We have a client who's company is considering acquiring a property but will also acquire £27,000 worth of outstanding debt owed in unpaid service charges if the purchase is made.
How would this debt be recognised, would it be Dr expense Cr liability or would it somehow form part of the asset. Any thoughts or a nudge in the right direction would be appreciated.
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How would this debt be recognised, would it be Dr expense Cr liability
I would definitely suggest that you speak to an accountant.
I doubt the client will acquire a debt. I suspect that the management company will refuse to register the transfer until the arrears are paid and that the buyer's solicitor will therefore clear the arrears at the point of purchase. Both parties' legal advisors will probably insist on this (unless the arrears are disputed for example).
That minor point aside, what do YOU think the answer is? From your post I suspect that your gut feeling is currently wrong
I agree with Mr AWOL
What does the purchase agreement say?
I would expect it would be something along the lines £27,000 of the purchase price is to be paid to the service charge provider, in which case it would be part of the cost of the property.
This was my initial thought but there isn't a purchase agreement (yet) so I don't have all the details. Thanks for your input, I think I'll suggest to the client we must wait until we have the arrangement in writing.
If I was buying a property and acquired £27,000 debt along with it, I would expect to pay the value of the property, less £27,000, and that's where I'd put the leftover £27,000 in the transaction, not on the P&L where it has no right being.