Assignment I: Managing a Real Estate Portfolio A Simulation Game

BY JULIAN YEO *

ABSTRACT
This business simulation game enables students to apply accounting principles to the preparation of financial statements in a dynamic setting. The whole class is divided into two teams. Based on the worldfamous board game Monopoly, the simulation presents students with the opportunity to mimic running a company with a team of classmates and to compete with the other team with the aim of maximizing the return on your teams investment.

CONTENTS
Simulation Game Objectives .............1 How the In-Class Simulation Game Is Played ...................................................1 Simulation Game Strategy .................2 Special Simulation Game Rules and Other Situations ..................................2 Manager's Diary ...................................4 Some Special Journal Entries ...........5 Exhibits.................................................7

ASSIGNMENT REQUIREMENTS
Submit: (1) journal entries of all its transactions (including adjusting and closing entries), (2) the balance sheet as of the end of Month 12, Year 1, and (3) the income statement for the period ended Month 12, Year 1 for your company.

* Assistant Professo of Accounting, Columbia Business School

Acknowledgments Elizabeth Unger, MBA 99, provided research and writing support for this case.

Copyright information 2010 by The Trustees of Columbia University in the City of New York. Reissued on July 13, 2010, with minor revisions to the text. This case cannot be used or reproduced without explicit permission from Columbia CaseWorks. To obtain permission, please visit www.gsb.columbia.edu/caseworks, or e-mail ColumbiaCaseWorks@gsb.columbia.edu.

Simulation Game Objectives

Based on the world-famous board game Monopoly (Classic Monopoly), this simulation presents student teams with the opportunity to mimic running a company with the aim of maximizing the return on their teams investment. See Exhibit 1 for an image of the board for Classic Monopoly and a comprehensive summary of Classic Monopolys rules of play. Whereas the goal of Classic Monopoly is to acquire the greatest nominal wealth, the objective of your team in this version of the game will be: (1) to produce the highest return on equity (ROE) for your portfolio of properties, and (2) to produce accurate financial statements that reflect your teams transactions during the course of a year. In this simulation, a month starts when the first team rolls the dice (or makes a transaction immediately prior to rolling the dice); a month ends after the second team has had a chance to move and has completed its transactions (i.e., when both teams have had one turn). During a month, a team may make transactions as it moves around the board or when another team takes an action that affects it.. To complete the assignment relating to the game, your will be required to submit: (1) journal entries of all its transactions (including adjusting and closing entries), (2) the balance sheet as of the end of Month 12, Year 1, and (3) the income statement for the period ended Month 12, Year 1 for your company. A business name for your property company will be allocated from the following monopoly tokens: CAR and HAT. See Exhibit 2 for a detailed outline of all potential journal entries related to the simulation game.

How the In-Class Simulation Game Is Played

The class will be divided into two teams consisting of roughly 30 people each. Two subteams of two to three people will then be formed; they will be responsible for initiating the transactions for the CAR and HAT teams. Each team needs to designate the following: A Chief Financial Officer (Treasurer) A Property Manager A Chief Operational Officer (COO)

Unlike the standard game of Monopoly, in this simulation both teams already own properties. The properties are your initial contributed capital to the company. CAR owns all properties between Go and Jail/Just Visiting and between Go to Jail and Go. HAT owns all properties between Jail/Just Visiting and Free Parking and between Free Parking and Go to Jail. Also, both teams take up a loan of $1,500 in cash from the bank at the beginning of Month 1.

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Simulation Game Strategy

Because the goal of each team is to maximize ROE, your team should consider its strategy before beginning to play. For example, to what extent will your team use leverage to maximize ROE? How can your team maximize its yield on the properties it owns? What property trades could be beneficial to your team? Consider the special in-class game rules below before deciding upon your strategy.

