September 12, 2014

Journal Entries for Land Acquisition - Modified Cash Basis

Question:

A church is in the process of purchasing property and wants to use the modified cash basis. The church plans to pay for part of the property with cash while financing the remainder of the payments through a long-term note. What are the debit and credit effects of the following hypothetical scenario?

Hypothetical Scenario:

The property that the church desires to purchase costs $100,000. The church is able to pay $50,000 with cash, meaning that the remaining $50,000 will be financed through a long-term note. The church expects to pay monthly payments of $500 on the long-term note. 

Answer:

The modified cash basis, as we recommend its application, includes no long-term assets or liabilities on the balance sheet. Therefore, the journal entries for the above scenario are as follows:

*Capital Expenditures (debit)                          $50,000
          Cash (credit)                                                               $50,000

The above journal entry is the only current entry. However, monthly payments on the long-term note are recorded as follows:

**Long-Term Loan Payments (debit)             $500
            Cash (credit)                                                               $500

While the balance sheet for the church reports no long-term assets or long-term debt, most members of the congregation will be interested to know the status of the reduction in the amount owed on the long-term note. We recommend that the reports to the congregation include a recap of loan activity. In our example, the first year report would likely include a beginning balance of $50,000. The principal portions of the $500 monthly payments that are subtracted (the remaining portion being interest cost) should result in an ending loan balance equal to the remaining debt. 

We encourage our viewers to read the following blog post that we published in June of 2013:


*An expense account used only on a rare occasion such as this.
**An expense account that can and should be provided a general fund budget.

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