A real estate developer sells land parcels to its customers and provides them with financing. In 2000, the first year of operation, the firm signed new land sale contracts for $25,000,000. This land had originally been acquired for $20,000,000, implying a gross margin of 20 percent. Customer receipts for the year were $8,000,000 for deposits on property sold and $1,000,000 in principal repayments under financing agreements with customers. What are the financial statement effects of this transaction if (a) revenue is recognized at sale, and (b) revenue is recognized when cash is received? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm’s CFO?

 

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