Special Simulation Game Rules and Other Situations

The following rules are not included in the standard rules of Classic Monopoly. However, they will be in force for the in-class simulation game and the assignment, and must be followed. 1. Immediate Purchase of Properties. Under the normal rules of Classic Monopoly, you are not allowed to purchase properties until you have completed one round of the board. However, to expedite proceedings, you may purchase properties from the commencement of the game, that is, on your first role of the dice. 2. Building Houses and Hotels. Unlike the Classic Monopoly rules that require you to build houses and hotels evenly over the property set, for the purposes of this assignment you may build houses and hotels on an uneven basis. For example, you may have a hotel on Boardwalk and nothing on Park Place. You still, however, must own the entire color set before you can commence building on it. A hotel is considered the fifth house in this simulation. 3. The Free Parking Rule. As the game progresses, money is put in the Free Parking pot every time a team pays a fine, a tax, or a building or street repairs bill. In other words, all the money that, in a normal game, would be paid to the bank now goes to Free Parking. (Exceptions: money for the purchase of properties or the sale of buildings, or for the mortgaging of properties or the sale of buildings, goes to the bank as usual. Interest on mortgaged property also goes to the bank. Income tax prepayments go to Free Parking, but the regular tax payments go to the bank.) Each time a team lands on Free Parking, it collects whatever money is in the pot at that time. Treat it as miscellaneous revenue. 4. Collecting/Paying Rent (in the following month). Under the standard rules of Classic Monopoly, if another player lands on one of your properties and you do not realize it, and the next player roles his or her dice before you claim your rent, you miss out on the rent. For this simulation, however, this rule does not apply. Additionally, when you land on another teams property, you are required to pay that team the required rent in the following month. 5. Income/Luxury Tax. When a team lands on either the Income Tax square or the Luxury Tax square, it must make a tax payment All tax paymentseven those paid when a team lands on the Luxury Tax squareare assumed to be prepaid income tax. In Classic Monopoly, when you land on the Income Tax square, you have the choice of paying either $200 or 10% of

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6.

7.

8.

9.

10. 11.

your total assets. For this assignment, the team is afforded no choice and must pay the $200. Both teams get a tax exemption in their first year of operation. Any tax payment made throughout the year will be refunded at the beginning of the next year. "Go to Jail". For the purpose of this simulation, you must pay $50 (classified as miscellaneous expense) immediately to "get out of jail" in the following month. Remaining in Jail is NOT an option. Mortgaging Properties. In Classic Monopoly, when you mortgage a property you are precluded from collecting rent and building houses and hotels on that property. In this simulation you are allowed to borrow moneyup to half the value stated on the boardat any time by placing a mortgage on a property. In addition, in this simulation mortgaging the property does not preclude the collection of rent on it, nor does mortgaging the property preclude building houses and hotels on it. Thus, if you dont have all the money to purchase a property, you may borrow to help pay for it and still collect rent and build houses and hotels on any of your properties. This rule has been introduced to encourage you to borrow money. Remember: debt can be good! The mortgage taken up in Year 1 must be paid off at the start of Year 2. To ensure that we can complete all steps in the simulation, you are not permitted to pay off the borrowed amount plus interest at any time during Year 1. Additionally, the bank may enter into special unsecured loans based on advances made to an individual team. These unsecured loans will, of course, attract higher interest rates than the secured loans. The bank also retains the right to call for final payment on a loan and/or interest when it so chooses without having to give advance notice. When a mortgaged property is transferred to another team, the mortgage must be assumed (with all accrued interest) by the acquirer. Interest. In Classic Monopoly, the bank charges 10% interest for a mortgage (regardless of how long it is outstanding). In this simulation game, the bank charges interest at the rate of 1% per month (1% per turn), rounded up to the nearest dollar. Interest is calculated on a noncompounding basis. You can also assume that the mortgage is taken up at the end of the month. For example, if CAR borrows $100 on turn 3 and repays it at the start of the following year, CAR would owe interest of $9 ($100 x 0.01 x 9 turns/months). Borrowing from Other Teams. Teams may make unsecured loans from other teams at negotiated interest rates and terms as long as interest is noncompounding and based on a monthly rate (e.g., 3% per month). In other words, you may charge as high a rate as the market will bear when you loan money. Paying off Mortgages. All mortgages must be paid off at the start of the following year. Trading or Selling Properties between Teams. Teams may decide to buy, sell, or trade properties between each other. All new traded properties are recorded at purchase price of the properties. Unlike under Classic Monopoly rules, in this simulation you are allowed to sell properties with buildings on them. However, the properties and buildings must be sold together, not separately.

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12. Giving Future Considerations when Acquiring Property. It is not permissible to give an opponent a future free ride or discount if it will facilitate making a trade. Therefore, no contingency asset or liability will be recorded. 13. Depreciation and Building Hotels. Houses and hotels must be depreciated over 50 months, including the months of acquisition and disposition. In calculating depreciation, the residual value of the house or hotel used should be the price the bank pays when it repurchases houses and hotels. In terms of the depreciation calculation, a hotel is equivalent to a fifth house. Any depreciation recorded for the houses will carry over to the hotels. 14. Selling Houses or Hotels to the Bank. You may need to sell previously acquired houses or hotels back to the bank in order to realize cash. However, houses and hotels may be sold to other teams only as part of the sale of the property and buildings. Unfortunately, the bank only pays 50% of the original board cost. This will necessitate recognition of an accounting loss (remember to include depreciation in your calculation). 15. No buildings on train and utility stations. For simplicity, we assume there are no buildings on train and utility stations. Therefore, in those cases you are not required to allocate the board price between buildings and the property. 16. Avoiding Bankruptcy. When a team runs out of cash and property and still owes money to a team or the bank, that team is considered bankrupt and would normally be out of the game. Financial statements could be prepared as of the date of bankruptcy but would show little of interest. Therefore, no team is allowed to go bankrupt. If a team runs out of cash and is ready to forfeit remaining properties (and thus would normally be out of the game), then: (1) the bankrupt team must mortgage all properties, and (2) the bank will advance to the team as much money (in multiples of $100) as they request, at a 2% per month rate of interest, to stay in the game.

