Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Question
Chapter 5, Problem 5.14BYP
Requirement – 1
To determine
Methods of Revenue Recognition
There are three methods or principles to recognize the revenue and costs for a business entity, they are:
- 1. The Realization principle or Point of delivery method
- 2. The Installment sales method
- 3. The cost recovery method
Installment sales method:
Under the installment sales, the revenue and costs are recognized only when the payment of cash is received from customer. Two composed components are involved in the each payment of cash, and components of sales are as follows:
- Partial recovery of the cost from sales
- Component of gross profit
These components are determined by the percentage of gross profit.
Cost recovery method:
Under the cost recovery method, gross profit is recognized when the cost of the sales is recovered. Where there is an extremely high degree of uncertainty in the installment sales, then this method can be used.
To calculate: The amount of gross profit that would be recognized in 2018 using each method.
Requirement – 2
To determine
To discuss: The circumstances under which each of the three methods would be used.
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Problem 3
Salameda sold a tract of land with a carrying amount of P3,000,000 to Hacienda Pontiveros on July
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#5
Deferred payment purchase
Cardinals Corporation purchased a computer on December 31, 2019, for $105,000, paying $30,000 down
and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 starting
December 31, 2020. An assumed interest rate of 10% is implicit in the purchase price. The computer is
depreciated on a straight-line basis over a useful life of 5 years with no salvage value.
Instructions: Prepare journal entries relating to the equipment and notes payable for all 5 years.
Chapter 5 Solutions
Intermediate Accounting
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