Accounting Principles - Buildings

Financial Accounting > Buildings

Buildings present a somewhat different subject for discussion than land. They are subject to a greater variety of possibilities than land, since it may almost be said of land that it cannot be carried away or destroyed, which is not true of buildings.

A new concern about to engage in business and seeking buildings for such purposes has a choice of two means of securing them. They may be constructed anew or they may be purchased. If not adapted to the needs of the business they may be altered to meet the demands.

Construction, presumably, is the method to be preferred. Having acquired the land upon which to place the building, the concern may proceed in one of three ways. The first is to purchase the material, engage the necessary workmen and supervise the construction. This statement while generally true should be qualified in one or two particulars. In New York City, and probably in all the other large cities of the United States, the building department of the city requires that the plans shall be drawn by, or under the direction of, an architect. In some cases where engineering construction is involved the plans must be made by an engineer.

As an alternative a contract may be made with some builder to erect the building. By this is meant an individual or concern which will take over the entire work of construction and be responsible for its completion. The plans may be obtained from an architect and furnished to the builder to follow.

As a second alternative the work may be turned over to an architect who will attend to the drawing of the plans, the letting of the contracts and sub-contracts, and the supervision of the work as it progresses. In this latter case it is customary for the concern, for which this work is being done and which is called the client of the architect, to make payments to the construction company or the contractors upon certificates of the architect as portions of the work are from time to time completed. m The architect receives for his services a fee which is based on a percentage of the cost of the work done. The rate for general work as established by the American Institute of Architects is six (6) per cent. The service which this rate covers includes the necessary conferences, preparation of preliminary studies, working drawings, specifications, large and full size detail drawings and the general direction and supervision of the work. The rate varies according to the class of work, ranging from six per cent as above to fifteen (15) per cent in the case of designs for fabrics or special decorative work and is higher for work outside, than inside, the city.

The architect is becoming an important factor in the new construction work of to-day, especially in the larger cities. Where formerly perhaps the scope of his work was limited to the drawing of the plans, to-day, as a rule, he is the building specialist, who combines his technical skill with artistic taste for the best interests of his client and superintends the work from beginning to end. Among his duties in addition to preparing the plans are those of determining the location of the building; the quality of the soil on which the foundations are to rest; filing the plans with the building departments and securing their approval; getting the necessary permits to begin operations, obstruct the streets, open the streets for gas, sewer, and electric connection, etc. As to the installation of electricity he must secure permission from the Department of Water, Gas and Electricity and the Board of Fire Underwriters. Further, he must see that there are no violations of the rules and regulations affecting the public health.

One point in connection with building operations and one which should have a decided effect upon the accounting is that of the acceptance of the work. The risk for employer’s liability and for fire is. with. the..contractor until the work has been accepted by the client. Two things would appear to be certain. First, payment on account of the contract price is a matter of convenience and does not imply acceptance of the work. Second, the liability of the client to the contractor does not rise, even after the signing of the contract until the contractor has complied with the terms of the contract and performed the work required of him. Hence it would seem to represent something not true as to facts if at the time of signing the contract, the contract price were to be recorded on the books as showing the cost of the construction and the corresponding liability to the contractor. What would appear if such a thing were to be done would be a so-called contingent asset on one side, offset by a contingent liability. It would probably be expressing it more correctly to say that two statistical accounts, having as their basis the contract price, have been raised, not to record facts but to provide for the recording of possibilities. The method which would seem to be more correct would be to charge—cost of contract and credit—the contractor when estimates certified by the architect are received, closing out the liability in favor of the contractor when the payment to him is made. One of these steps might be eliminated also by charging the contract account direct and crediting cash at the time the payment of the estimate is made. A summary of the two ways of handling the matter would show as follows:

First Method:
First Step. Charge a contract account with the contract price.
Second Step. Credit the contractor in a similar amount.
Third Step. As estimates are paid charge the contractor and credit cash.’
Result. The account with the contractor will be closed and the contract account remaining open will show the cost of the construction.
Second Method:
First Step. As estimates are certified by the architect, charge the contract account and credit the contractor.
Second Step. As estimates are paid, charge contractor and credit cash.
Result. Same as first method.