Manager's Diary
A member of your team will be asked to maintain a manager's diary during the game. This will help you in the preparation of your accounts and in establishing whether you made any mistakes. This diary should contain the following: All events that involve your team that occur during the game A record of all cash inflows (e.g., rent, miscellaneous revenues, and property sales) and cash outflows (e.g., taxes, repairs, rent, and building purchases). If rent is received, you should record the property involved. A running cash balance

In summary, when something happens, write it down. An example of a manager's diary for the CAR team follows:

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Month 01

Moved to Baltic Avenue. HAT landed on Oriental Avenue (which we own) and paid rent of $6. [Cash: $1,500 + $6 = $1,506] Built 2 houses (one house each) on Park Place and Boardwalk for $400. We landed on "Just Visiting." HAT landed on St. Charles Place (which they own). [Cash: $1,500 $400 = $1,100].

Month 02

Some Special Journal Entries

When producing your journal, make sure to take into consideration the following year-end adjusting entries: Depreciation: Assume all houses and hotels have an expected useful life of just over 50 months. Depreciation should be recorded for the total number of months a house or hotel is owned, including the month of construction and the month of disposition. Don't forget the estimated residual value (potential proceeds from a sell-back to the bank). Consulting Revenue: Accrue unpaid consulting revenue for every full side of the board that you are past Go. For example, if you are on the side of the board just past "Go," accrue no consulting revenue, but if you are on the side between Go to Jail and Go, accrue 75% ($150). Interest Expense: If any properties are mortgaged, they accrue interest at 1% per month (or, if your team is bankrupt, at 2% per month) for the number of turns the money has been borrowed. Loans from other teams also accrue interest for the number of turns the money has been borrowed, at the rate that has been negotiated. Your initial loan takes place at the start of Month 1. You can assume all subsequent loans/mortgages take place at the end of the month.

The following items also need to be considered in preparing your statements: Recording owners contribution to the business. Each team should record this transaction as follows: Month 01 Accounts Properties Contributed Capital Debit XX XX Credit

Assume that at the start of the game the properties prices on the board are their fair values. CARs properties are worth $2,510; HATs properties are worth $3,180.

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Borrowing $1,500 cash at the beginning of the first year. Each team should record this transaction as follows: Month 01 Accounts Cash Loan Debit 1,500 1,500 Credit

Passing Go and collecting salary from the bank. Example: CAR passes the Go space and collects $200. Date 06/01 Accounts Cash Consulting Revenue Debit 200 200 Credit

Paying or receiving cash as a result of Free Parking, Chance, or Community Chest cards. All cash payments and receipts as a result of Chance, Community Chest cards, and other sources outside the normal operation of your company must be recorded as miscellaneous revenue or expense.

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Exhibits

Exhibit 1 Classic Monopoly Setup and Official Monopoly Game Rules (for individual players)
Below is a snapshot of the U.S. playing board upon which our in-class simulation was based:

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The game box includes a board, 2 dice, tokens to represent the players on the board, 32 houses, and 12 Hotels. There are 16 Chance and 16 Community Chest cards, 28 Title Deed cards (one for each property), and play money. Before play begins, each player is given $1500. One player acts as the Banker and Auctioneer. This player has a substantial role in the game, as he or she manages most of the financial transactions in the game. The Bank holds the Title Deeds, houses, and hotels prior to purchase by the players. The Bank pays salaries and bonuses. It sells and auctions properties and hands out the proper Title Deed cards when purchased by a player. It also sells houses and hotels to the players and loans money when required on mortgages. The Bank collects all taxes, fines, loans, and interest, and the price of all properties it sells and auctions. Starting with the Banker, each player in turn throws the dice. The player with the highest total starts the play. Place your token on the corner marked "Go", then throw the dice and move your token (in the direction of the arrow) the number of spaces indicated by the dice. After you have completed your play, the turn passes to the left. The tokens remain on the spaces occupied and proceed from that point on the player's next turn. Two or more tokens may rest on the same space at the same time. Depending on the space your token reaches, you may be entitled to buy real estate or other properties, or be obliged to pay rent, pay taxes, draw a Chance or Community Chest card, and so forth. If you throw doubles, you move your token as usual the sum of the two dice, and are subject to any privileges or penalties pertaining to the space on which you land. Retaining the dice, you throw again and move your token as before. If you throw doubles three times in succession, move your token immediately to the space marked "In Jail." Each time a player's token lands on or passes over "Go," whether by throwing the dice or drawing a card, the Banker pays that player a $200 salary. The $200 is paid only once each time around the board. However, if a player passing "Go" on the throw of the dice lands two spaces beyond it on Community Chest, or seven spaces beyond it on Chance, and draws the "Advance to Go" card, she collects $200 for passing "Go" the first time, and another $200 for advancing to it the second time by the instructions on the card.
BUYING PROPERTY

