Principles of Real Estate Accounting and Taxation
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Principles of Real Estate Accounting and Taxation
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Fall 2020 – Exam #1
1. A C corporation can be taxed as a partnership if elected under the check the box rules.
True False
2. A company owes its employees $5,000 for the year ended December 31. It will pay employees on January 6 for the previous two weeks’ salaries. The year-end adjusting on entry on December 31 will include a debit to Salaries Expense and a credit to Cash.
True False
3. Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.
True False
4. Assets that cost $400,000 and had accumulated depreciation of $80,000 is sold at a gain of $50,000. This implies that $450,000 cash was received from the sale.
True False
5. The cash method of accounting recognizes income when received or constructively received.
True False
6. A company paid $9,000 for a six-month insurance policy. The policy coverage began on February 1. On February 28, $150 of insurance expense must be recorded.
True False
7. Failure to record an accrued liability will understate the liability and understate the expense.
True False
8. Increases in liability accounts are recorded as debits.
True False
9. Depreciation expense is deducted in arriving at GAAP net income and funds from operations (“FFO”), but it is not deducted in arriving at net operating income.
True False
10. A corporation which would otherwise qualify as a REIT is owned (and will be owned during the last half of the year) by eight (8) unrelated individuals (each of whom own 5% of the company) and three (3) unrelated individuals (each of whom own 20% of the company). The company can elect to be a REIT without violating the requirement to not be closely held rule.
True False
11. A company’s balance sheet shows: cash $301,000, accounts receivable of $25,000, capitalized loan fees of $15,000 (with no accumulated amortization), land of $100,000, building of $650,000, accumulated depreciation-building of $40,000, and accrued expenses of $32,000. What is the amount of owner’s equity?
_______________________
12. At the beginning of December of the current year, Roger Wilco Builders’ ledger reflected accounts payable with a credit balance of $134,000. During December, the company paid $114,800. to creditors and was billed an additional amount of $14,800. At the end of December, the balance in the accounts payable account should be:
_______________________
13. A company reported the following: Owner’s equity was $325,000 as of the balance sheet date on December 31, 2019. The following information includes all of the information recorded for the year ended December 31, 2020:
| Rental income | $334,000 |
| Prepaid rent | $123,000 |
| Deferred revenue | $20,000 |
| Property operating expenses | $423,000 |
| Notes payable | $1,200,000 |
What is the total equity of the company at December 31, 2020?
___________________
14. The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been owned:
A. Is referred to as depreciation expense. B. Is referred to as accumulated depreciation. C. Is shown on the income statement of the final period. D. Is only recorded when the asset is disposed of. E. Is referred to as an accrued asset.
15. If the liabilities of a business increased $25,000 during a period of time and the owner’s equity in the business decreased $400,000 during the same period, the assets of the business must have:
A) Decreased $375,000.
B) Decreased $425,000.
C) Increased $425,000.
D) Increased $375,000.
E) None of the above.
16. FastForward had beginning equity of $7,000, net loss of $21,000, withdrawals of $20,000 and investments by owners of $16,000. Its ending equity should be:
_____________________________
17. If a parcel of land is assessed for tax purposes at $215,000, is offered for sale at $225,000, was originally purchased for $45,000, is recognized by its purchasers as easily being worth $240,000, and is sold for $414,000. At the time of the sale, assume that the seller owed $80,000 to TrustOne Bank on the land. Immediately after the sale, the seller paid off the loan to TrustOne Bank. What is the effect of the sale of the land and the payoff of the loan on the accounting equation?
Assets (circle) increases OR decreases by ____________
Liabilities (circle) increases OR decreases by ______________
Owner’s equity (circle) increases OR decreases by ______________
18. Inge Industries received $3,000 from a customer in advance for services not yet rendered. Inge’s general journal entry to record this transaction will be:
Debit _______________
Credit _______________
19. On May 1, 2020, a three-year insurance policy was purchased for $36,000 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company’s income statement for the year ended December 31, 2020?
________________________
20. A company purchased a property (land and building) at a cost of $2,500,000 on July 1, 2019. The building is estimated to have a useful life of 25 years. Land was included in the purchase for $1,500,000. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the building for the year ended December 31, 2019?
