Download - Installment (Lia)
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7/24/2019 Installment (Lia)
1/23
NSTALLMENT
NSTALLMENT
SALESSALES
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7/24/2019 Installment (Lia)
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nstallment Sales
nstallment Sales
Down PaymentDown Payment Balance in a series of paymentBalance in a series of payment
Special Revenue Recognition
Postponed revenue recognition untilprobability of collection can be reasonably estimated
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7/24/2019 Installment (Lia)
3/23
Sellers risk:
ellers risk:
Repossession lossesepossession losses
To avoid repossession losses:To avoid repossession losses:
!! DP s"ould be large enoug" to cover t"eDP s"ould be large enoug" to cover t"e
decline in t"e value of an article!decline in t"e value of an article!
#!#! T"e period of installment paymentT"e period of installment payment
s"ould not be too long $% mont"&!s"ould not be too long $% mont"&!
'!'! Payments periodic s"ould e(ceed t"ePayments periodic s"ould e(ceed t"edecline in t"e value of article!decline in t"e value of article!
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7/24/2019 Installment (Lia)
4/23
Methods of GP Recognition
ethods of GP Recognition
on nstallment Sales
n nstallment Sales
!! )P recogni*ed at t"e time of sale!)P recogni*ed at t"e time of sale!
#!#! )P recogni*ed at t"e collection of cas"+)P recogni*ed at t"e collection of cas"+
t"e alternatives:t"e alternatives:, collections regarded as first to, collections regarded as first to recovery ofrecovery of
cost!cost!
, collections regarded as first to, collections regarded as first to reali*ation ofreali*ation ofprofit!profit!
, collections regarded to bot" recovery cost, collections regarded to bot" recovery cost
and reali*ation of profit!and reali*ation of profit!
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7/24/2019 Installment (Lia)
5/23
The nstallment Method
he nstallment Method
Deffered )ross Profit:Deffered )ross Profit:
T"e difference of sales price andT"e difference of sales price and -.)S-.)S
Recogni*ed as revenue periodically $inRecogni*ed as revenue periodically $in
proportion of cas" collection&!proportion of cas" collection&!
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7/24/2019 Installment (Lia)
6/23
Sale of Real Estate on
ale of Real Estate on
nstallment Salesnstallment Sales
.ctober / 01#/ 2R co! sells to S3!2est for.ctober / 01#/ 2R co! sells to S3!2est for456/666 property t"at it owns and carries on its456/666 property t"at it owns and carries on its
boo7s at 4'6/666! T"e company receives 46/666boo7s at 4'6/666! T"e company receives 46/666on t"e date of t"e sale and a mortgage note foron t"e date of t"e sale and a mortgage note for486/666 payable in #6 semiannual installments of486/666 payable in #6 semiannual installments of4#/666 plus interest on t"e unpaid principal at4#/666 plus interest on t"e unpaid principal at
#9! -omisions and ot"er e(penses on t"e sale#9! -omisions and ot"er e(penses on t"e saleamounting to 4/566 are paid! Regulleramounting to 4/566 are paid! Regullerinstallments of principal and intrest on t"einstallments of principal and intrest on t"emortgage notes are received by t"e seller in 01'mortgage notes are received by t"e seller in 01'
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7/24/2019 Installment (Lia)
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Recognition of Profit in Period of SaleRecognition of Profit Periodically inproportion to collections
.ctober / 01#
Sold real estate $Parcel A&/ boo7 value/ 4'6/666/ for 456/666
Receivable from Receivable from
S3 2est 56!666 S3 2est 56!666
Real estate Real estate
$Parcel A& '6!666 $Parcel A& '6!666
)ain on sale Deffered )P
$Parcel A& #6!666 $Parcel A& #6!666
Received DP/ 46/666/ and mortgage note for balance/ 486/666
-as" 6!666 -as" 6!666
ortgage ;ote 86!666 ortgage ;ote 86!666Receivable from Receivable from
S3 2est 56!666 S3 2est 56!666
Paid e(penses on sale/ 4/566
Selling e(penses !566 Selling e(penses !566-as" !566 -as" !566
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7/24/2019 Installment (Lia)
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Recognition of Profit in Period ofSale
Recognition of Profit Periodically inproportion to collections
December/ ' 01#
$& Ad
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7/24/2019 Installment (Lia)
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Recognition of Profit in Period of SaleRecognition of Profit Periodically inproportion to collections
@an / 01'
To reserve accrued interest establis"ed at t"e end of previous period!
