INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 5, Problem 5.19P

Requirement – 1

To determine

The revenue recognition principle

The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.

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.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To calculate: The amount of gross profit that would be recognized in each year from installment sales.

Requirement – 1

Expert Solution
Check Mark

Explanation of Solution

Gross profit in the year 2016:

Here,

Cash collection in 2016 is $120,000 

Gross profit is 40% (Refer to equation (1)).

Now, calculate the gross profit:

Gross profit=(Cash collection×Gross profit)=$120,000×40%=$48,000

Hence, the calculated gross profit is $48,000.

Working note:

Calculate the cost of recovery in 2016:

Given,

The cost of sales is $180,000

Sales are $300,000

Now, calculate the cost recovery:

Cost recovery=(Cost of installment salesInstallment sales)=($180,000$300,000)=60%

Hence, the calculated cost recovery is 60%, than gross profit ratio is 40% (100%  40%) (1)

Gross profit in the year 2017:

Here,

The cash collection form 2016 sales is $100,000,

Cash collection form 2017 sales is $150,000,

Calculated 2016 gross profit is 40% (Refer to equation (1)),

Gross profit is $30% (Refer to equation (2)).

Now, calculate the gross profit:

Gross profit=((Cash collection form 2016 sales×2016 gross profit)+(Cash collection form 2017 sales×2017 gross profit ))=($100,000×40%)+($150,000×$30%)=$40,000+$45,000=$85,000

Hence, the calculated gross profit is $85,000.

Working note:

Calculate the cost of recovery in 2017:

Given,

The cost of sales is $280,000

Sales are $400,000

Now, calculate the cost recovery:

Cost recovery=(Cost of installment salesInstallment sales)=($280,000$400,000)=70%

Hence, the calculated cost recovery is 70%, than gross profit ratio is 30% (100%  70%) (2)

Requirement – 2

To determine

To prepare: All necessary journal entries for each year.

Requirement – 2

Expert Solution
Check Mark

Explanation of Solution

Journal entries for the year 2016 and 2017 are as follows:

In the year 2016

Date Account Title and Explanation Post Ref. Debit Credit
  Installment receivables   $300,000  
         Inventory      $180,000
            Deferred gross profit     $120,000
  (To record installment sales)      

Table (1)

  • Installment receivable is a liability. There is a decrease in asset value. Therefore, it is debited.
  • Inventory and deferred gross profits are assets. There is a decrease in assets value. Therefore, it is credited.
  • Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
Date Account Title and Explanation Post Ref. Debit Credit
  Cash    $120,000  
         Installment receivables       $120,000
  (To record cash collections from installment sales)      

Table (2)

  • Cash is an asset. There is an increase in asset value. Therefore, it is debited.
  • Installment receivable is a liability. There is an increase in liability value. Therefore, it is credited.
Date Account Title and Explanation Post Ref. Debit Credit
  Deferred gross profit   $48,000  
          Realized gross profit     $48,000
  (To record gross profit recognize from installment sales)      

Table (3)

  • Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
  • Realized gross profit is a liability. There is an increase in liability value. Therefore, it is credited.

In the year 2017

Date Account Title and Explanation Post Ref. Debit Credit
  Installment receivables   $400,000  
         Inventory      $280,000
            Deferred gross profit     $120,000
  (To record installment sales)      

Table (4)

  • Installment receivable is a liability. There is a decrease in asset value. Therefore, it is debited.
  • Inventory and deferred gross profits are assets. There is a decrease in assets value. Therefore, it is credited.
  • Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
Date Account Title and Explanation Post Ref. Debit Credit
  Cash    $250,000  
         Installment receivables       $250,000
  (To record cash collections from installment sales)      

Table (5)

  • Cash is an asset. There is an increase in asset value. Therefore, it is debited.
  • Installment receivable is a liability. There is an increase in liability value. Therefore, it is credited.
Date Account Title and Explanation Post Ref. Debit Credit
  Deferred gross profit   $85,000  
           Realized gross profit     $85,000
  (To record gross profit recognize from installment sales)      

Table (6)

  • Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
  • Realized gross profit is a liability. There is an increase in liability value. Therefore, it is credited.
Conclusion

Therefore, the journal entries for the year 2016 and 2017 are recorded.

Requirement – 3

To determine

To prepare: All necessary journal entries for each year in cost recovery method.

