Difficulty: Hard

Average Score: 39%

On a statement of settlement, which of the following entries would be made regarding the balance of an assumed loan?

Rationale

A) A debit to seller, credit to buyer

In a statement of settlement, the balance of an assumed loan is typically recorded as a debit to the seller and a credit to the buyer. This reflects that the buyer is taking on the loan obligation, thus increasing their liability, while the seller is relieved of that obligation.

A (A debit to seller, credit to buyer) CORRECT

This entry accurately represents the transfer of the loan obligation during the settlement process. When the buyer assumes the loan, their balance increases (credit), while the seller’s balance decreases (debit), effectively reflecting the change in liability due to the assumption of the loan.

B (A credit to seller, debit to buyer) YOUR ANSWER

This choice incorrectly suggests that the seller is gaining a benefit from the loan assumption, which is not the case. In fact, the seller is transferring their loan responsibility to the buyer, resulting in a debit to the seller's account rather than a credit.

C (A debit to seller, credit to broker) YOUR ANSWER

This option misrepresents the parties involved in the transaction. While a debit to the seller is appropriate, a credit to the broker does not apply here, as the broker is not directly involved in the loan balance adjustment on the settlement statement.

D (A credit to buyer, debit to broker) YOUR ANSWER

This choice incorrectly indicates that the buyer is gaining something from the broker in relation to the loan balance. The buyer should be credited for assuming the loan, but there is no direct debit to the broker related to this transaction, making this entry irrelevant.

Conclusion

In a statement of settlement concerning an assumed loan, the correct accounting reflects a debit to the seller and a credit to the buyer. This entry accurately captures the shift in liability from the seller to the buyer, ensuring clarity in the financial transaction. Understanding these entries is crucial for maintaining accurate records in real estate transactions involving loan assumptions.

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