Question:
On August 31, 2013, the Silva Company sold merchandise to the Bendix Corporation for $500,000.
Terms of the sale called for a down payment of $100,000 and four annual installments of $100,000 due
on each August 31, beginning August 31, 2014. Each installment also will include interest on the unpaid
balance applying an appropriate interest rate. The book value of the merchandise on Silva’s books on the
date of sale was $300,000. The perpetual inventory system is used. The company’s fiscal year-end is
December 31.
Required:
1. Prepare a table showing the amount of gross profit to be recognized in each of the five years of the
installment sale applying each of the following methods:
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 requirement 1. Ignore interest charges.
3. Prepare a partial balance sheet as of the end of 2013 and 2014 listing the items related to the
installment sale applying each of the three methods listed in requirement 1.
Answer:
Requirement 1
Total profit = $500,000 – 300,000 = $200,000
Installment sales method: Gross profit % = $200,000 ÷ $500,000 = 40%
On August 31, 2013, the Silva Company sold merchandise to the Bendix Corporation for $500,000.
Terms of the sale called for a down payment of $100,000 and four annual installments of $100,000 due
on each August 31, beginning August 31, 2014. Each installment also will include interest on the unpaid
balance applying an appropriate interest rate. The book value of the merchandise on Silva’s books on the
date of sale was $300,000. The perpetual inventory system is used. The company’s fiscal year-end is
December 31.
Required:
1. Prepare a table showing the amount of gross profit to be recognized in each of the five years of the
installment sale applying each of the following methods:
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 requirement 1. Ignore interest charges.
3. Prepare a partial balance sheet as of the end of 2013 and 2014 listing the items related to the
installment sale applying each of the three methods listed in requirement 1.
Answer:
Requirement 1
Total profit = $500,000 – 300,000 = $200,000
Installment sales method: Gross profit % = $200,000 ÷ $500,000 = 40%