________________________
21. Use the following information to calculate how much cash was received during the year for rents:
| Rental income (accrual method) | $12,323,000 |
| Prepaid rent (liability account), January 1 | 621,400 |
| Prepaid rent (liability account), December 31 | 350,400 |
A. $11,701,600. B. $12,673,400. C. $12,323,000. D. $12,594,000. E. $12,052,000.
F. None of the above
22. Which of the following statements is incorrect?
A. The normal balance of land is a debit. B. The normal balance of loans payable is a credit. C. The normal balance of revenues is a credit. D. The normal balance of an expense account is a debit. E. The normal balance of the owner’s capital account is a debit.
23. If the assets of a business decreased $229,000 during a period of time and its liabilities increased $671,000 during the same period, equity in the business must have:
(Circle one) increased or decreased by $ _________________
24. James, LLC sold an office building (assume no land) for $15,000,000. The building was purchased in 1991 for a cost of $12,000,000 and James LLC deducted $5,000,000 depreciation (cumulatively) through date of sale. James’s gain is:
___________________________________
25. List the four names of the statements included in the financial statements:
1) ___________________________________
2) ___________________________________
3) ___________________________________
4) ___________________________________
26. PPW Co. leased a portion of its store to another company for eight months beginning on October 1, 2017, at a monthly rate of $2,000. The tenant paid $16,000 cash on October 1, which PPW Co. recorded as unearned revenue. The journal entry made by PPW Co. at year- end on December 31, 2017 would include:
A) A debit to Rent Earned for $24,000.
B) A credit to Unearned Rent for $6,000.
C) A debit to Cash for $6,000.
D) A credit to Rent Earned for $24,000.
E) A debit to Unearned Rent for $2,000.
F) None of the above.
27. A company purchased a property (land, building and land improvements) at a cost of $26,500,000 on July 1, 2018. The building and the building improvements both have are estimated to have a useful life of 25 years. Land, which was included in the total purchase price, was assigned a cost of $5,000,000. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the building for the year ended December 31, 2018?
A) $662,500.
B) $1,060,000.
C) $430,000.
D) $860,000.
E) None of the above.
28. If the assets of a business increased $1,229,000 during a period of time and its liabilities decreased by $607,000 during the same period, equity in the business must have:
(circle) increased OR decreased by _________________________
29. On September 30, the Cash account of Value Company had a normal balance of $5,000. During September, the account was debited for a total of $12,200 and credited for a total of $11,500. What was the balance in the Cash account at the beginning of September?
A. A $0 balance. B. A $4,300 debit balance. C. A $4,300 credit balance. D. A $5,700 debit balance. E. A $5,700 credit balance.
30. Financial statements are typically prepared in the following order:
A. Balance sheet, statement of owner’s equity, income statement. B. Statement of owner’s equity, balance sheet, income statement. C. Income statement, balance sheet, statement of owner’s equity. D. Income statement, statement of owner’s equity, balance sheet. E. Balance sheet, income statement, statement of owner’s equity.
31. For each of the following accounts, indicate whether a debit or a credit would increase the account balance (answer debit or credit)
Repairs expenses _____________
Cash ______________
Owners Withdraws ______________
Notes Payable ______________
Accounts receivable ________________
Owners Contributions ______________
Building (at cost) _______________
Accumulated depreciation ________________
Accrued salaries _______________
Rental income ______________
Utilities expenses _____________
Deferred revenue ___________________
32. The following is from a December 31 balance sheet for Tome Homebuilders. Compute the capital account balance:
| Accounts receivable | $24,000 |
| Accounts payable | 41,000 |
| Building | 134,000 |
| Accumulated depreciation | 55,000 |
| Deferred revenue | 21,000 |
| Notes payable | 258,000 |
| Inventory | 11,000 |
| R. Perkins, Capital | ______ |
| Land | 31,000 |
33. Texark Inc., a calendar year taxpayer, reported $210,300 net income before tax on its financial statements prepared in accordance with GAAP. The tax records reveal the following information. Depreciation expense per books (included as a deduction in arriving at GAAP net income) was $213,700, but tax depreciation is $122,000.
