Question

On a balance sheet for a bank ( where loans are assets /receivable) what adjusting entry comes from a commercial real estate loan in foreclosed property where the bank takes the title.

Answer 1

First of all Foreclosed property situation arises when the Assets holder who mortgaged the property to the Financial instituiton / bank and taken funds failed to pay the financial cost for a particular duration of time and which cause financial institution / banks to initiate the foreclosure actions. This action comes into picture once after regular reminder asset's liability holder failed to return the money lended to them.

Two things will be adjusted :

1. Transfer of Property in the name of Financial Institution / Bank

2. Gain / loss over the foreclosure initiated

Adjustment entry will be:

Depreciation A/c Dr

Foreclosure Asset Liability A/c Dr

To Foreclosure Asset Cost A/c

( Being Transfer of Foreclosed asset)

Difference between Asset cost and fair value will be booked as Gain / loss on foreclosure Asset.