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Lev, Tax Preparer
Category: Finance
Satisfied Customers: 29774
Experience:  Personal Investment, Tax Preparation
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I have a contract (called a land contract in Texas).

Customer Question

I have a contract for deed (called a land contract in Texas). Payments are interest and escrow, with a balloon that is now overdue. I have been charging late fees per the terms of the contract. My question is, do I calculate the late fees in with the interest and the escrow each month? The other way to do it is to separate them out and get a separate total. I am in better shape if I charge them when they accrued, because then interest and late fees will be due at the end of the contract, not just late fees, which he does not want to pay. Please advise what regular accounting standards are on this issue.
Submitted: 1 year ago.
Category: Finance
Expert:  Lev replied 1 year ago.

The way you should handle late fees is not based on accounting standards or IRS regulations - but based on your contract.
If you are using a standard contract form - there must be a clause.
As a general accounting and lending practice - interest is compounded (added to the balance) monthly - for instance - you added all fees and interest on the last day of each month - and interest for the next month is calculated based on that amount.
Credit card companies have interest compounded DAILY - but banks and mortgage companies - monthly.

In some situations - the interest is compounded annually - added on the last day of the year.

But never compounded for longer period.

Expert:  Lev replied 1 year ago.

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