Requirement – 3

Expert Solution
Check Mark

Explanation of Solution

Solution:

All necessary journal entries for each year in cost recovery method are as follows:

In the year 2016

Date Account Title and Explanation Post Ref. Debit Credit
  Installment receivables   $300,000  
        Inventory      $180,000
        Deferred gross profit     $120,000
  (To record installment sales)      

Table (7)

  • Installment receivable is a liability. There is a decrease in asset value. Therefore, it is debited.
  • Inventory and deferred gross profits are assets. There is a decrease in assets value. Therefore, it is credited.
  • Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
Date Account Title and Explanation Post Ref. Debit Credit
  Cash   $120,000  
        Installment receivables     $120,000
  (To record cash collections from installment sales)      

Table (8)

  • Cash is an asset. There is an increase in asset value. Therefore, it is debited.
  • Installment receivable is a liability. There is an increase in liability value. Therefore, it is credited.

In the year 2017

Date Account Title and Explanation Post Ref. Debit Credit
  Installment receivables   $400,000  
         Inventory      $280,000
            Deferred gross profit     $120,000
  (To record installment sales)      

Table (9)

  • Installment receivable is a liability. There is a decrease in asset value. Therefore, it is debited.
  • Inventory and deferred gross profits are assets. There is a decrease in assets value. Therefore, it is credited.
  • Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
Date Account Title and Explanation Post Ref. Debit Credit
  Cash    $250,000  
        Installment receivables     $250,000
  (To record cash collections from installment sales)      

Table (10)

  • Cash is an asset. There is an increase in asset value. Therefore, it is debited.
  • Installment receivable is a liability. There is an increase in liability value. Therefore, it is credited.
Date Account Title and Explanation Post Ref. Debit Credit
  Deferred gross profit (2)   $40,000  
          Realized gross profit     $40,000
  (To record gross profit recognize from installment sales)      

Table (11)

  • Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
  • Realized gross profit is a liability. There is an increase in liability value. Therefore, it is credited.

Working note:

Calculate the value of gross profit in 2016:

Given,

Cash collected is $120,000

Cost recovery is $120,000.

Now, calculate the gross profit:

Gross profit = Cash collectedCost recovery=$120,000$120,000=$0 (1)

Calculate the value of gross profit in 2017:

Given,

Cash collected form 2016 sales is $100,000

Cash collected form 2017 sales is $150,000

Cost recovery form 2016 is $120,000

Cost recovery form 2017 is $120,000

Now, calculate the gross profit:

Gross profit =((Cashcollected form 2016 salesCost recovery form 2016)+(Cash collected form 2017 sales Cost recovery form 2017))=(($100,000$60,000)+($150,000$150,000))=$40,000+$0=$40,000 (2)

Conclusion

Therefore, the journal entries as per cost recovery method for the year 2016 and 2017 are recorded.

