Company A sold merchandise to company B for $500,000. Terms are a down payment of
$100,000 and four annual payments of $100,000 due on August 31, beginning August 31,
2010. Installments will also include interest. Book value of the merchandise on the date
of sale is $300,000. Perpetual inventory system is used. Fiscal year end is December 31.
Prepare a table displaying the amount of gross profit to be recognized in each of the five
years of the installment sale applying each of the following methods: 1. a. point of
delivery revenue recognition. b. installment sales method. c. cost recovery method 2.
Prepare journal entries for each of the five years applying the three revenue recognition
methods listed in part 1, ignoring interest. 3. Prepare a partial balance sheet as of the end
of 2009 and 2010 listing the items related to the installment sale applying each of the
three methods listed in part 1.
Requirement 1
Total profit = $500,000 - 300,000 = $200,000
Installment sales method: Gross profit % = $200,000 ÷ $500,000 = 40%
8/31/09
8/31/10
8/31/11
8/31/12
8/31/13
Cash collections
$100,000 $100,000 $100,000 $100,000 $100,000
a. Point of delivery method
$200,000
-0-
-0-
-0-
-0-
$ 40,000
$ 40,000
$ 40,000
$ 40,000
$40,000
-0-
-0-
b. Installment sales method
(40% x cash collected)
c. Cost recovery method
- 0 - $100,000 $100,000
Requirement 2
Installment receivable
Sales revenue
Cost of goods sold
Inventory
To record sale on 8/31/09.
Installment receivable
Inventory
Point of
Delivery
500,000
500,000
300,000
300,000
Installment
Sales
500,000
Cost Recovery
500,000
300,000
300,000
Deferred gross profit
To record sale on 8/31/09.
Cash
Installment receivable
Entry made each Aug. 31.
200,000
100,000
100,000
100,000
Deferred gross profit
Realized gross profit
To record gross profit.
200,000
100,000
100,000
100,000
40,000
40,000
(entry made each Aug. 31)
Deferred gross profit
Realized gross profit
To record gross profit.
100,000
100,000
(entry made 8/31/12 & 8/31/13)
Requirement 3
Point of
Delivery
Installment
Sales
Cost
Recovery
December 31, 2009
Assets
Installment receivables
Less: Deferred gross profit
Installment receivables, net
400,000
400,000
(160,000)
240,000
400,000
(200,000)
200,000
December 31, 2010
Assets
Installment receivables
Less: Deferred gross profit
Installment receivables, net
300,000
300,000
(120,000)
180,000
300,000
(200,000)
100,000