Condominium Townhouse Investment (CTI): A Case for Accounting Courses Where Cases are not the Emphasis Condominium Townhouse Investment (CTI): A Case with Instruction Guide for Accounting Courses Where Cases are not the Emphasis ABSTRACT This accounting case/instructional aid describes methods and strategies for students new to the case method and an actual case to work on. The objectives of this aid are: 1) to present a detailed approach that a student new to the case method can use for working on cases, independent of the need for instructor aid during class time; 2) to instill into the student that accounting is not always about arriving at a final number, but includes many interesting situations that require a variety of skills from an accountant; and 3) to provide a small real-life actual case for students to work on. The Condominium Townhouse Investment case (CTI) uses introductory management accounting concepts and analysis to introduce students to the case method of learning. The main concepts reinforced are relevant costs and benefits; and opportunity and sunk costs. The student is not only asked to identify these concepts, but to apply them in a decision on whether to rent out or sell a residential property. This decision is something students would be interested in and can relate to personally, because they themselves will eventually be involved in home ownership decisions. Nevertheless, the case focuses on real estate as an investment. The consequences of the alternative decisions are both monetary and qualitative, that require managerial and financial analysis to evaluate. Keywords Case method; Sunk and Opportunity costs; Decision making; Actual case CASE SYNOPSYS Mr. George Adams is a theoretical economist by education and training, but has always been interested in getting into the real estate market. Currently, he works full time in a management position as a senior financial analyst for a public insurance company which is listed on the NYSE. In December of 2001 he finally decided to take a chance and bought a brand new Condominium Townhouse (CTI) in Mississauga, Ontario, Canada. At that time, only a deposit of $15,000 was required to be paid to the builder. Since this was the last unit the builder had for sale in this subdivision that backed on to a protected wildlife reserve, George made the non- refundable deposit and signed the “Agreement to Purchase” without consulting his wife.2 The possession date was May 31, 2002, with a probable ownership date of September 2002. The CTI rules state that the unit cannot be rented out or sold until ownership. An occupancy fee of $1,400 per month will be charged between the possession date and ownership date. Only Mr. Adams' family can occupy the unit during the occupancy period. Mr. Adams already has a residence and his primary occupation is that of an economist. Mr. Adams’ intention for this property was for it to be an investment and not his personal residence. I ...

1. Condominium Townhouse Investment (CTI): A Case for
Accounting Courses Where Cases are not the Emphasis
Condominium Townhouse Investment (CTI): A Case with
Instruction Guide for Accounting Courses Where Cases are not
the Emphasis
ABSTRACT
This accounting case/instructional aid describes methods and
strategies for students new to the case method and an
actual
case to work on. The objectives of this aid are: 1) to present a
detailed approach that a student new to the case method can use
for working on cases, independent of the need for instructor aid
during class time; 2) to instill into the student that accounting is
not always about arriving at a final number, but includes many
interesting situations that require a variety of skills from an
accountant;
and 3) to provide a small real-life
actual
case for students to work
on.
The Condominium Townhouse Investment case (CTI) uses
introductory management accounting concepts and analysis to
introduce students to the case method of learning. The main
concepts reinforced are relevant costs and benefits; and
opportunity and sunk costs. The student is not only asked to
identify these concepts, but to apply them in a decision on

2. whether to rent out or sell a residential property. This decision
is something students would be interested in and can relate to
personally, because they themselves will eventually be involved
in home ownership decisions. Nevertheless, the case focuses on
real estate as an investment. The consequences of the
alternative decisions are both monetary and qualitative, that
require managerial and financial analysis to evaluate.
Keywords Case method; Sunk and Opportunity costs; Decision
making; Actual case
CASE SYNOPSYS
Mr. George Adams is a theoretical economist by education and
training, but has always been interested in getting into the real
estate market. Currently, he works full time in a management
position as a senior financial analyst for a public insurance
company which is listed on the NYSE. In December of 2001 he
finally decided to take a chance and bought a brand new
Condominium Townhouse (CTI) in Mississauga, Ontario,
Canada. At that time, only a deposit of
$15,000 was required to be paid to the builder. Since this was
the last unit the builder had for sale in this subdivision that
backed on to a protected wildlife reserve, George made the non-
refundable deposit and signed the “Agreement to Purchase”
without consulting his wife.2
The possession date was May 31, 2002, with a probable
ownership date of September 2002. The CTI rules state that the
unit
cannot
be rented out or sold until ownership. An occupancy fee of
$1,400 per month will be charged between the possession date

