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

$ 1000 received from the bank under Reverse Mortgage should be presented as "Loan" in the statement of Cash Flows.

The reason for the same is because the term "Reverse Mortgage" is used to refer to a Loan given on mortgage of a property with the bank against which a monthly payment is received from the bank.

Further, it cannot be termed as a Sale because $ 1000 earned is not out of the sale of taco i.e. not a business income or from the sale of the taco truck.