Page 42 - Apple REIT 9 2008 Annual Report

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Revenue Recognition
Revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s
services.
Offering Costs
The Company is raising capital through a best-efforts offering of Units by David Lerner Associates, Inc., the managing
underwriter, which receives a selling commission and a marketing expense allowance based on proceeds of the Units sold (see Note
4). Additionally, the Company has incurred other offering costs including legal, accounting and reporting services. These offering
costs are recorded by the Company as a reduction of shareholders’ equity. Prior to the commencement of the Company’s offering,
these costs were deferred and recorded as prepaid expense. As of December 31, 2008, the Company had sold 41 million Units for
gross proceeds of $446.4 million and proceeds net of offering costs of $400.5 million. The Company will offer Units until April 25,
2010, unless the offering is extended, or terminated if all of the Units are sold before then.
Comprehensive Income
The Company recorded no comprehensive income (loss) other than net income (loss) for the periods reported.
Earnings Per Common Share
Basic earnings per common share is computed as net income (loss) divided by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is calculated after giving effect to all potential common shares that were
dilutive and outstanding for the year. There were no shares with a dilutive effect for the year ended December 31, 2008 or for the
period from November 9, 2007 (initial capitalization) through December 31, 2007. As a result, basic and dilutive outstanding shares
were the same. Series B convertible preferred shares are not included in earnings per common share calculations until such time that
such shares are converted to common shares (see Note 4).
Federal Income Taxes
The Company is operated as, and will elect to be taxed as, a REIT under Sections 856 to 860 of the Internal Revenue Code.
Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial
reporting purposes primarily due to the differences for federal income tax purposes in the estimated useful lives used to compute
depreciation. The characterization of 2008 distributions of $0.51 per share for tax purposes was 42% ordinary income and 58% return
of capital (unaudited).
The Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state income taxes. The taxable REIT
subsidiary incurred a loss for the year ended December 31, 2008, and therefore did not have any tax expense. No operating loss benefit
has been recorded in the consolidated balance sheet since realization is uncertain. Total net operating loss carry forward for federal
income tax purposes was approximately $1.3 million as of December 31, 2008. The net operating loss carry forward will expire in
2028. There are no material differences between the book and tax basis of the Company’s assets.
Sales and Marketing Costs
Sales and marketing costs are expensed when incurred. These costs represent the expense for franchise advertising and reservation
systems under the terms of the hotel management and franchise agreements and general and administrative expenses that are directly
attributable to advertising and promotion.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.