One point in connection with the final payment on contracts arises regardless of which method is employed. That is the amount which is reserved by the client to protect himself against defective work. Such a reserve is customary in contract work and is sometimes withheld for a year or more. The effect which such procedure would have on the second method is apparent. Pending final payment the contract account will not show the total cost of the work which information might be needed for various purposes prior to final settlement. On the other hand it is not desirable to charge the contract and credit the contractor with the amount retained since it may not be a liability in his favor if defective or unsatisfactory work is discovered subsequent to the completion of the work. Both ends may be served by charging the contract and crediting a reserve for defective work, or an account with some other appropriate title.

To leave the matter of contracts, while having discussed them from the side of the client only, would seem to leave the subject only half completed. Apparently, to find a more appropriate time to consider this phase of contracts would be difficult.

Approaching the subject from the point of view of the contractor, he appears to be in this position: he holds a contract under which he is to do certain work and from which presumably he will derive some profit. With him it is largely a question of whether he shall consider a profit as earned until the contract is completed and the actual cost determined and if so how the earnings shall be taken up with regard to periods.

The price at which a contractor agrees to do a certain piece of work is presumably made up of two parts, namely, cost and profit. Taking for example a contract in which the price is $10,000, made up of an estimated cost of $8,000 and an estimated profit of $2,000, it would appear that when the contract is one-half completed, if the actual cost has not exceeded $4,000, the contractor is entitled to take up a profit of $1,000. In other words, he appears to be entitled to take into his earnings, onehalf of the contract price, or $5,000. In an ideal case such as this is, it is not probable that any objection could be raised to this procedure. Two things in practice, however, complicate matters.

Many contractors, while making estimates on individual jobs, do not keep accurate records, and in some cases do not keep records at all, showing the actual cost of the individual jobs. Thus it is impossible in such cases to determine from the cost records the stage of completion which has been reached when the general books are closed. By this is meant whether the contract is one-half or two-thirds completed, or whatever the stage may be.

In a large concern having several contracts there will be a variation in the length of time required to do the different jobs, so that no exact data as to the stage of completion can, in the absence of a cost system, be obtained. If the contractor decides to take up a part of the earnings before completion, the percentage to be taken up will necessarily be based on an estimate which should be an average of the various stages of completion of all contracts.

In addition to the above two complications it may be mentioned that the second half of a contract may be the part which will prove destructive to the profits. At a stage of half completion the actual cost may have been kept within the estimated cost and one-half of the earning and accompanying profit quite properly taken up. In completing the contract the balance of the estimated cost may be so greatly exceeded as to wipe out not only the profit corresponding to the latter one-half but also that pertaining to the former part. 6-m.•’”-vi^1 Ua*m+±zw*j~i4. Jk**^ t^l^^

As contrasted with the practice of^afengapercentage of the contract price into earnings before completion, there exists the practice of deferring such an operation until the contract is completed. This practice meets with the objection that the cost is not consistently applied against the income. Under such methods it would be possible to have a case wherein all the cost with no income, would appear in one accounting period, whereas in the succeeding period all the income, with no cost, might be shown.

While such an occurrence is possible it is rather improbable and many accountants are inclined to the opinion, that as between periods the two factors will be “averaged up.”

One more point should, it seems, be discussed before leaving this topic. The two previous cases were based on the assumption that, upon the signing of the contract, or as estimates had been rendered charges had been made to the customer’s account in the amount of the contract price and some account, the name of which at this time is unimportant, had been credited. In this case it may be assumed that such a step is deferred until the contract is practically completed. As estimates are rendered no record is made in the financial books. When the estimates are paid, cash is charged and the customer’s account credited. When the contract is completed, the customer is charged with the full contract price and the earning account is credited.

All of the above cases have been founded on building and similar contracts where payments on account, or estimates, as they are called, affect the bookkeeping. The above remarks are equally applicable to other kinds of contracts, such, for instance, as an accountant would make with a client. The variation is slight in such cases and consists principally in substituting temporarily for the client’s account, one termed, unfinished contracts or unfinished engagements. This offers an opportunity for building up or adjusting the charges to the customer’s account until the contract or engagement is completed.

No matter which method is adopted the contractor must make provision for an appropriate reserve if the customer retains a certain percentage for defective work after completion. The manner in which this is accomplished depends upon whether the contracts are entered in total or by estimates and whether the estimates are entered gross or net.

