Pigdon Estates Case Study

CASE 7 Pigdon Estates Ltd

The widely differing accounting practices used by land development companies direct attention to the diversity of accounting practices and how particular practices are selected from those available and commonly adopted.

• Diversity

• Accounting policy changes

• Revenue recognition

• Expenditure carried forward

Pigdon Estates Ltd (PE) paid $400 000 for a prime piece of subdivisional land adjoining several growing educational institutions. The purchase was funded with a fixed term two-year loan of $360 000 at 16 per cent from the Triangle Building Society. Interest was payable monthly with the full amount of the principal due at the end of two years.

The company expended $142 400 in each of the two years to secure all necessary permits, remove the existing farm structures and provide water, sewerage, drainage and roads. On the first day of the third year, a very successful auction on site sold all the lots for a total of $1 million. Sufficient cash was received immediately to repay the loan. The remaining amounts due to the company were payable in instalments over two years, free of interest.

The company accountant was asked to recommend how these transactions should be reflected in the accounts. The accountant rang various personal contacts in the real estate business and was told of the following approaches adopted by other companies.

1. 1.      Treat the interest as an expense in the year paid and all land sales as revenue at the time of the auction.

2. 2.      Capitalise the interest until the land was sold and regard sales as revenue at the time of the auction.

3. 3.      Treat interest as part of the cost of the land and recognise revenue from sales according to the time at which payment is due.

4. 4.      Treat interest as part of the cost of the land, but do not recognise sales as revenue until the final payment is received from the purchaser.

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