3. and ownership date. Only Mr. Adams' family can occupy the
unit during the occupancy period. Mr. Adams already has a
residence and his primary occupation is that of an economist.
Mr. Adams’ intention for this property was for it to be an
investment and not his personal residence.
It is now November 1, 2002.
Mr. Adams has taken title of the unit and is now free to rent it
out to anyone. Of course, taking title of the unit required taking
out a mortgage of
$145,000 and $40,000 as a down payment. Mr. Adams made
such a large down payment because a 20% down payment did
not require the mortgage to be insured from the Canadian
Mortgage and Housing Corporation (CMHC) by his bank. The
standard insurance premium can cost up to
2 George and his wife (who works as a nutritionist for a major
Toronto hospital) have subsequently argued many times about
making such a large purchase without discussing it with her.
This is an actual case with only minor changes to real events
and numbers.
3.1 % of the mortgage amount, which Mr. Adams has avoided.3
However, the higher down payment would reduce the amount of
interest that can be expensed for tax purposes if the CTI is
rented out.
After months of frustration waiting for the builder and the
municipality to approve the taking of title, he is now pondering
what to do next. George realizes that there are property
management companies that can rent out and manage the CTI,
but he desires to take on the responsibility of a landlord
himself.

4. George has asked you, Jacqueline Books, to advise. Since you
are a friend of George, you agreed not to charge him and only
take 20 minutes of his time with your
ANALYSIS.
Jacqueline is not only a good accountant but she has some
experience with residential real estate, which is why George
asked for her analysis. She was able to forecast the cash flows
from renting the property (Exhibit 1) and from selling it
(Exhibit 2).
Amounts omitted from the exhibits are the occupancy costs paid
during the months between the possession period and taking of
title; the initial deposit; the down payment; and taxes. In
Canada, net rental income is fully taxed and only half of the
capital gain is taxable. -
3
http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm.
Rental Income
20,400
Cash outlays:

5. Mortgage (interest of 500 and principal of 200 per month)
8,400
Property Taxes
3,000
Condo fees (include insurance of Unit)
1,200
Maintenance & unexpected expenses
1,000
Property Manager Fees
2,040

6. Total Expenses
15,640
Expected Net Cash inflow before income tax
4,760
Sale Proceeds
240,400
Costs to dispose of property:
Mortgage paid back to Bank of Nova Scotia
145,000
Real Estate Commissions
12,000

7. Total Outflows
157,000
Expected Net Cash inflow before income tax
83,400
REQUIREMENTS:
Determine the purchase price of the townhouse unit.
1. Identify any combination of four sunk costs and opportunity
costs, and give amounts if applicable. Identify if the cost is a
sunk cost or an opportunity cost.
2. Take the role of Jacqueline Books and advise your friend
George Adams.
a. Identify the issue(s).
b. Provide 2-4 alternatives and an analysis for each of the
alternatives. Be sure to use the projections in Exhibits 1 and 2
in your alternatives.
Quantitative analysis can be within the report or as appendices.

8. c. Qualitative issues need to be addressed.
d. A recommendation is not required but you may include one.
3. What additional information would have been useful in the
analysis?
Are taxes important in the decision choices?
Sample Case Marking Key
(marks are unique for each case)
Sample Grading Key
ISSUE(S) OR PROBLEM(S) IDENTIFICATION
· Usually one issue
· Problem identification - usually more than one
Max
5
ALTERNATIVES
3 are usually enough
Max

9. 4
ANALYSIS OF ALTERNATIVES
Can use S. W. O. T., Advantages (Pros.), Disadvantages
(Cons.), etc. to evaluate and analyze each of the above
alternatives.
Max
8
for each alternative
Try not to mentally come up with a recommendation at this
phase. Finalizing now could lead you to overlook something.
Max
20
for section
RECOMMENDATION(S)
More than one recommendation is expected if there are many
complimentary tasks the
company/firm/person(s) need to do.
Max
3

10. Format and Grammar
Logical Format
Max
3
Appropriateness of Recommendation(s)
Max
1
Clarity
Max

11. 3
Conciseness and Spelling
Max
1
Maximum marks awarded
35
Notes:
· The marks available are greater than the number of marks for
the case in order to allow flexibility of answers for each
section.
· When doing the analysis of alternatives, appendices may be
appropriate for calculations. Always refer to these appendices
within the case solution.

12. To consider:
Prepare forecasted Income Statements for the next 5 years that
includes 1 year where the unit is
not rented. Make sure to list assumptions below statement. [To
save space, only use 1 column for
each yr. and not a separate stmt. for each year
Provide the Net Present Value [NPV] and accounting rate of
return for each year of the CTI
investment if it is rented for 4 years and sold at the end of 5
years. Show calculations and list all
assumptions you make. Be consistent with your Income
Statements above