An entry to cover this reserve would be necessary upon completion of the contract were the estimates to be entered net. Were they to be entered broad, or gross, the reserve would be automatically built up from time to time. To explain this, let it be assumed that the first estimate on a $40,000 contract is as follows:
To material and labor supplied in the con-
struction of factory building at Flushing,
Long Island $6,550

Less 10% 655
Amount due $5 395

The estimate after being approved or certified by the architect, or his inspector, goes to the customer. If the contract price is $40,000 then it will be plain that upon completion the various deductions will have accumulated so that $36,000 will have been paid and $4,000 withheld.
If the estimates are entered net, the account with the customer charged with $36,000 and the earnings account corresponding amount. It will then be necessary entry charging the customer’s account and creditin the amount of $4,000.

If the estimates had been entered broad, the entry in the instance of the above estimate would have charged the customer with $6,550 and credited earnings with $5,895 while the reserve account was credited with $655. Subsequently as estimates were made, ten per cent would have been credited to the reserve so that at the end of the contract, the customer’s account would have been charged with $40,000, an amount of $36,000 credited to earnings and $4,000 to the reserve. No further entry would then be necessary for this purpose.
The question may now arise as to the amount of $4,000 standing in the customer’s account, and offset by a reserve of $4,000, as to its status from an accounting point of view. May it be looked upon as a positive or as a contingent asset?

The reserve has been created because of an uncertainty in collecting the amount from the customer. Failure to collect it may be due to defective work. If defects arise, the customer will usually notify the contractor who will proceed to make the work satisfactory, after which time the contractor may collect the balance due him.

If the contractor refuses to make good the defect, or correct something which has proven unsatisfactory, the contract usually provides that the customer may cause the necessary work to be done and pay for same out of the funds of the contractor which he has retained. Any balance remaining will then be paid over to the contractor. If the funds prove insufficient a demand for additional funds will usually lead to legal complications which need not be followed out here.

What is of interest, is the effect which the procedure just mentioned has upon the item of $4,000 in the customer’s account. At first glance, and from the side of the contractor, it has the appearance of a contingent asset. From the side of the customer, it appears to be a contingent liability. The contingency in both cases is that the work may prove defective or unsatisfactory. If such a thing happens the contractor, it would appear, will have no claim upon the customer and the customer will not be obliged to pay the contractor.

It is just here that the fallacy of such reasoning becomes apparent. In the first place it may be considered that the contractor did have a good claim upon the customer. He has not been able to realize upon it on account of being obliged to make the customer an allowance for defective work. Need a merchant who sells goods look upon his accounts receivable as being in part contingent assets because of the fact that he may be obliged to make allowances to customers for damaged or defective goods? It is not probable that many accountants would reason thus. Consequently the contractor will probably be seen in the same light as the merchant. The contractor seems to have agreed for a certain price, to deliver certain “goods” in the form of a building. If the building is not satisfactory he allows the customer to make it so at his (the contractor’s) expense.

The customer, on the other hand, is relieved from making the final payment to the contractor and thus would appear to escape the liability. He is obliged, however, if the defect is to be corrected, to pay some one other than the contractor. This has no effect on the liability. A liability, it must be remembered, is not determined by determining who the creditor is. The fact that the customer has to pay some one to do the work would seem to remove any trace of a contingency and stamp the amount in question as a definite liability.

The various methods of handling contracts on the books of the contractor may be generally ‘represented by eight typical cases. To show the accounts affected and the manner in which they are affected, in the different cases, is the object of the following journal entries and ledger accounts. The figures used in each case are:
Contract price $40,000
Amount retained 4,000 (or 10 per cent)
Cost 30,000 ,
Estimates
(1) $12,000
(2) 8,000
(3) 14,000
(4) 6,000
First Case, based on the assumption that
(a) Contract price is entered in books when contract is signed.
(6) Income (or earning) from contract is not taken up until contract is completed.
Upon signing the contract
Customer

To Income from Contracts
Upon payment of estimates
Cash

To Customer
For cost of contract
Cost of Contract

To Accounts Payable (or cash)
Upon completion of contract
Income from Contracts
To Reserve for Defective Work

The ledger accounts will appear as follows:

$40,000 36,000 30,000 4,000 Cost of Contract

Second Case, based on the assumption that
(o) Contract price is entered in books when contract is signed.
(b) Income from contracts is applied to period in which
earned.
(c) Books close when contract is half completed.
Upon signing the contract

Customer
To Income from Contracts $40,000
Upon payment of two estimates
Cash

To Customer 18,000
For Costj of Contract
Cost of Contract
To Accounts Payable (or cash) 15,000

Upon closing the books
Income from Contracts $22,000
To Reserve for Uncompleted Contracts $20,000
Reserve for Defective Work 2,000

The ledger accounts will appear as follows:
Customer Income from Contracts Cash Cost of Contracts