Texark received a $100,000 of next year’s rent in advance. For tax the amount should be included in income in the year received. Compute Texark’s taxable income.
34. Robert Haddon contributed $70,000 in cash and land worth $130,000 to open a new business, RH Consulting. Which of the following general journal entries will RH Consulting make to record this transaction?
A. Debit Assets $200,000; credit Haddon, Capital, $200,000. B. Debit Cash and Land, $200,000; credit Haddon, Capital, $200,000. C. Debit Cash $70,000; debit Land $130,000; credit Haddon, Capital, $200,000. D. Debit Haddon, Capital, $200,000; credit Cash $70,000, credit Land, $130,000. E. Debit Haddon, Capital, $200,000; credit Assets, $200,000.
35. In which of the following situations would the trial balance not balance?
A. A $1,000 collection of an account receivable was erroneously posted as a debit to Accounts Receivable and a credit to Cash. B. The purchase of office supplies on account for $3,250 was erroneously recorded in the journal as $2,350 debit to Office Supplies and credit to Accounts Payable. C. A $50 cash receipt for the performance of a service was not recorded at all. D. The purchase of office equipment for $1,200 was posted as a debit to Office Supplies and a credit to Cash for $1,200. E. The cash payment of a $750 account payable was posted as a debit to Accounts Payable and a debit to Cash for $750.
36. Hal Smith opened Smith’s Repairs on March 1 of the current year. During March, the following transactions occurred and were recorded in the company’s books: 1. Smith invested $10,000 cash in the business. 2. The company paid $5,200 for salaries for the month. 3. The company paid $1,600 cash to rent office space for the month. 4. Smith withdrew $5,000 for his personal use from the company. 5. The company received $19,000 cash for repair services provided during March. 6. The company provided $12,000 of services to customers on account. 7. The company paid cash of $500 for monthly utilities. 8. The company received $3,100 cash in advance of providing repair services to a customer.
Based on this information, net income for March would be:
A. $11,700. B. $13,400 C. $23,700 D. $26,800 E. None of the above.
37. Chili Owners opened a real estate leasing business on January 1, 2018 of the current year. During the year, the following transactions occurred and were recorded in the company’s books:
1. Chili Willy, owner, invested $325,000 cash to start the business Chili Owners. 2. Chili Owners bought a commercial building for $575,000 on March 1, 2018. The property was comprised of building of $450,000 and land of $125,000. The building is depreciable over a 30 year life for GAAP. 3. The company received $42,000 in rent which represented payment under the lease on the property. The payment was for the rental period from January 1 – December 31, 2018. 5. The company paid $2,200 for a maintenance contract under which services were rendered during the year. 6. The company received $7,000 of rent which represented payment under the lease on the property. The payment was for the rental period from January 1 – January 31, 2019. 7. The company paid cash of $3,500 for utilities for 2018 bills. 8. The company paid 2018 property taxes in the amount of $11,000 on July 1, 2018 and the company also paid for 2019 property taxes in the amount of $3,500 on December 15, 2018.
9. The company paid interest expense of $4,000 on its outstanding debt during 2018. Accrued, unpaid interest through the end of the year, December 31, 2018, was an additional $500. 10. Chili Willy withdrew $15,000 for its personal use from the company.
Based on the information above, GAAP net income as computed using the accrual method of accounting, should be:
_____________________
Based on the information above, net operating income (NOI) for GAAP as computed under the accrual method of accounting should be:
_____________________
Based on the information above, net income as computed under the cash method of accounting (i.e. not under
GAAP) should be:
_____________________
38. A REIT has 500 shares of stock outstanding and is owned by 500 separate US taxable individuals. It has the following items of taxable income for the year ended December 31, 2020. The REIT makes declares a distribution of $400,000 for each share of REIT stock outstanding in 2020 (so the total to its 50 shareholders was $20,000,000). Assume all of shareholders are US taxable individuals in the highest tax bracket and they proportionally own the REIT shares:
Rents from real property: $10,000,000
Depreciation expense: ( 1,000,000)
Property expenses: ( 4,000,000)
Capital gain on the sale of real estate: 3,000,000
Interest income: 300,000
Total taxable income/earnings and profits: $ 8,300,000
a) Calculate the aggregate taxes due on the $20,000,000, assuming that each of the 50 shareholders has a tax basis of $1,000,000 in their REIT shares (a total of $50,000,000). Show each category of income from the REIT to the shareholders.
b) Calculate the aggregate taxes due on the $20,000,000, assuming that each of the 50 shareholders has a tax basis of $400,000 in their REIT shares (a total of $10,000,000). Show each category of income from the REIT to the shareholders.