>nterest >ncome !#66 >nterest >ncome !#66Accrued >nterest Accrued >nterest
.n !;ote !#66 .n !;ote !#66
Apr / 01'
Received semiannual installment on mortgage notes/ 4#/666 and interest on 486/666 at
#9 for mont"s/ 4#/866
-as" 8!866 -as" 8!866
! ;ote #!666 ! ;ote #!666
>nterest >ncome #!866 >nterest >ncome #!866
.ct / 01'
Received semiannual installment on mortgage notes/ 4#/666 and interest on 4'/666 at#9 for mont"s/ 4#/#6
-as" 8!#6 -as" 8!#6
! ;ote #!666 ! ;ote #!666>nterest >ncome #!#6 >nterest >ncome #!#6
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7/24/2019 Installment (Lia)
10/23
Recognition of Profit in Period of SaleRecognition of Profit Periodically inproportion to collections
December/ ' 01'
$& Adnterest Accrued >nterest
.n !;ote!66 .n !;ote !66
>nterest >ncome !66 >nterest >ncome !66
Deffered )P
$Parcel A& !66
Reali*ed )P
$Parcel A& !66
To close nominal accounts
Reali*ed )P
$Parcel A& !66
>nterest >ncome8!56 >nterest >ncome 8!56
>ncome summary 8!56 >ncome summary !6
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7/24/2019 Installment (Lia)
11/23
The difference of
he difference of
recogniing net gainecogniing net gain
Csing first met"ods:Csing first met"ods:
4/566 $4#6/666,4/566&4/566 $4#6/666,4/566&
Csing second met"ods:Csing second met"ods:
01#: 4#/566 $48/666,4/566&01#: 4#/566 $48/666,4/566&
01' and eac" of ne(t 6 year:01' and eac" of ne(t 6 year:
4/66 $869 6f 48/666&4/66 $869 6f 48/666&
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7/24/2019 Installment (Lia)
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Assume in t"e previous e(ample t"at buyer fails to meetAssume in t"e previous e(ample t"at buyer fails to meet
installment due on April / 018! T"e seller surrendersinstallment due on April / 018! T"e seller surrenders
t"e mortgage note wit" an unpaid balance of 4'/666!t"e mortgage note wit" an unpaid balance of 4'/666!
And repossesses t"e property! .n t"e date/ t"e fairAnd repossesses t"e property! .n t"e date/ t"e fairvalue of t"e property is 4#/566value of t"e property is 4#/566
Reacuired real estate $Parcel A& valued at 4#/566+ surrendered !note wit" unpaidbalance of 4'/666
Real astate Real astate
$Parcel A& #!566 $Parcel A& #!566
Loss on Repossession Deferred )P$Parcel A& ?566 $Parcel A& 8866
)ain on Rep !066
! ;ote '!666 ! ;ote '!666
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7/24/2019 Installment (Lia)
13/23
The loss and gain
he loss and gain
calc!lations:
alc!lations:Recognition ofRecognition of
Profit in PeriodProfit in Periodof Saleof Sale
Recognition of
Profit Periodicallyin proportion tocollections
Total amountTotal amount
collectedcollectedLoss in value ofLoss in value ofrepossessed prop:repossessed prop:
.rignal basis.rignal basis
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;et gain;et gain)ain recogni*ed)ain recogni*edprior to repossessionprior to repossession
)ain $loss& on)ain $loss& onrepossessionrepossession
4'6/6664'6/666
#/566#/566
48/66648/666
/566/566
4#/5664#/566
#6/666#6/666
$4?/566&$4?/566&
48/66648/666
/566/566
4#/5664#/566
5/665/66
4/0664/066
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7/24/2019 Installment (Lia)
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Sale of merchandise on
ale of merchandise on
nstallment "asisnstallment "asis
T"e balance s"eet of F co!on @an / 01?:T"e balance s"eet of F co!on @an / 01?:
-as" #5!666 Acc Payable 86!666
erc"andise inventory 66!666 Deferred )P on installment sales
Acc Rec $Reguler& 5!666 01 ##!66
>nstallment -ontract Rec/01 6!666 Deferred )P on installment sales
>nstallment -ontract Rec/015 #6!666 015 ?!666
Total Assets ##6!666 -apital Stoc7 66!666
Retained earnings 56!#66
Tot liab G SE ##6!666
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7/24/2019 Installment (Lia)
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#omp!tation of $eff% GP
omp!tation of $eff% GP
percentageercentage
01 :01 : Deff )P 01Deff )P 01
installment sales contract 01installment sales contract 01
H '9H '9
015 :015 : Deff )P 015Deff )P 015
installment sales contract 015installment sales contract 015
H '59H '59
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7/24/2019 Installment (Lia)
