Snowbird case solutionSnowbird case based roughly on Example 1 Case D in implementation guidanceASC 360-20-55-37 thru 55-43 LAND OWNED BY SELLER OF IMPROVEMENTSAssumptions:Sales price of improvements 1,000,000 Represented by proceeds of:Cash down payment 150,000 Loan by insurance company (lien on property) pv= 700,000 Term of loan in years = 25 300 =nAnnual interest rate= 7.00% 0.005833333 =I per monthPayable monthly in arrears 0 =fvComputed amt of payment $4,947.45 0 typeNote received by seller from buyer pv= 150,000 Term of loan in years = 30 360 =nAnnual interest rate= 8.00% 0.006666667 =I per monthPayable monthly in arrears 0 =fvComputed amt of payment $1,100.65 0 type1,000,000 OTHER FACTS:Interdependent contract:Land lease 50,000$ per year plus 1% of gross receiptsPayable monthly in advance50,000.00 annuallyTerm in years = 50If no land lease, profit would beCarrying value of the improvements 600,000 400,000 Cost of land 475,000 No continuing involvement by sellerComputation of SALES VALUE1. Present value of land lease for period of primary loanpv= 576,438 475,000 not in excess of sellers cost of land per Term of loan in years = 25 300 =n ASC 360-20-40-57Annual interest rate (given)8.00% 0.006666667 =i Use rate of a 2nd lien as in Case CAnnual payment = 50,000.00 0 =fv This works better than using the 11% I gave but you had to 1 type study more than on example!2. Loan from insurance company 700,000 Equivalent primary debt= 1,175,000 3. Note receivable from buyer 150,000 Total debt or equivalent= 1,325,000 4. Down payment 150,000 SALES VALUE FOR COMPUTING INITIAL INVESTMENT REQUIRED 1,475,000 ASC 360-20-55-38Minimum initial investment = 15% 221,250 Actual downpayment = 150,000 FAILS first test FALSEGO ON TO SECOND TEST (not necessary if we fail the first test)(See example computation ASC 360-20-55-33 toward bottom)Sales value 1,475,000 115% of primary debt NOT including land lease 805,000 Down payment must be at least this much 670,000 150,000 Therefore second test is not met FALSEThe full accrual method of revenue recognition can NOT be usedThe second test may alternatively be applied as the ratio of total debt to equivalent primary debtSee numeric example ASC 360-20-55-31Total debt equivalent 1,325,000 189%Primary debt 700,000 The result must be LESS than 115% in this computation FALSECONCLUSION: The full accrual method cannot be used Profit recognized at time of sale should not exceed that recognizable under the installment methodas if the subordinate lease were an installment receivable.For numeric example, see ASC 360-20-55-39Profit recognition computation:Sale value as computed above for initial investment test 1,475,000 Less: Carrying value of improvements 600,000 givenLess: Carrying value of land 475,000 given 1,075,000 Anticipated total profit on sale of improvements = 400,000 See ASC 360-20-55-40Cash received or to be received by seller (other than primary loan) Profit thereonDown payment 150,000 77,419 Present value of loan to buyer 150,000 77,419 Present value of land lease payments 475,000 245,161 Total cash equivalent 775,000 400,000 322,581 deferredafter down paymentSee ASC 360-20-55-41Compute gross profit percentage (to be used in installment method):Anticipated total profit 400,000 equals 51.61%divided by cash to be received 775,000 See ASC 360-20-55-42 150,000 down paymentGross profit percentage 51.61%Profit recognized at date of sale = 77,419.35 Deferred gross profit = 322,580.65 to be recognized as payments are collectedSee table at right - we would not really recognize interest revenue on the leaseThis is just so we can see when the remaining profits would be recognized.If there is only the initial payment in first year25,806.45 land lease paymentIf there were 12 payments in the first year: 646.73 loan to buyerComputed above on downpayment: 77,419.35 Total profit in first 12 months 103,225.81 deferred at year end = 296,774.19 Verify original amt of deferred gross profit: From amortization tablesrelated to land lease 245,161.29 related to loan from seller to buyer 77,419.35 322,580.65 TRUE0.00Total gross profit percentage 51.61% Total gross profit to be recognized 77,419.35 Land lease paymentsInterest Principal BalanceGross Profit recognized246,232.87 51.61%0 8.00% 576,438 Note receivable1 50,000.00 0 50,000.00 526,437.91 25,806.45 payment InterestPrincipalBalanceGross Profit Recognized2 50,000.00 42,115.03 7,884.97 518,552.95 4,069.66 0 0.006666667 150,000 3 50,000.00 41,484.24 8,515.76 510,037.18 4,395.23 1 1,100.65 1,000.00 100.65 149,899.35 51.95 4 50,000.00 40,802.97 9,197.03 500,840.16 4,746.85 2 1,100.65 999.33 101.32 149,798.04 52.29 5 50,000.00 40,067.21 9,932.79 490,907.37 5,126.60 3 1,100.65 998.65 101.99 149,696.04 52.64 6 50,000.00 39,272.59 10,727.41 480,179.96 5,536.73 4 1,100.65 997.97 102.67 149,593.37 52.99 7 50,000.00 38,414.40 11,585.60 468,594.36 5,979.67 5 1,100.65 997.29 103.36 149,490.01 53.35 8 50,000.00 37,487.55 12,512.45 456,081.91 6,458.04 6 1,100.65 996.60 104.05 149,385.96 53.70 9 50,000.00 36,486.55 13,513.45 442,568.46 6,974.68 7 1,100.65 995.91 104.74 149,281.22 54.06 10 50,000.00 35,405.48 14,594.52 427,973.93 7,532.66 8 1,100.65 995.21 105.44 149,175.79 54.42 11 50,000.00 34,237.91 15,762.09 412,211.85 8,135.27 9 1,100.65 994.51 106.14 149,069.64 54.78 12 50,000.00 32,976.95 17,023.05 395,188.80 8,786.09 10 1,100.65 993.80 106.85 148,962.79 55.15 13 50,000.00 31,615.10 18,384.90 376,803.90 9,488.98 11 1,100.65 993.09 107.56 148,855.23 55.52 14 50,000.00 30,144.31 19,855.69 356,948.21 10,248.10 12 1,100.65 992.37 108.28 148,746.95 55.89 15 50,000.00 28,555.86 21,444.14 335,504.07 11,067.94 13 1,100.65 991.65 109.00 148,637.95 56.26 16 50,000.00 26,840.33 23,159.67 312,344.40 11,953.38 14 1,100.65 990.92 109.73 148,528.23 56.63 17 50,000.00 24,987.55 25,012.45 287,331.95 12,909.65 15 1,100.65 990.19 110.46 148,417.77 57.01 18 50,000.00 22,986.56 27,013.44 260,318.50 13,942.42 16 1,100.65 989.45 111.20 148,306.57 57.39 19 50,000.00 20,825.48 29,174.52 231,143.98 15,057.82 17 1,100.65 988.71 111.94 148,194.64 57.77 20