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I have a question related to COGS on IS. This is a

construction business. They purchased a...
I have a question related to COGS on IS. This is a construction business. They purchased a house to rehab and sell. Their bookkeeper booked it (purchase price) as fixed asset and related expenses as expenses on IS. I need to show it in ending inventory in COGS and as Inventory on BS. Move all the expenses to Purchases/additional costs that adds to value of the property. How should I handle, especially COGS on IS. There is no COGS but purchases and ending inventory.Thank you, Martina
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Answered in 12 minutes by:
3/8/2018
Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 7,473
Experience: Extensive Experience with Tax, Financial & Estate Issues
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Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

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Martina:

I think I worked with you the other day on these issues.

What are you asking here, how to make the Journal entries?

You seem to have it pretty well worked out along the lines we discussed, is there something else you are asking now?

Steve G.

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For example, if this property were the only activity in COGS, the same figure would be in Purchases and in Ending Inventory, so there would be no COGS for this item in the IS.

So, the total amount of the original purchase of the property would have to be re-classed from fixed assets to Inventory and all the costs associated with this project would have to be moved (credited) from the IS accounts to Inventory (debited).

Let me know if I can clarify anything for you.

Steve G.

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Customer reply replied 5 months ago
Hi Stephen, yes we have worked together. By that being said, does it mean I do not need to show it in COGS or on the IS at all?
Customer reply replied 5 months ago
I have read some articles online. They say that such as financial institutions or for mortgage loan purposes, they want to still see it on IS? Does it make any sense?

It doesn't really matter from a tax standpoint.

If you reflect it in CGS on the income statement sub-schedule for CGS, (Form 1125A), it won't appear on the "IS" (Page 1 of the Return).

The rule for filing the Form 1125A is as follows:

Who Must File:

Filers of Form 1120, 1120-C, 1120-F,

1120S, 1065, or 1065-B, must complete

and attach Form 1125-A if the applicable

entity reports a deduction for cost of goods

sold.

Steve G.

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Customer reply replied 5 months ago
I agree for tax purposes. I wanted to know how to properly account for it in books.

Well, it actually depends upon what presentation you're using for the Income Statement.

There's certainly no problem with showing the CGS in your income statement if that's something you want to do. In fact, if you carry the Project in Inventory, and you don't have any other transactions that belong in CGS, then it may seem somewhat out-of-place as there are no related Sales or Cost of Sales for this activity.

Disregard the spacing as all the numbers should line up.

Beginning Inventory - 0 -

Purchases $250,000.

Other Costs 100,000.

Subtotal 350,000.

Less WIP Inventory -350,000.

Cost of Goods Sold $ -0-

That would be one way to present CGS in this situation.

Steve G.

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Customer reply replied 5 months ago
This is exactly what I've meant. I guess, I want to be able to look at the IS and be able to see expanses related to the inventory item on BS. How about recording all the purchases/expenses related to Inventory when incurred? How do I book it? Lets say:
1: purchase of the new rehab property for loan
2: purchase of additions/expenses related to the property for cash (bank account)
Customer reply replied 5 months ago
Also, as far as the fixed assets on BS, rental properties, what is the basis of the property? Acquisition price and accumulated depreciation each year, correct? How about the expenses that were incurred in order to have the property ready for the rental? Does it bring the value up or how do I account for it? Why would be basis for depreciation different for book and different for the tax purpose?

1. Debit - Inventory or Purchases; Credit - Loan Payable

2. Debit - Inventory or Purchases; Credit - Cash

Re: Fixed Assets:

Basis of Rental Property:

Acquisition Cost + Capital Improvements less Accumulated Depreciation = Net Book Value.

Before the Rental Property is available for rent, expenses to bring the property up to being Available to Rent would be added to the basis of the rental property;

Depreciation Differences would result from Different Depreciation Methods/Class Lives for Tax Purposes verses Useful Life for Book Purposes.

For example, Residential Rental Property must be depreciated over

27 1/2 years using the straight-line method for tax purposes, whereas for Book Purposes the concept of Useful Life comes into Play; for example may be 40 years using the Straight-Line Method.

Martina:

I don't mind responding to any & all of your questions but when you switch topics, the site expects that you will start a new question thread.

I can be flexible about this but I have to be careful to try & stay within the site rules.

Steve G.

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Customer reply replied 5 months ago
That makes sense.I understand, Stephen. It was all related to the same client.
When I called the customer service today they told me my monthly fee is much higher due to the content that is being covered in my question. They said it is based of what was answered within my question.I am confused now. I will call them to double check. I definitely want to follow the rules and at the same time make sure I am not overcharged.Thanks for info

Martina:

As "Experts" we don't have access to any of the financial arrangements between the site and the customers;

I believe many customers have an arrangement that they can ask unlimited questions, which is fine. We however are compensated on a question by question basis, so while it not make any difference to you as a customer, it matters to us if multiple topics are split up into different questions verses having them all under one question thread.

I try to be flexible, and have no problem answering multiple follow-up questions, but when it gets into several follow-ups and topics change, then it's fairer if we switch to a new question thread.

Thanks very much,

Steve G.

You can always ask for me if you wish; just indicate "For Steve G" at the beginning of your question.

Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 7,473
Experience: Extensive Experience with Tax, Financial & Estate Issues
Verified
Stephen G. and 87 other Finance Specialists are ready to help you
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Customer reply replied 5 months ago
That I understand. I agree it is unfair. It is also unfair to double charge customer while paying expert for “question”. I also, did not ask for you today, they automatically assigned you which I was surprised.
I am new to this site.I think it is unfair to both, customer and expert. They need to bring down my fee and I have no problem to post separate questions for each topic.Thank you for sharing.
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