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Chapter 5 Solutions

INTERMEDIATE ACCOUNTING

Ch. 5 - Is a customers right to return merchandise a...Ch. 5 - Prob. 5.12QCh. 5 - Under what circumstances should sellers consider...Ch. 5 - When should a seller view a payment to its...Ch. 5 - What are three methods for estimating stand-alone...Ch. 5 - When is revenue recognized with respect to...Ch. 5 - In a franchise arrangement, what are a franchisors...Ch. 5 - When does a company typically recognize revenue...Ch. 5 - Prob. 5.19QCh. 5 - Prob. 5.20QCh. 5 - Must bad debt expense be reported on its own line...Ch. 5 - Explain the difference between contract assets,...Ch. 5 - Explain how to account for revenue on a long-term...Ch. 5 - Prob. 5.24QCh. 5 - Prob. 5.25QCh. 5 - Prob. 5.26QCh. 5 - Prob. 5.27QCh. 5 - Prob. 5.28QCh. 5 - What are the two general criteria that must be...Ch. 5 - Explain why, in most cases, a seller recognizes...Ch. 5 - Revenue recognition for most installment sales...Ch. 5 - Prob. 5.32QCh. 5 - How does a company report deferred gross profit...Ch. 5 - Prob. 5.34QCh. 5 - Briefly describe the guidelines for recognizing...Ch. 5 - Prob. 5.36QCh. 5 - Briefly describe the guidelines provided by GAAP...Ch. 5 - Prob. 5.1BECh. 5 - Timing of revenue recognition LO53 Estate...Ch. 5 - Prob. 5.3BECh. 5 - Allocating the transaction price LO54 Sarjit...Ch. 5 - Prob. 5.5BECh. 5 - Performance obligations; warranties LO55 Vroom...Ch. 5 - Prob. 5.7BECh. 5 - Prob. 5.8BECh. 5 - Prob. 5.9BECh. 5 - Prob. 5.10BECh. 5 - Prob. 5.11BECh. 5 - Variable consideration LO56 Leo Consulting enters...Ch. 5 - Prob. 5.13BECh. 5 - Prob. 5.14BECh. 5 - Prob. 5.15BECh. 5 - Payment s by the seller to the customer LO56...Ch. 5 - Estimating stand-alone selling prices: adjusted...Ch. 5 - Estimating stand-alone selling prices: expected...Ch. 5 - Estimating stand-alone selling prices; residual...Ch. 5 - Prob. 5.20BECh. 5 - Prob. 5.21BECh. 5 - Prob. 5.22BECh. 5 - Prob. 5.23BECh. 5 - Prob. 5.24BECh. 5 - Contract assets and contract liabilities LO58...Ch. 5 - Prob. 5.26BECh. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Prob. 5.28BECh. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Long-term contract; revenue recognition; loss on...Ch. 5 - Prob. 5.35BECh. 5 - Prob. 5.36BECh. 5 - Prob. 5.37BECh. 5 - Prob. 5.38BECh. 5 - Prob. 5.39BECh. 5 - Revenue recognition; software contracts under IFRS...Ch. 5 - Prob. 5.41BECh. 5 - BE 5–31 Receivables and inventory turnover...Ch. 5 - Prob. 5.32BECh. 5 - Prob. 5.33BECh. 5 - Prob. 5.34BECh. 5 - Prob. 5.1ECh. 5 - Ski West, Inc., operates a downhill ski area near...Ch. 5 - Allocating transaction price LO54 Video Planet...Ch. 5 - Prob. 5.4ECh. 5 - Prob. 5.5ECh. 5 - Prob. 5.6ECh. 5 - Prob. 5.7ECh. 5 - On May 1, 2016, Meta Computer, Inc., enters into a...Ch. 5 - Prob. 5.9ECh. 5 - Variable considerationmost likely amount; change...Ch. 5 - Variable considerationexpected value; change in...Ch. 5 - Prob. 5.12ECh. 5 - Approaches for estimating stand-alone selling...Ch. 5 - E 5–14 FASB codification research LO5–6,...Ch. 5 - Prob. 5.15ECh. 5 - FASB codification research LO58 Access the FASB...Ch. 5 - Prob. 5.17ECh. 5 - Prob. 5.18ECh. 5 - Prob. 5.19ECh. 5 - Prob. 5.20ECh. 5 - Prob. 5.21ECh. 5 - Prob. 5.22ECh. 5 - Prob. 5.23ECh. 5 - Prob. 5.24ECh. 5 - Prob. 5.25ECh. 5 - Prob. 5.26ECh. 5 - Prob. 1CPACh. 5 - Prob. 2CPACh. 5 - Prob. 3CPACh. 5 - Prob. 4CPACh. 5 - Prob. 5CPACh. 5 - Prob. 6CPACh. 5 - Prob. 7CPACh. 5 - Prob. 8CPACh. 5 - Prob. 1CMACh. 5 - Prob. 5.1PCh. 5 - Prob. 5.2PCh. 5 - Prob. 5.3PCh. 5 - Prob. 5.4PCh. 5 - Prob. 5.5PCh. 5 - Prob. 5.6PCh. 5 - Prob. 5.7PCh. 5 - Prob. 5.8PCh. 5 - Prob. 5.9PCh. 5 - Prob. 5.10PCh. 5 - Prob. 5.11PCh. 5 - Prob. 5.12PCh. 5 - Prob. 5.13PCh. 5 - Prob. 5.14PCh. 5 - Prob. 5.15PCh. 5 - Prob. 5.16PCh. 5 - Prob. 5.17PCh. 5 - Prob. 5.18PCh. 5 - Prob. 5.19PCh. 5 - Prob. 5.20PCh. 5 - Prob. 5.21PCh. 5 - Prob. 5.22PCh. 5 - Prob. 5.23PCh. 5 - Prob. 5.1BYPCh. 5 - Judgment Case 52 Satisfaction of performance...Ch. 5 - Judgment Case 53 Satisfaction of performance...Ch. 5 - Prob. 5.4BYPCh. 5 - Prob. 5.5BYPCh. 5 - Prob. 5.6BYPCh. 5 - Prob. 5.8BYPCh. 5 - Prob. 5.9BYPCh. 5 - Prob. 5.10BYPCh. 5 - Prob. 5.11BYPCh. 5 - Prob. 5.12BYPCh. 5 - Prob. 5.13BYPCh. 5 - Prob. 5.15BYPCh. 5 - Prob. 5.16BYPCh. 5 - Prob. 5.17BYPCh. 5 - Prob. 5.18BYPCh. 5 - Prob. 5.19BYPCh. 5 - Prob. 5.23BYP
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