39. Assume that you purchased a commercial office building on January 1, 2019. The rent collected from the single tenant in year 1 was $330,000. The terms of the lease require $30,000/month. The first-year expenses to operate the property were as follows:
Cleaning and maintenance 12,000
Insurance 11,000
Legal and other professional fees 7,500
Repairs 10,000
Property Taxes 70,500
Utilities 18,000
Management Fees 35,000
Other Expenses 23,000
The property was purchased for $3,500,000. You will borrow 70% of the acquisition cost of the property. The loan terms will be interest only, with a 4.5% annually-compounding, single payment interest rate.
To compute depreciation on the property, you will allocate 80% of the purchase price to building and 20% to land. The building will have a depreciable life of 30 years and will be straight-line depreciation (even depreciation over the 30-year period). Assume no closing costs on the acquisition, no organizational costs, no state taxes and no loan fees.
Questions:
39a) Compute the net operating income for 2019 using the data above.
39b) Determine financial income (GAAP) using the depreciation methods and the accrual method for rental income recognition using the data above.
39c) Determine taxable income for 2019 using the data above.
39d) Assuming a single individual directly owns the property, determine the tax that will be required from the net rental income.
39e) Assuming a single individual owns the property through a corporation, determine the tax that will be required (including both the corporate tax and the tax on dividends).
40. Use the trial balance of a rental real estate company copied below – determine the: (1) Net Income, (2) NOI, and (3) FFO as three separate numbers.
40a) Again using the trial balance of the rental real estate company separately attached – assume the net income = taxable income, and calculate the US federal taxes using the following facts:
a. A US individual owns the business directly and is subject to the highest tax rate and (3) the interest income earned is unrelated to the business (e.g. it does not get a passthrough deduction).
b. A US individual owns the business through a US C corporation. The taxable income will be double taxed because cash distributions out of the business for the year are greater than the earnings and profits of the business.
| Trial Balance | ||||
| Retail LLC | ||||
| Account | Description | Debit | Credit | |
| 1010-000 | CASH IN BANK | 157,358.50 | ||
| 1012-000 | PRIMARY CASH ACCOUNT | 8,208.02 | ||
| 1029-000 | OTHER RESERVES/ESCROWS | 49,299.78 | ||
| 1105-000 | A/R – OTHER | 140,794.92 | ||
| 1110-000 | RENTAL INCOME RECEIVABLE | 249,046.99 | ||
| 1170-000 | INTERCOMPANY RECEIVABLE | 1,217,273.64 | ||
| 1405-000 | LAND | 5,379,727.00 | ||
| 1406-000 | UNIMPROVED LAND | 7,515,474.00 | ||
| 1500-000 | BUILDING COSTS | 10,276,612.00 | ||
| 1520-000 | TENANT IMPROVEMENTS | 926,857.00 | ||