Third Case, based on the assumption that
(o) Contract price is not entered in books when contract is signed.
(6) Estimates are entered broad as rendered.
(c) Income from contracts is not taken up until contract
is completed.
Upon signing the contract

No entry in general books
Upon rendering estimates 1 to 4

Customer (1) $12,000
To Income from Contracts $10,800
Reserve for Defective Work 1,200
Customer (2) (3) (4) 28,000
To Income from Contracts 25,200
Reserve for Defective Work 2,800
Upon payment of estimates
Cash

To Customer 36,000
For Cost of Contract
Cost of Contract
To Accounts Payable (or cash) 30,000

Upon closing the books—no entry necessary

Fourth Case, based on the assumption that
(a) Contract price is not entered in books when contract
is signed.

(fc) Estimates are entered broad as rendered.
(c) Income from contracts is applied to period in which
earned.

(rf) Books close when contract is half completed.
Upon signing the contract—no entry
Upon rendering estimates 1 and 2

(1) Customer $12,000
To Income from Contracts $10,800 /… Reserve for Defective Work 1,200
(2) Customer 8,000
To Income from Contracts
‘,’ Reserve for Defective Work

Upon payment of estimates
Cash

To Customer
For Cost of Contract
Cost of Contract
To Accounts Payable (or cash)

Upon closing the books—no entry
7,200
800

18,000
15.000

Fifth Case, based on the assumption that
(o) Contract price is not entered in books when contract is signed.
(b) Estimates are entered net as rendered.
(c) Income from contracts is not taken up until contract
is completed.
Upon signing the contract—no entry
Upon rendering estimates 1 to 4
Customer

To Income from Contracts $36,000
(1) $10,800
(2) 7,200
(3) 12,600
(4) 3.400
Upon payment of estimates

Cash
To Customer 36,000
For Cost of Contract
Cost of Contract
To Accounts Payable (or cash) 30,000
Upon closing the books
Customer

To Reserve for Defective Work 4,000
The ledger accounts:

Customer Income from Contracts Reserve for Defective
Sixth Case, based on the assumption that
(o) Contract price is not entered in books when contract is signed.
(6) Estimates are entered net as rendered.
(c) Income from contract is applied to period in which
earned.
(d) Books close when contract is half completed.
Upon signing the contract—no entry

Upon rendering estimates 1 and 2
(1) Customer
To Income from Contracts $10,800
(2) Customer
To Income from Contracts 7,200
Upon payment of estimates
Cash

To Customer x 8,000
For Cost of Contract
Cost of Contract
To Accounts Payable (or cash) 15,000
Upon closing the books
Customer
To Reserve for Defective Work

The ledger accounts:
Customer Income from Contracts
2,000
Reserve for Defective
Work

Seventh Case, based on the assumption that
(a) Contract price is not entered in books when contract
is signed.

(6) Estimates are not entered as rendered,
(c) First entry is made when cash is received,
(rf) Income from contracts is not taken up until con-
tract is completed.
Upon signing the contract—no entry
Upon rendering estimates—no entry
Upon payment of estimates
Cash

To Customer $36,000
For Cost of Contract
Cost of Contract

To Accounts Payable (or cash) 30,000
Upon closing the books

Customer $40,000
To Income from Contracts 36,000 . Reserve for Defective Work 4,000

Eighth Case, based on the assumption that
(a) Contract price is not entered in books when contract is signed.
(6) Estimates are not entered as rendered.
(c) First entry is made when cash is received.
(d) Income from contracts is applied in the period in
which earned.
(e) Books close when contract is half completed.
Upon signing the contract—no entry
Upon rendering estimates—no entry
Upon payment of estimates 1 and 2

(1) Cash
To Customer $10,800
(2) Cash
To Customer 7,200
For Cost of Contract
Cost of Contract

To Accounts Payable (or cash) 15,000
Upon closing the books

Customer $20,000
To Income from Contracts 18,000
Reserve for Defective Work 2,000

Before leaving the subject, a word or two should be offered in explanation of the foregoing cases.
When the statement has been made that no entry has been made in the books it is understood to mean the general books. Few cases could probably be found in which a memorandum of contracts in some subsidiary book of account or record are not made. Statistics are not available to show the preference with regard to the various methods shown.

