cover maintenance fees. This would be more appropriate for current fees, and not as appropriate for fees in arrears.

The fees in arrears would be part of loss on disposal assuming the foreclosure sale does not cover the mortgage, foreclosure costs, and fees in arrears.

Net income should not change in any case. We are just dealing with the types of income and expenses, thus the net does not change. This is ignoring depreciation expense if the rental activity crosses tax reporting years and the asset has positive value.

Thanks a lot for all your help. This is a little clearer now.