I understand that this is a reserve that is set aside for repairs / capex. In our model example, I saw the sources and uses made up as such:
- Construction loan = $400
- Investor equity = $600
- Land acquisition = $200
- Construction cost = $700
- Replacement reserve = $100
If it is set up like this, then it seems like the replacement reserve will be an asset on the balance sheet (debit balance)?
However, based on what I am reading online, the replacement reserve should be a credit balance (see paragraph below).
Example of the Accounting for a Reserve
For example, a business wants to reserve funds for a future building construction project, and so credits a Building Reserve fund for $5 million and debits retained earnings for the same amount. The building is then constructed at a cost of $4.9 million, which is accounted for as a debit to the fixed assets account and a credit to cash. Once the building is completed, the original reserve entry is reversed, with $5 million debited to the Building Reserve fund and $5 million credited to the retained earnings account.