It will be noted that the ledger accounts have been allowed to remain unclosed to profit and loss. It should be understood that no closing entries have been made except such as are necessary to make the accounts affected by the contracts show the true facts in the different cases. If the closing entries were continued, such accounts as cost of contracts and income from contracts would be closed out to profit and loss to show either of these two results, as the case might be. An intermediate account, called a contract account, is sometimes used for this purpose. Into it are closed the cost of contracts and income from contracts, and after the profit or loss on contracts is thus determined it is closed out to profit and loss. It may also be mentioned that this contract account is frequently used in practice, not as an intermediary in closing, but to take the place of the detail accounts just mentioned, namely, cost of contracts and income from contracts. It is true that such an account will show the profit or loss on contracts, but it has too great a resemblance to the merchandise and other mixed accounts to meet with favor in the best modern practice.

In the eight typical cases previously illustrated by journal entries and ledger accounts the reserve for defective work was left open. The question which might naturally arise is, what is to become of the reserve? The disposition of it will depend upon whether the work withstands the test of a reasonable length of time. If it does, the reserve will have served its purpose. The amount reserved by the customer will be due. The reserve may be closed into the income from contracts account or to profit and loss, depending upon the circumstances.

If the work becomes defective, one of two things may occur; either the customer will cause the contractor to cure the defect or if the contractor refuses he will proceed to do it himself. If the contractor is obliged to do further work, while he will still be able to collect the amount withheld, from the customer, the additional work will have the effect of increasing the cost and consequently reducing the profit. Reducing the profit means reducing the reserve if the cost of the contract happens to have been closed out to profit and loss, so that if such is the case it would appear proper to charge the additional work against the reserve.

Should the contractor refuse to make good the defects and the customer proceeds with such work, then at time of settlement, the customer would be credited with the amount expended and would pay over the balance. Assuming that of $4,000 retained by the customer, $2,500 has been so expended, the situation would be described by the following journal entries:

Reserve for Defective Work $4,000
To Customer $2,500
Income from Contracts 1,500
(or profit and loss)

Cash
To Customer 1,500
Applied Theory Test Number Two
Part 1

A employs B to draw plans for a building, paying him therefor four per cent of the cost of the building. B furnishes no supervision. A buys from C all material, amounting to $40,000 on which he has paid $35,000. The labor cost $55,000. Incidentals, permits, etc., $1,153.85 (paid). Determine the cost of the building and express the factors entering into the cost in the form of a journal entry followed by full description.

The Spencer Manufacturing Company engaged Mr. Archibald Russian as the architect to draw plans and supervise the construction of an addition to its plant. The customary rate was to be charged for this work, but it was agreed that he should design certain decorative work in the private office which was a part of the new construction. For this work he was to receive fifteen per cent. The contract was let to James Downs for $60,000, who rendered three estimates from time to time in the amounts of $15,000, $25,000, and $20,000. Extra work amounted to $2,500. Ten per cent was retained on the regular work, but not on the extra work. The decorative work in the private office cost $2,250. The work was begun in May and was two thirds completed at June 30, 1008, when both firms closed their books. The extra work and decorative work was completed at such time. (Jhe. extra work had been invoiced, as had the first two estimates. The decorative work was included in the contract. Downs had received pay for the first estimate. Both firms followed the practice of entering estimates broad, as rendered. Downs had expended $37,500 and charged it to an account— Spencer Contract—and had figured $51,000 as the cost to him when he made the contract. The cost of the extra work was $1,800. Frame the entries necessary to show the facts at June 30th, (a) as to the books of the Spencer Manufacturing Co., (b) as to the books of James Downs.

After the work was completed, some parts of it proved defective. Downs refused to make the necessary corrections and the company was obliged to spend $2,500 in making it right. The balance of Downs’s funds were paid over to him. Assuming all bills of every description to have been paid by both parties, frame the journal entries and set up skeleton ledger accounts to show how the work would finally stand on the books of the three different parties interested in the construction.

Land in the last chapter was seen to have an important bearing upon the business situation with respect to its location. Buildings play an equally important part with regard to their physical arrangement. Considerable attention has undoubtedly been given always to the matter of convenience in constructing or arranging a new building or system of buildings. More than the usual attention is now being paid to what might be termed the scientific arrangement of buildings in a manufacturing plant, which is in effect a system of buildings. Great attention is given to the planning in order that there may be no lost motion in the case of production. The receiving department should be easily accessible for wagon and team deliveries as well as on the railroad siding if one exists. The stores department should be adjacent to both the receiving department and the manufacturing department in which the material is first used. The idea thus conveyed should be carried out in the succeeding stages of manufacture, in such manner that the finished goods will, with the least possible amount of lost motion, end in the shipping room.
New construction, and especially that of new plants, which rather than old plants are usually best adapted to maximum production with a minimum of cost and expense, frequently involve such large sums of money that concerns are obliged to borrow for construction purposes. Such funds are frequently obtained through the medium of bonds, the security for which is vested in the newly constructed buildings. It is usually provided in such bonds that the proceeds resulting from their sale are to be used only in the construction for which the funds are obtained.