| 1530-000 | FURNITURE & EQUIPMENT | 139,237.00 | ||
| 1570-002 | SOFT COSTS-LEGAL | 9,100.25 | ||
| 1570-006 | SOFT COST-COMMISSIONS | 36,614.75 | ||
| 1591-000 | BUILDING – ACCUM DEPREC | 2,280,649.76 | ||
| 1630-000 | PREPAID CAP LOAN COSTS | 65,635.00 | ||
| 1690-000 | ACCUM AMORT-PPD LOAN COST | 26,254.02 | ||
| 1810-000 | PREPAIDS | 5,468.74 | ||
| 1812-000 | INSURANCE-PPD | 4,994.66 | ||
| 2020-000 | ACCOUNTS PAYABLE ACCRUAL | 22,421.67 | ||
| 2050-001 | RETAIL SECURITY DEPOSITS | 85,152.85 | ||
| 2060-000 | RENT RECVD IN ADVANCE | 53,336.76 | ||
| 2200-000 | MORTGAGES PAYABLE | 15,760,000.00 | ||
| 2225-000 | PAYMENTS-PERM 1ST | 646,237.42 | ||
| 3100-000 | DISTRIBUTIONS | 3,137,794.90 | ||
| 3300-000 | PARTNER’S CAPITAL | 7,852,091.91 | ||
| 3920-000 | INCOME/LOSS-CURRENT YEAR | 1,862,299.75 | ||
| 4110-000 | TENANT RENTS | 2,150,656.19 | ||
| 4130-000 | PERCENTAGE RENTS | 10,086.07 | ||
| 4220-000 | PROP TAX RECOVERIES | 219,348.96 | ||
| 4225-000 | PRIOR YR. PROP TAX RECOV | 6,259.10 | ||
| 4230-000 | INSURANCE RECOVERIES | 10,777.92 | ||
| 4235-000 | PRIOR YR. INSUR. RECOV. | 1,172.23 | ||
| 4240-000 | CAM REVENUE CHARGES | 164,511.09 | ||
| 4245-000 | PRIOR YR. CAM ADJUSTMENT | 13,117.48 | ||
| 4250-000 | UTILITIES RECOVERIES | 27,609.17 | ||
| 4253-000 | GAIN ON SALE OF LAND | 19,516.98 | ||
| 4900-000 | OTHER REVENUES | 26.28 | ||
| 5110-000 | ELECTRIC | 14,324.39 | ||
| 5130-000 | WATER AND SEWER | 0.00 | ||
| Account
5135-000 |
WATER IRRIGATION |
Debit
2,166.00 |
Credit | |
| 5136-000 | STORM WATER | 14,808.46 | ||
| 5495-000 | REIMB-HVAC | 538.00 | ||
| 5500-000 | REPAIRS AND MAINTENANCE | 22,481.19 | ||
| 5510-000 | ROOF REPAIRS | 397.59 | ||
| 5525-000 | ELECTRICAL SUPPLIES | 4,175.45 | ||
| 5530-000 | PLUMBING REPAIRS | 5,509.94 | ||
| 5570-000 | FIRE AND SAFETY | 6,983.30 | ||
| 5580-000 | PAINTING | 4,850.00 | ||
| 5590-000 | REPAIR AND MAINT-OTHER | 835.00 | ||
| 5620-000 | PEST CONTROL | 723.00 | ||
| 5640-000 | CONTRACT SERV-LANDSCAPE | 37,777.85 | ||
| 5670-000 | SNOW REMOVAL | 1,902.50 | ||
| 5680-000 | SIGNAGE | 889.28 | ||
| 5710-000 | CONTRACT SERV – SECURITY | 19,595.00 | ||
| 5830-000 | ONSITE WAGES & BENEFITS | 31,212.00 | ||
| 5900-000 | PROPERTY TAXES | 215,205.65 | ||
| 6010-000 | PROPERTY INSURANCE | 5,387.92 | ||
| 6090-000 | INSURANCE-OTHER | 7,037.49 | ||
| 6300-000 | PARKING EXPENSE | 15,996.00 | ||
| 7113-000 | WATER & SEWER- N/R | 40,881.98 | ||
| 7114-000 | WASTE REMOVAL-N/R | 1,443.00 | ||
| 7140-000 | BLDG REPAIRS & MAINT-N/R | 28,095.51 | ||
| 7210-000 | ACCOUNTING FEES | 4,240.46 | ||
| 7270-000 | PROFESSIONAL FEES-OTHER | 1,120.73 | ||
| 7280-000 | MARKETING & ADVERTISING | 7,184.04 | ||
| 7410-000 | OWNERSHIP EXPENSE | 27,115.20 | ||
| 7425-000 | MANAGEMENT FEE N/R | 66,028.42 | ||
| 7426-000 | BANK FEES – N/R | 680.20 | ||
| 8300-000 | INTEREST EXPENSE | 691,291.13 | ||
| 8400-000 | DEPRECIATION & AMORT. | 571,130.16 | ||
| Total: | 31,191,514.80 | 31,191,514.80 |
