Pankratov Lakes is a new recreational real estate development which consists of 500 lake-front and lake-view lots. As a special incentive to the first 100 buyers of lake-view lots, the developer is offering 3 years of free financing on 10-year, 12% notes, no down payment, and one week at a nearby established resort "a $1200 value." The normal price per lot is $12,000. The cost per lake-view lot to the developer is an estimated average of $2,000. The development costs continue to be incurred; the actual average cost per lot is not known at this time. The resort promotion cost is $700 per lot. The notes are held by Davis Corp., a wholly owned subsidiary.
a. Discuss the revenue recognition and gross profit measurement issues raised by this situation.
b. How would the developer's past financial and business experience influence your decision concerning the recording of these transactions?
c. Assume 50 persons have accepted the offer, signed 10-year notes, and have stayed at the local resort. Prepare the journal entries that you believe are proper.
d. What should be disclosed in the notes to the financial statements?