This section is from the book "Real Estate Accounts", by Walter Mucklow. Also available from Amazon: Real Estate Accounts.

Admitting that all the profit is not earned until all the payments are made, it follows that the profits are earned in proportion as the payments are made. In other words, the earned profit bears the same ratio to the total book profit as the payments made bear to the total selling price.

In our example, therefore, the profits would be earned as follows:

No. | Instalments | Corresponding Earned Profits |

1 | $24,000 | $16,000 |

2 | 30,000 | 20,000 |

3 | 36,000 | 24,000 |

4 | 42,000 | 28,000 |

5 | 48,000 | 32,000 |

$180,000 | $120,000 |

The rule for calculating the earned profits may be formulated in the following manner:

Payments made / Total selling price X total gain = earned profits

It is evident that the total profits divided by the total selling price gives the ratio of profit to be deducted from each instalment payment as actually earned profit; e.g., when the above transaction is completed, the total profit thereon is $120,000, which, divided by the total selling price, $180,000, shows the ratio of profit to be 66 2/3%. Therefore, on the first payment of $24,000, the earned or realized profit would be 66 2/3% of this sum, or $16,000.

It may be argued that the course indicated is too conservative, and that, when a considerable portion of the price has been paid, say one-half, it is safe to assume that all profits accruing from the transaction are already earned - on the ground that the security is worth double the amount of the unpaid purchase money. In the case of a sale under contract, this assumption is not justified, on account of the absence of any obligation on the part of the purchaser to pay the full amount. In the case of a mortgage, it is admitted that, in certain instances, it may be safe so to regard the matter; for instance, in the case of a dwelling, office building, or other property available for a large variety of purchasers or users, on which half of a reasonable purchase price has been paid. Such conditions, however, are frequently absent from large transactions, where the actual considerations may be based on possible profits to be derived by a purchaser, as in the case of a development company; or where the transaction is of such magnitude, or the property concerned of such a nature, that the number of possible purchasers or users is materially restricted.

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