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Transaction
@an , Dec
$& Reg sales consisted of cas" sales 4#56/666/ and sales on account/4#66/666+ installment sales were 456/666
$#& purc"ases of merc"andise on account were 48#5/666
$'&Receipt in addition to t"ose from cas" sales were from t"e following sources:account receivablesIIIII406!666installment -R 01?IIIII!!!6!666installment -R 01IIIIII86!666installment -R 015IIIIII5!666
$8& Payment were applied to account payable $48'5/666 J discount45/666& andoperating e(penses 4#6/666
$5& Ad
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7/24/2019 Installment (Lia)
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Transaction
$& To close installment sales and cost of installment sales accounts and torecord )P on installment sales for year/ 46/666 869 of installment sales
$?& To record t"e )P reali*ed as a result of collection on installment contracts of
01?/ 01/ 015/ as follows:0(? accounts/ 869 of 46/666I4'#/6660( accounts/ '9 of 486/666I45/#660(5 accounts/ '59 of 45/666I45/#56$& To close beginning inventory/ purc"ases/ purc"ases discount/ ands"ipments on installment sales account into >ncome Summary/ t"ussummari*ing t"e goods available for regular sales $48'6/666&$0& To record ending inventory/ summari*ing -.)S ro reg sales $4'6/666&$6& To close reg sales into >S/ summari*ing )P on reg sales $486!666&!$& To close reali*ed )P on >S of current and prior years into >S/ sumr* tot )P$40#/856&
$#&To close operating e(penses into >S/ sumr* >ncome bfor income Ta($4?#/856&$'& To record estimated income ta( payable at 869 of t"e 4?#/856 incomebefore ta(/ or 4#/06!$8& To close income ta( into >S/ sumr* net income $48'/8?6&$5& To transfer ;> to RE $48'/8?6&
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7/24/2019 Installment (Lia)
18/23
-as" #56!666
Account Receivables #66!666
Sales $Reguler& 856!666
>nstallment -ontract Rec!01? 56!666>nstallment Sales 56!666
Purc"ases 8#5!666
Accounts Payable 8#5!666
-as" '#5!666Account Receivables 06!666
>nstallment -ontract Rec!01? 6!666
>nstallment -ontract Rec!01 86!666
>nstallment -ontract Rec!015 5!666
Accounts Payable 8'5!666
.perating E(penses #6!666
Purc"ase discount 5!666
-as" 556!666
- t f > S l 06 666
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-ost of >ns Sales 06!666
S"ipments on >nst Sales 06!666
>nstallment Sales 56!666
-ost of >nst Sales 06!666
Def )P on >nst Sales 01? 6!666
Def )P on >nst Sales/ 01? '#!666
Def )P on >nst Sales/ 01 5!#66
Def )P on >nst Sales/ 015 5!#56
Reali*ed )P on >nst Sales/ 015,01? 5#!856>ncomesummary 8'6!666
S"ipments on >nst Sales 06!666
Purc"ase discount 5!666
erc"andise >nv/ beg 66!666
Purc"ase 8#5!666
erc"andise >nv/ ending #6!666
>S #6!666
Sales $Reg& 856!666
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>ncome ta( #!06
>ncome Ta( payable #!06
>S #!06
>ncome Ta( #!06
>S 8'!8?6
RE 8'!8?6
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#alc!lation
alc!lation
-ost of goods sold $reg sales&:-ost of goods sold $reg sales&:
Beginning inventory:Beginning inventory:
;et purc"ases:;et purc"ases:
S"ipment on >nst!Sales:S"ipment on >nst!Sales:
466/666466/666
8#6/6668#6/666
$06!666&$06!666&
Available for sale:Available for sale:
Ending inventory:Ending inventory:
8'6/6668'6/666
#6/666#6/666
-ost of goods sold-ost of goods sold 4'6/6664'6/666
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Alternati&e Proced!re
lternati&e Proced!re
for #alc!lating Realied
or #alc!lating Realied
GP
P 01?01? 0101 015015
Balance of D)P before ad-R 01?/ 869(?6/666.n >-R 01?/ 869(?6/666
.n >-R 01/ '9(#6/666.n >-R 01/ '9(#6/666
.n >-R 015/ '59(5/666.n >-R 015/ '59(5/666
46/66646/666
#/666#/666
4##/664##/66
?/66?/66
4?/6664?/666
/?56/?56
Reduction in D)P balances atReduction in D)P balances att"e end of 01?,)P reali*edt"e end of 01?,)P reali*edas a result of collectionsas a result of collectionsduring 01?during 01?
4'#/6664'#/666 45/#6645/#66 45/#5645/#56
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'inancial Statement
inancial Statement
Kelton Co.Kelton Co.
Balance SheetBalance SheetDecember 31,19!December 31,19!
"ssets"ssets #iabilities $ S%#iabilities $ S%