Patterson Company is a large diversified business with a unit that sells commercial real estate. As a company, Patterson has been profitable in recent years with the exception of the real estate business, where economic conditions have resulted in weak sales. The vice president of the real estate division is aware of the poor performance of his group and needs to find ways to ‘‘show a profit.’’
During the current year, the division is successful in selling a 100-acre tract of land for a new shopping center. The original cost of the property to Patterson was $4 million. The buyer has agreed to sign a $10 million note with payments of $2 million due at the end of each of the next five years. The property was appraised late last year at a market value of $7.5 million. The vice president has come to you, the controller, asking that you record a sale for $10 million with a corresponding increase in Notes Receivable for $10 million.
Required
1. Does the suggestion by the vice president as to how to record the sale violate any accounting principle? If so, explain the principle it violates.
2. What would you do? Write a brief memo to the vice president explaining the proper accounting for the sale.