Frank and Jesse are brothers. Frank, a carpenter, found a house commonly referred to in the...
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Frank and Jesse are brothers. Frank, a carpenter, found a house commonly referred to in the real estate business as a "fixer upper" and brought it to the attention of Jesse, an investor. Although the house was structurally sound, it needed a considerable amount of remodeling and cosmetic work that Frank could do himself, working evenings and weekends over the course of a year. Because the house could be bought at the distressed price of $100,000, Frank convinced Jesse of the opportunity for making a significant profit by fixing it up. Based on present prices of comparable houses in good condition, the brothers expected to be able to sell the remodeled house for around $200,000 The brothers worked out the following agreement. Jesse would provide all the financing through his company, Jesse's Investments. In turn, Frank would provide the labor through his company, Frank's Construction, in return for "sweat equity" in the house. Once the house was finished, two options would be available. One would be to sell it, using the proceeds to pay off the loan and interest from Jesse's Investments, as well as pay for the materials, and split the remainder equally. The other would be for Frank's Construction to buy the house, paying off Jesse's Investments' share with the proceeds of a conventional mortgage based on the (remodeled) house's fair market value Jesse's Investments arranged to borrow the $100,000 needed to buy the house on a 1 year note bearing 10 percent interest, and also advanced the $10,000 needed for materials Frank's Construction provided all the labor necessary to bring it to a "like new" marketable condition, finishing the work on schedule. As soon as the house was finished, the brothers obtained competent appraisals that indicated the fair market value of the remodeled house was $200,000. Frank's Construction then bought the house, taking out an 80 percent mortgage ($160,000) and using the proceeds as previously agreed. * How should Frank's Construction recognize the purchase of the house assuming that the market value of Frank's labor was $15,000? What if you were not given this market value number for Frank's labor but just a self-estimate by Frank, say also 15,000? Frank and Jesse are brothers. Frank, a carpenter, found a house commonly referred to in the real estate business as a "fixer upper" and brought it to the attention of Jesse, an investor. Although the house was structurally sound, it needed a considerable amount of remodeling and cosmetic work that Frank could do himself, working evenings and weekends over the course of a year. Because the house could be bought at the distressed price of $100,000, Frank convinced Jesse of the opportunity for making a significant profit by fixing it up. Based on present prices of comparable houses in good condition, the brothers expected to be able to sell the remodeled house for around $200,000 The brothers worked out the following agreement. Jesse would provide all the financing through his company, Jesse's Investments. In turn, Frank would provide the labor through his company, Frank's Construction, in return for "sweat equity" in the house. Once the house was finished, two options would be available. One would be to sell it, using the proceeds to pay off the loan and interest from Jesse's Investments, as well as pay for the materials, and split the remainder equally. The other would be for Frank's Construction to buy the house, paying off Jesse's Investments' share with the proceeds of a conventional mortgage based on the (remodeled) house's fair market value Jesse's Investments arranged to borrow the $100,000 needed to buy the house on a 1 year note bearing 10 percent interest, and also advanced the $10,000 needed for materials Frank's Construction provided all the labor necessary to bring it to a "like new" marketable condition, finishing the work on schedule. As soon as the house was finished, the brothers obtained competent appraisals that indicated the fair market value of the remodeled house was $200,000. Frank's Construction then bought the house, taking out an 80 percent mortgage ($160,000) and using the proceeds as previously agreed. * How should Frank's Construction recognize the purchase of the house assuming that the market value of Frank's labor was $15,000? What if you were not given this market value number for Frank's labor but just a self-estimate by Frank, say also 15,000?
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Related Book For
Modern Advanced Accounting In Canada
ISBN: 9781259066481
7th Edition
Authors: Hilton Murray, Herauf Darrell
Posted Date:
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