In addition to the above ways in which buildings may be obtained for business purposes, it should of course be mentioned that they may be purchased. If adapted to the purposes of the business they may be occupied without alteration or improvement. They may be purchased for cash or on credit. In either case they may be free or they may carry a mortgage. In the purchase of buildings on which there is a mortgage such mortgage may be assumed or the buildings bought subject to the mortgage, and regardless of this the building may be partially paid for by a purchase money mortgage. After a building or buildings have been acquired free from mortgage it may be necessary to borrow money, giving the buildings as security.

Thus in the purchase of land or buildings, or both, or in the borrowing of money as security for which the building is offered the accountant may come in contact with two classes of items which may affect the accounts.

One may be that of commission paid to the real estate broker who brings about the transaction. The transaction itself may consist in a sale or a loan. In either case, in New York City at least, the broker as a rule receives a commission of one per cent. In the case of a sale the commission is usually paid by the client who retains the broker. In the case of a loan the commission is usually paid by the borrower.
Another interesting and somewhat involved situation occurs in the “closing of a title,” as it is called. This is the technical expression used by real estate men to describe the consummation of the transaction involving the purchase of a piece of property. It is the time when the title of the property is actually transferred by the vendor to the vendee.

There are usually many details which arise at the time of closing title which may not be overlooked, such as insurance, taxes, interest, rents, assessments, water rates, and the expense of drawing and recording the mortgage, as well as the mortgage tax if a mortgage is involved.

The insurance premium is usually pro-rated and an amount equal to the unexpired proportion paid to the seller by the purchaser.

The expenses in connection with the mortgage, such as the drawing and recording and the mortgage tax, are borne by the purchaser.

Rents, and interest on the mortgage, will depend upon whether they have been collected or paid, in either case, by the seller or whether they are to be collected or paid by him.

Taxes and assessments are usually paid by seller if at date of closing they have become a lien upon the property. The same is true of water rates when based upon the frontage, but where measured by meter the item is subject to adjustment.

The matter of rents, for example, would depend upon whether they were payable in advance or at the end of a period and whether or not they have been collected by the owner, or seller, at the time of closing title. If they have been collected, it is clear that the purchaser will not receive them. If the rent of a certain store is $100 per month payable in advance, and the property changes hands on the fifteenth of a given month, then at time of closing title the seller will have received $50 which belongs to the purchaser. This amount the seller must give the purchaser credit for in closing.

To bring out the various points which arise in the purchase of property, and to confront the accountant with a situation such as he is liable to meet, is the purpose of the following tests:

Applied Theory Test Number Three
The Mellenette Realty Company after negotiations with James Stafford has entered into a contract to purchase from him a four-story building occupied as a factory. The contract price is $80,000. The title is to close December 15th. There was paid, by the Company, as earnest money, $10,000. The property is to be taken subject to a mortgage of $15,000 which bears interest at six per cent and which was last paid to include June 30th. The building is insured. The last premium paid was $360, which covered the property for the year beginning January 1st. There are two firms occupying the building. One pays $600 per month in advance. The other $100 per month, at the end of the month. The liens against the property are: taxes, $1,320; paving, $400; water rents, $250.

Assuming that at the time of closing, there was to be a purchase money mortgage of $3,000 given, the rents had been paid according to agreement and that the expense of drawing the mortgage was $10, recording $3, and the mortgage tax $15, prepare the closing statement.

In connection with the closing of title mention may be made of the title insurance policy which the purchaser usually provides himself with before closing.

The purchaser is presumed to know that the title is free and clear of encumbrances. To be sure of this fact it is necessary that the public record be searched. Few laymen are qualified for this work. A lawyer may furnish a report on a title and still the purchaser has nothing more than the lawyer’s opinion that the title is clear.

Title insurance companies engage in such business and not only render opinions in the shape of reports, but back up reports with a guarantee against defect in the title. For this service a premium, payable but once, is charged. That such companies fill a long-felt demand is evidenced by their number and prosperous condition.

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