Write Off Falls Run Community Association Liability

to Net Cash Provided by Operating Activities

   Increase (Decrease) in:

      Accounts Payable

2,092

      Income Taxes Payable

(1,796)

      Due to Falls Run Community Association

(201,944)

      Prepaid Assessments

(3,146

            Net Cash Flows from Operating Activities

$      (11,055)

CASH FLOWS FROM INVESTING ACTIVITIES:

   Received from Assessments (Reserves)

$149,393

   Received from Interest-Bearing Deposits

112,000

   Disbursed for Interest-Bearing Deposits

(254,000)

            Net Cash Flows from Investing Activities

$           7,393

            Net Change in Cash and Cash Equivalents

$        (3,662)

   Cash and Cash Equivalents at Beginning of Year

189,322

   Cash and Cash Equivalents at End of Year

$185,660

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   Cash Paid for Income Taxes

$2,120

NOTE 1 -NATURE OF OPERATIONS:

The Condominium is an association organized under the laws of the Commonwealth of Virginia for the purposes of maintaining and preserving the common property of the condominium. The Association is located in Stafford County, Virginia and consists of 199 units. The Board of Directors administers the condominium operations.

NOTE 2 -SIGNIFICANT ACCOUNTING POLICIES:

A) Method of Accounting - The financial statements are presented on the accrual method of accounting in which revenues are recognized when earned and expenses when incurred, not necessarily when received or paid.

B) Member Assessments -Association members are subject to assessments to provide funds for the Association's operating expenses, future capital acquisitions, and major repairs and replacements. Assessments receivable at the balance sheet date represent fees due from unit owners. The Association's policy is to retain legal counsel and place liens on the properties of owners whose assessments are delinquent. Any excess assessments at year-end are retained by the Association for use in future years. The Association utilizes the allowance method of accounting for bad debt.

D) Estimates -The preparation of financial statements, in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates affect the reported amounts of assets and liabilities. They also affect the disclosure of contingent assets and liabilities. at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

E) Cash Equivalents -For purposes of the statement of cash flows, the Association considers all highly liquid investments and interest-bearing deposits with an original maturity date of three months or less to be cash equivalents.

NOTE 3 -REPLACEMENT RESERVES:

The Association's governing documents require that funds be accumulated for future major repairs and replacements. Accumulated funds are generally not available for expenditures for normal operations.

The Association had a replacement reserve study conducted by Mason & Mason Capital Reserve Analysis, Inc. during 2006. The table included in the Supplementary Information on Future Major Repairs and Replacements is based on this study.

The study recommends a contribution to reserves of $85,780 and an interest contribution of $10,935 for 2008. For 2008, the Association budgeted to contribute $142,234 to reserves. In addition, the Association contributed interest income of $7,159 to reserves. The Association elected to transfer $47,760 from initial working capital and $61,511 from unappropriated members' equity to replacement reserves.

Funds are being accumulated in replacement reserves based on estimates of future needs for repair and replacement of common property components. Actual expenditures may vary from the estimated future expenditures and the variations may be material; therefore, amounts accumulated in the replacement reserves mayor may not be adequate to meet all future needs for major repairs and replacements. If additional funds are needed, the Association may increase regular assessments, pass special assessments, or delay major repairs and replacements until funds are available.

As of December 31, 2008, the Association had designated $430,224 for replacement reserves. These designated reserves were funded by cash and interest­ bearing deposits.

NOTE 4 -INCOME TAXES:

For income tax purposes, the Association may elect annually to file either as an exempt condominium or as an association taxable as a corporation. As an exempt condominium, the Association's net assessment income would be exempt from income tax, but its interest would be taxed. Electing to file as a corporation, the Association is taxed on its net income from all sources (to the extent not capitalized or deferred) at normal corporate rates after corporate exemption, subject to the limitation that operating expenses are deductible only to the extent of income from members. For 2008, the income taxes were calculated using the corporate method.

NOTE 4 -INCOME TAXES: (CONTINUED)

In accordance with accounting standards, a deferred tax asset has been recorded in the financial statements. Deferred assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. That is, the interest expense deductions currently exceed taxable income, and a deferred tax asset will be shown until this excess is applied to future years' taxable income.

The Association had a non-membership loss carryforward of $52,947 as of December 31, 2008. This is related to the loss from the write off of the prior management receivable. As of December 31, 2008, the Association had a deferred tax asset of $11, I 19. For 2008, the asset represents $7,942 for federal and $3,177 for state income taxes. The non-membership loss carryforward and expiration dates are as follows:

Expiration Loss Date Carryforward

                            2028                  $ 52,947

NOTE 5 -CASH AND INTEREST-BEARING DEPOSITS:

As of December 31, 2008, the Association had maintained its funds in the following manner:

NOTE 5 -CASH AND INTEREST-BEARING DEPOSITS: (CONTINUED)

The Association has funds maintained in a Smith Barney money fund. Although the value per share of this account has not changed since it was opened and its goal is to maintain a per share value of $1, this account is subject to market fluctuation risk. Therefore, the market fluctuation risk as of December 31, 2008 was $1,052. On September 19, 2008, the U.S. Department of the Treasury approved a temporary guarantee program. The temporary guarantee program provides coverage to shareholders for amounts that they held in participating money funds as of the close of business on September 19, 2008. The coverage on these funds extends through September 18, 2009. The guarantee will be triggered if a participating fund's net asset value falls below $0.995.

NOTE 6 -ASSESSMENTS RECEIVABLE -NET:

The Association utilizes the allowance method of accounting for bad debt. Individual receivables are written off as a loss when a determination is made that they are non-collectible. Under the allowance method, collection efforts may continue and recoveries of amounts previously written off are recognized as income in the year of collection.

NOTE 7 -INITIAL WORKING CAPITAL:

At settlement, the Association collects from each original purchaser two months assessments. This fund is maintained for the purpose of providing working capital in the early stages of the community's operations. During 2008, the Association elected to transfer the balance of $47,760 to replacement reserves.

NOTE 8 -MASTER ASSOCIATION:

Association members are also subject to the declaration of the Falls Run Community Association. During 2008, these dues were paid directly to the master association by individual unit owners. Prior to 2008, the Association collected master association assessments from its members and submitted payments to the Falls Run Community Association. During 2008, the Association reimbursed the master association $77,545 for prior years assessments and expense payment reimbursements. By agreement, the balance due of $124,399 was written off during 2008.

NOTE 9 -ACCOUNTS RECEIVABLE-PRIOR MANAGEMENT:

During 2005, a total of $150,000 was withdrawn from the Association's checking account without proper documentation. In addition, homeowner assessment receipts of $4,247 were charged off to expenses and were not deposited in the Association's accounts. During 2006 the Association overpaid its management fees in the amount of $3,430 and the July 5, 2006 ACH payments (homeowner assessment receipts) of $9,990 were not deposited in the Association's accounts. During 2008, the Association collected $100,000 in insurance claim reimbursements and wrote off the remaining balance of $67,667.

NOTE 10 -MANAGEMENT SERVICES:

The Association retains Jeffrey Charles & Associates as its management agent. Jeffrey Charles & Associates and Horizon Property Services share common ownership interests. Horizon Property Services provides general repairs and maintenance services. During 2008, the Association paid Horizon Property Services $23,484. As of December 31, 2008, the Association owed $345 for these services.

2006 Estimated Typical Service Life (Years)

2006 Estimated Replacement Cost

Concrete Driveways/Garage Thresholds