Whenever you land on an unowned property, you may buy that property from the Bank at its printed price. You receive the Title Deed card showing ownership. Place the card face up in front of you. If you do not wish to buy the property, the Bank sells it through an auction to the highest bidder. The high bidder pays the Bank the amount of the bid in cash and receives the Title Deed card for that property. Any player, including the one who declined the option to buy it at the printed price, may bid. Bidding may start at any price.

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PAYING RENT

When you land on a property owned by another player, the owner collects rent from you in accordance with the list printed on its Title Deed card. If the property is mortgaged, no rent can be collected. When a property is mortgaged, its Title Deed card is placed face down in front of the owner. It is an advantage to hold all the Title Deed cards in a color group (i.e., Boardwalk and Park Place, or Connecticut, Vermont, and Oriental Avenues) because the owner may then charge double rent for unimproved properties in that color group. This rule applies to unmortgaged properties even if another property in that color group is mortgaged. It is even more advantageous to have houses or hotels on properties because rents are much higher than for unimproved properties. The owner may not collect the rent if he fails to ask for it before the second player following throws the dice.
CHANCE AND COMMUNITY CHEST

When you land on either of these spaces, take the top card from the deck indicated, follow the instructions, and return the card face down to the bottom of the deck. The "Get out of Jail Free" card is held until used and then returned to the bottom of the deck. If the player who draws it does not wish to use it, then she may sell it, at any time, to another player at a price agreeable to both.
JAIL

You land in Jail when one of the following events occurs: 1. Your token lands on the space marked "Go to Jail," 2. You draw a card marked "Go to Jail," or 3. You throw doubles three times in succession. When you are sent to Jail, you cannot collect your $200 salary in that move since, regardless of where your token is on the board, you must move directly into Jail. Your turn ends when you are sent to Jail. If you are not sent to Jail but in the ordinary course of play land on that space, you are "Just Visiting," you incur no penalty, and you move ahead in the usual manner on your next turn. You still are able to collect rent on your properties because you are "Just Visiting." You get out of Jail by 1. Throwing doubles on any of your next three turns. (If you succeed in doing this, you immediately move forward the number of spaces shown by your doubles throw. Even though you threw doubles, you do not take another turn.) 2. Using the "Get Out of Jail Free Card." 3. Purchasing the "Get out of Jail Free Card" from another player and playing it. 4. Paying a fine of $50 before you roll the dice on either of your next two turns. If you do not throw doubles by your third turn, you must pay the $50 fine. You then get out of Jail and immediately move forward the number of spaces shown by your throw. Even though you are in Jail, you may buy and sell property, buy and sell houses and hotels, and collect rents.

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FREE PARKING

A player landing on this place does not receive any money, property, or reward of any kind. This is just a "free" resting place.
HOUSES

When a player owns all the properties in a color group, she may buy houses from the Bank and erect them on those properties. If you buy one house, you may put it on any one of those properties. The next house you buy must be erected on one of the unimproved properties of this or any other complete color group you may own. The price you must pay the Bank for each house is shown on your Title Deed card for the property on which you erect the house. The owner still collects double rent from an opponent who lands on the unimproved properties of her complete color group. Following the above rules, you may buy and erect at any time as many houses as your judgment and financial standing will allow. But you must build evenly; that is, you cannot erect more than one house on any one property of any color group until you have built one house on every property of that group. You may then begin on the second row of houses, and so on, up to a limit of four houses to a property. For example, you cannot build three houses on one property if you have only one house on another property of that group. As you build evenly, you must also break down evenly if you sell houses back to the Bank (see SELLING PROPERTY).
HOTELS

When a player has four houses on each property of a complete color group, he may buy a hotel from the Bank and erect it on any property of the color group. He returns the four houses from that property to the Bank and pay the price for the hotel as shown on the Title Deed card. Only one hotel may be erected on any one property.
BUILDING SHORTAGES

