Question:
Sanchez Development Company uses the installment sales method to account for some of its installment
sales.
On October 1, 2013, Sanchez sold a parcel of land to the Kreuze Corporation for $4 million. This amount
was not considered significant relative to Sanchez’s other sales during 2013. The land had cost Sanchez
$1.8 million to acquire and develop. Terms of the sale required a down payment of $800,000 and four
annual payments of $800,000 plus interest at an appropriate interest rate, with payments due on each
October 1 beginning in 2014.
Kreuze paid the down payment, but on October 1, 2014, defaulted on the remainder of the contract.
Sanchez repossessed the land. On the date of repossession the land had a fair value of $1.3 million.
Required:
Prepare the necessary entries for Sanchez to record the sale, receipt of the down payment, and the default
and repossession applying the installment sales method. Ignore interest charges.
Answer:
October 1, 2013
Installment receivable............................................................................. 4,000,000
Inventory.......................................................................................... 1,800,000
Deferred gross profit......................................................................... 2,200,000
To record the installment sale
Cash....................................................................................................... 800,000
Installment receivable....................................................................... 800,000
Sanchez Development Company uses the installment sales method to account for some of its installment
sales.
On October 1, 2013, Sanchez sold a parcel of land to the Kreuze Corporation for $4 million. This amount
was not considered significant relative to Sanchez’s other sales during 2013. The land had cost Sanchez
$1.8 million to acquire and develop. Terms of the sale required a down payment of $800,000 and four
annual payments of $800,000 plus interest at an appropriate interest rate, with payments due on each
October 1 beginning in 2014.
Kreuze paid the down payment, but on October 1, 2014, defaulted on the remainder of the contract.
Sanchez repossessed the land. On the date of repossession the land had a fair value of $1.3 million.
Required:
Prepare the necessary entries for Sanchez to record the sale, receipt of the down payment, and the default
and repossession applying the installment sales method. Ignore interest charges.
Answer:
October 1, 2013
Installment receivable............................................................................. 4,000,000
Inventory.......................................................................................... 1,800,000
Deferred gross profit......................................................................... 2,200,000
To record the installment sale
Cash....................................................................................................... 800,000
Installment receivable....................................................................... 800,000
