Question

It is a case with key issue for ACC research memo. Need advise for Brief Conclusion, Analysis, Conclusion, Financial Statement and Disclosure Impacts. Thank you!

We need cash for the taco stand, so have decided to do a ‘reverse mortgage’ on our taco truck. A bank will pay us $1000/month for the next 10 years. We continue to own and operate the truck, but at the end of the ten years, ownership goes to the bank. If we go out of business before then, ownership also goes to the bank. We cannot sell the taco truck under this reverse mortgage. How is the $1000 presented in the statement of cash flows? Sale or loan?

Answer 1

A reverse mortgage is a loan type which allows borrowing of money using the ownership in an asset as security. The amount of loan can be taken in lump sum or through a stream of regular income or a combination of these alternatives. Interest is charged like any other loan except that there is no need to make any repayments, which often happens in a normal mortgage. Considering the above, in the given case, it can be said that $1000 received should be presented as loan and not sale under the statement of cash flows.