When the Bank has no houses to sell, players wishing to build must wait for some player to return or sell her houses to the Bank before building. If there are a limited number of houses and hotels available and two or more players wish to buy more than the Bank has, the houses or hotels must be sold at auction to the highest bidder.
SELLING PROPERTY

Unimproved properties, railroads, and utilities (but not buildings) may be sold to any player as a private transaction for any amount the owner can get. However, no property can be sold to another player if buildings are standing on any properties of that color group. Any buildings so located must be sold back to the Bank before the owner can sell any property of that color group. Houses and hotels may be sold back to the Bank at any time for one half the price paid for them. All houses on one color group may be sold at once, or they may be sold one house at a time (one hotel equals five houses), evenly, in reverse of the manner in which they were erected.
MORTGAGES

Unimproved properties can be mortgaged through the Bank at any time. Before an improved property can be mortgaged, all the buildings on all the properties of its color group must be sold back to the

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Bank at half price. The mortgage value is printed on each Title Deed card. No rent can be collected on mortgaged properties or utilities, but rent can be collected on unmortgaged properties in the same group. In order to lift the mortgage, the owner must pay the Bank the amount of mortgage plus 10% interest. When all the properties of a color group are no longer mortgaged, the owner may begin to buy back houses at full price. The player who mortgages property retains possession of it and no other player may secure it by lifting the mortgage from the Bank. However, the owner may sell this mortgaged property to another player at any agreed price. If you are the new owner, you may lift the mortgage at once if you wish by paying off the mortgage plus 10% interest to the Bank. If the mortgage is not lifted at once, you must pay the Bank 10% interest when you buy the property, and if you lift the mortgage later you must pay the Bank an additional 10% interest as well as the amount of the mortgage.
BANKRUPTCY

You are declared bankrupt if you owe more than you can pay either to another player or to the Bank. If your debt is to another player, you must turn over to that player all you have of value and retire from the game. In making this settlement, if you own houses or hotels, you must return these to the Bank in exchange for money to the extent of one half the amount paid for them. This cash is given to the creditor. If you have mortgaged property, you also turn this property over to your creditor, but the new owner must at once pay the Bank the amount of interest on the loan, which is 10% of the value of the property. The new owner who does this may then, at his option, pay the principal or hold the property until some later turn, then lift the mortgage. If he holds property in this way until a later turn, he must pay the interest again upon lifting the mortgage. Should you owe the Bank, instead of another player, more than you can pay (because of taxes or penalties) even by selling off buildings and mortgaging property, you must turn over all assets to the Bank. In this case, the Bank immediately sells by auction all property so taken, except buildings. A bankrupt player must immediately retire from the game.
Source: http://richard_wilding.tripod.com/monorules.htm (last viewed on July 13, 2010)

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Exhibit 2
Below is an index of most journal entries we will come across during the business simulation game accounts (in alphabetical order): Accrued Consulting Revenue Accumulated Depreciation Advances from Customers Buildings Consulting Revenue Consulting Revenue Receivable Contributed Capital Depreciation Expense Gains/losses on Sales of Properties Income Tax Refund Receivable Insurance Expense Interest Expense Interest Payable Loan Miscellaneous Expenses Miscellaneous Revenues Prepaid Income Tax Prepaid Insurance Properties Rental Expense Rental Receivable Rental Revenue Rental Payable Repair and Maintenance Expense Write-off Expense p.18 p.19 p.18 p.15 p.13 p.18 p.12 p.19 p.15 p.17 p.17 p.19 p.19 p.12 p.14 p.13 p.17 p.17 p.12 p.14 p.13 p.13 p.14 p.15 p.16

Templates of unadjusted/adjusted Trial Balance can also be found at the end of this document. Upon completion of this topic, you should be able to do the following: Journalize all transactions that take place in a simulated business environment Make all the necessary adjusting entries Prepare financial statements based on transactions that take place in a simulated business environment

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BEFORE WE START PLAYING

Month 01

Owners contribution to the business: Accounts Properties Contributed Capital/PIC Debit xx Credit xx

Both teams already own properties and both teams are using their properties as their capital contribution. We assume the prices on the board are the fair values of the properties. CARs properties are worth $2,510 and HATs properties are worth $3,180. Question: Does HAT have an advantage over CAR? Note that the performance measure we focus on is ROE (Return on owners equity). (Initial) Loan Debit $1,500 Credit $1,500

Month Accounts 01 Cash Loan

You need cash as part of the businesss operating activities. As a result of this transaction, you have an increase in asset (cash debit) and an increase in liabilities (loan credit).
WHILE WE ARE PLAYING

Common Revenues Revenues are inflows of assets or settlements of liabilities, or both, during a period as a result of the delivery or production of goods, the rendering of services, or other earnings activities that constitute an entitys typical day-to-day activities. Some possible revenues you will come across in the simulation game include the following: Rental Revenue Consulting Revenue Miscellaneous Revenue

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Rental Revenue When another team visits one of your properties, even though it does not pay the rent in the same month of its visit (it pays in the following month), you have performed your services and earned the revenue. Therefore, you can recognize rental revenue in the month another team stays at one of your properties. Month Accounts Debit Credit xx Rental Receivable xx Rental Revenue xx Here, you have an increase in asset (rental receivable debit) and an increase in revenue (rental revenue credit). When you receive the cash in the following month Month Accounts xx Cash Rental Receivable Debit xx Credit xx

Consulting Revenue Each time you pass "Go," you collect $200 cash from the bank for consulting work you have performed. Month Accounts xx Cash Consulting Revenue Debit xx Credit xx

Miscellaneous Revenue Apart from rental and consulting revenue, you may have earned revenue outside of the two main services you provide. For example, you may have earned revenue as a result of landing on "Free Parking" when there is cash available. You may have earned revenue because of a chance/community chest card you draw. Given that it is not unusual that you receive miscellaneous revenue throughout the game, they are clearly part of your core operating revenue. Month xx Accounts Cash Misc. Revenue Debit xx Credit xx

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Common Expenses Expenses are outflows of assets or incurrence of liabilities, or both, during a period as a result of the delivery or production of goods, the rendering of services, or other earnings activities that constitute an entitys typical, day-to-day activities. Some possible expenses that you will incur include the following: Rental Expenses Repair and Maintenance Expenses Miscellaneous Expenses

Rental Expense When you land on another teams properties, you incur a rental expense in the month of your visit, even though you dont have to pay it until the following month. This is part of the expenses you have to incur in order to generate revenue coming in (i.e., in order to generate consulting revenue, you have to move around the board). Month Accounts Debit Credit xx Rental Expense xx Rental Payable xx Here you have an increase in expense (rental expense debit) and an increase in liability to be paid in the following month (rental payable credit). When you make the cash payment in the following month Month Accounts xx Rental Payable Cash Debit xx Credit xx

Repair and Maintenance Expenses These are expenses you have to incur in order to generate rental revenue. Given that these expenses are often period-specific (i.e., you have to incur them periodically), and the amount is often trivial, rather than capitalizing them as assets and depreciate them overtime, you will recognize these expenses in the period in which you incur them. Month Accounts xx Repair and Maintenance Expense Cash Debit xx Credit xx

Miscellaneous Expenses Just as you have miscellaneous revenues, you may incur expenses throughout the game that are difficult to aggregate into a specific category. You may also incur expenses that you do not like to
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disclose explicitly. For example, when you land on "Go to Jail," rather than having a separate category for billing out of jail expense on your financial statements, I think you will be more comfortable putting those expenses as part of "miscellaneous." Given that you will incur miscellaneous revenue frequently throughout the game, they are part of your core operating expenses. Month xx Accounts Misc. Exp Cash Debit xx Credit xx

Other transactions Building houses and hotels A hotel is considered the fifth house in this simulation game. When building a house (an increase in asset debit), you record the following entry: Month xx Accounts Building Cash Debit xx Credit xx

Gains/losses on Sales of Properties In this simulation, properties are held to generate future rental revenues; properties are not held primarily for trading purposes. This does not preclude the possibility that you may sell/exchange some of your properties. Given that these are not part of your peripheral operating activities, when a profit/loss is made when properties are sold/exchanged, a gain/loss is recognized. For example, when a team sells a property to another team for cash, the difference between the cash amount received and the book value of the property gives rise to a gain/loss on sale of property. For example, another team pays $100 cash for Baltic Avenue that has a book value of $60. The journal entry is as follows: Month xx Accounts Cash Properties - Baltic Gain on sale of property Debit $100 Credit $60 $40

If the property is sold with a building, dont forget to depreciate the building up to the point of sale. See unrecorded expenses for more on depreciation. Lets now consider case a where there is an exchange of property between the two teams. For example, CAR gave up Oriental Avenue (book value of $100) for HATs New York Avenue (book value of $200).

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In CARs book Month xx Accounts Properties New York Ave Properties Oriental Ave Gain on exchange of property In HATs book Debit $200 Credit $100 $100

(Note that HAT can bring in the new property at purchase price, which is the book value of New York Ave that HAT gave up.) Month xx Accounts Properties Oriental Ave Properties New York Ave Debit $200 Credit $200

Question: Should HAT recognize a loss instead? Question: Does it matter if CAR and HAT have different treatments for the same transaction? Loss of Properties in a Storm Unfortunately, some of your properties are in areas that are prone to natural disaster. It is not uncommon that you will lose some of your buildings in the storm. When it happens, you will record an expense for your loss of building. This can also happen to your properties. The cost of getting the land into a condition that is rentable may outweigh the costs of the construction; therefore, it may be cheaper for you to write off the property as an expense. When that happens, dont forget to bring the depreciation expense up to date. Using the example of a building, after accounting for depreciation, you will record the following: Month xx Accounts Write-Off Expense Buildings Accumulated Dep Buildings Buildings Debit xx xx Credit

xx

AFTER WE HAVE FINISHED PLAYING

Entries that require adjustment at the end of the period: Prepaid Expenses Prepaid expenses are transactions in which services the firm receives are paid for in advance. Adjusting entries are required at the end of the period to recognize the portion of the prepaid expenses that has already been used up (therefore, allocate them to an expense account).

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BY JULIAN YEOP*

Prepaid Insurance In this simulation, insurance is valid for 24 months. When you pay the entire amount up front, you are paying for something with economic benefits that is going to last longer than the current year. When you make the cash payment, we will treat it as an asset and make the adjustment at the end of the year to recognize the insurance coverage we have used up for the current year. At the time when you make the payment Month xx Accounts Prepaid Insurance Cash Debit xx Credit xx

At the end of the year, you will recognize the coverage that you have used up for the current year. Month 12 Accounts Insurance Expense Prepaid Insurance Debit xx Credit xx

Prepaid Income Tax Throughout the game, when you land on squares on the board that require tax payments, all tax payments are assumed to be prepaid income tax (even when you land on the Luxury Tax square). When you make prepaid income tax payments Month xx Accounts Prepaid Income Tax Cash Debit xx Credit xx

For your simulation, you are not liable for any income tax for your first year of operations (however, prepaid income tax will tie up your cash flows). At the end of the year, you will recognize that you can get a cash refund for all the income taxes you have prepaid. Month 12 Accounts Income Tax Refund Receivable Prepaid Income Tax Debit xx Credit xx

Unearned Revenue Unearned revenues are obligations to deliver goods or services that result from receiving assets (e.g., cash) before providing the goods or services. An adjusting entry is required at the end of the year to recognize the portion of unearned revenue that is earned. In our simulation, some customers pay their rent in advance. When that happens, given that you havent performed the services to earn that revenue, we have to recognize that the business still owes
Managing a Real Estate Portfolio | Page 18
BY JULIAN YEOP*

the customers the rental amount received in advance. As a result of the transaction, you have an increase in Cash (asset debit) and an increase in Advances from Customers (liability credit). At the time you receive cash from customers in advance Month xx Accounts Cash Advances from Customers Debit xx Credit xx

At the end of the year, if you have performed part of the services, you have to recognize that part of the liability is no longer owed and revenue is earned. Month 12 Accounts Advances from Customers Rental Revenue Debit xx Credit xx

Accrued Revenue Accrued revenues are revenues you have earned but for which you have not yet collected the cash. As part of the simulation, each time you pass "Go," you receive consulting revenue of $200. Depending on where you are at the end of the game, you may have performed part of the consulting services. For example, if you finish at three spaces before passing "Go," you should accrue 75% of the consulting revenue (you have completed three-fourths of the consulting work). Month 12 Accounts Debit Credit Consulting Revenue Receivable $150 Consulting Revenue $150 When cash is received in the following year, you will then record the following entry: Month 01 (YR 2) Accounts Cash Consulting Revenue Receivable Consulting Revenue Debit $200 Credit

$150 $50

Accrued Expenses Accrued expenses are expenses you have incurred but have not paid. One example of this is interest expense on loans/mortgages. For the initial loan you take up in Month 1, you have to accrue 12 months worth of interest.

Page 19 | Managing a Real Estate Portfolio

BY JULIAN YEOP*

For subsequent loans/mortgages you take up, you can assume the transaction takes place at the end of the month. For example, if you take up a mortgage in Month 8, you can assume it happens at the end of Month 8; therefore, you only need to accrue interests for Months 912 (4 months). At the end of the year, you should record the following entry: Month 12 Accounts Interest Exp Interest Payable Debit xx Credit xx

Unrecorded expenses Depreciation Some assets provide economic benefits over several accounting periods. At the end of the year, we need to recognize the extent to which we have "used up" some of the benefits. One example is the houses/hotels you built as part of the simulation. Here, depreciation is calculated on a straight-line basis: Depreciation Expense = (Cost Residual Value)/Useful Life The residual value is the proceeds you can get for selling back the building (in this case, half the construction cost). For example, a house was built on Boardwalk (costing $200) in Month 11, Year 1. At the end of the year (Month 12), you need to depreciate the house for two months (including the month of construction). Depreciation Expense per month = ($200-$100)/50 = $2 per month. When recognizing the depreciation expense (debit depreciation expense), the corresponding entry is to recognize a decrease in the value of the building. Rather than crediting the asset account directly, we can credit a contra-asset account called Accumulated Depreciation. This, in turn, allows us to keep the historical cost of the assets separate from the "used up" portion of the asset. Both items provide useful information. We will look into this when we discuss long-lived assets later in the course. Accounts Debit Credit Depreciation Expense $4 Accumulated Depreciation $4 The net book value of the building is Building Accumulated Depreciation. The net book value is the amount that will appear on the balance sheet. Month 12

Managing a Real Estate Portfolio | Page 20

BY JULIAN YEOP*

TRIAL BALANCE FOR OUR BUSINESS SIMULATION GAME

Unadjusted/Adjusted Trial Balance as at December 31, Year 1. A trial balance lists the balances of all the accounts in the ledger on a particular date. This is prepared to ensure the posting procedure has been carried out such that the sum of debit account balances equals the sum of credit account balances. A trial balance is typically prepared both before and after you make adjusting entries. The trial balance you prepare before you make adjusting entries is commonly known as an Unadjusted Trial Balance. Adjusted entries are made to ensure that net income is measured correctly at the end of the period. Given that these entries will change the balances in some of the accounts, another trial balance (known as Adjusted Trial Balance) is prepared to check the accuracy of the arithmetic in the posting procedure. Question: What types of errors are not captured by the trial balance? Attached are two templates you can use in preparing your unadjusted and adjusted trial balances. You may not need all of the accounts listed. In some instances, you may need to add new accounts. I have also inserted a column called Reference Number. Each account a company prepares is typically given a reference number. These numbers are company specific, and a new reference number is generated each time a new account is created. In practice, it is not uncommon to see these reference numbers being grouped by categories. For example, an asset account typically has reference numbers of 10001999, a liability account has reference numbers of 20002999, an equity account has reference numbers of 30003999, a revenue account has reference numbers of 40004999, and an expense account has reference numbers of 50005999. Once your accounts are grouped by these categories, you can easily prepare your income statement and balance sheet.

Page 21 | Managing a Real Estate Portfolio

BY JULIAN YEOP*

UNADJUSTED/ADJUSTED TRIAL BALANCE FOR CAR/HAT AS AT DECEMBER 31, YEAR 1 Amounts in Accounts Amounts in Accounts Ref Accounts with Debit Balances with Credit Balances 1001 Cash 1002 Rental Receivables 1003 Consulting Revenue Receivables 1004 Interest Receivables 1005 Income Tax Refund Receivables 1006 Prepaid Income Tax 1007 Prepaid Insurance 1008 Properties/Land 1009 Buildings 1010 Accumulated Dep Building

2001 2002 2003 2004 2005

Rental Payable Advances from Customers Interest Payable Loan Mortgages

3001 3002

Contributed Capital Retained Earnings

4001 4002 4003 4004 4005

Rental Revenue Consulting Revenue Miscellaneous Revenue Accrued Consulting Revenue Gain from Sales of Properties

5001 5002 5003 5004 5005 5006 5007 5008

Rental Expense Miscellaneous Expenses Repair and Maintenance Expense Interest Expense Depreciation Expense Insurance Expense Write-off Expense Loss from Sales of Properties

Totals

Managing a Real Estate Portfolio | Page 22

BY JULIAN YEOP*

UNADJUSTED/ADJUSTED TRIAL BALANCE FOR CAR/HAT AS AT DECEMBER 31, YEAR 1 Amounts in Accounts with Amounts in Accounts Ref Accounts Debit Balances with Credit Balances 1001 Cash 1002 Rental Receivables 1003 Consulting Revenue Receivables 1004 Interest Receivables 1005 Income Tax Refund Receivables 1006 Prepaid Income Tax 1007 Prepaid Insurance 1008 Properties/Land 1009 Buildings 1010 Accumulated Dep Building

2001 2002 2003 2004 2005

Rental Payable Advances from Customers Interest Payable Loan Mortgages

3001 3002

Contributed Capital Retained Earnings

4001 4002 4003 4004 4005

Rental Revenue Consulting Revenue Miscellaneous Revenue Accrued Consulting Revenue Gain from Sales of Properties

5001 5002 5003 5004 5005 5006 5007 5008

Rental Expense Miscellaneous Expenses Repair and Maintenance Expense Interest Expense Depreciation Expense Insurance Expense Write-off Expense Loss from Sales of Properties

Totals

Page 23 | Managing a Real Estate Portfolio

BY JULIAN YEOP*