Installment Sales

Example & Homework Problem

Example:
1. ABC Corp. sold a piece of real estate on January 2, 2009 for $,000,000. !t "ad
purc"ased t"e property in 2002 for $#,00,000 in cas". At t"at time t"e land $as
$ort" $#0,000 and t"e remainder $as attri%uted to t"e %uildin&. At t"e time of
t"e sale, t"e carryin& 'alue of t"e %uildin& $as $(,)0,000.
*"e terms of t"e sale $ere as follo$s:
+o$npayment $ 20,000
,ote -ecei'a%le $#,.0,000
!nterest rate 10/
0en&t" of mort&a&e 20 years
Annual payment $ .,9(( due at end of eac" year
*"e sale "as %een consummated, t"e seller1s recei'a%le is not su%2ect to future
su%ordination, and t"e seller "as no continuin& in'ol'ement $it" t"e property. 3o$e'er,
%ecause t"e initial in'estment is inade4uate, t"e seller must use t"e installment met"od to
account for t"is sale.
-E56!-E+: Journal entries needed in 2009, 2010.
Solution to Installment Accounting Example
1. 7ross profit percenta&e 8 19/ :;,000<()0<#0=>000
or $900,000 deferred &ross profit di'ided %y $,000,000 sellin& price
1>2>09 Cas" 20,000
,otes -ecei'a%le #,.0,000
Acc1d +epreciation #00,000
0and #0,000
Buildin& #,00,000
+eferred &ross profit on installment sale of land 900,000
12>29>09 Cas" .,9((
!nterest re'enue #.,000
,otes recei'a%le 92,9((
12>(1>09 +eferred &ross profit ?;92,9((@20,000=A19/B 9,929
7ain on installment sale of land 9,929
12>(1>10 Cas" .,9((
!nterest -e'enue #)),.0.
,ote recei'a%le 91,22.
12>(1>10 +eferred &ross profit ;19/ A 91,22.= 1),#21
7ain on installment sale of land 1),#21
Homework Problem:
2. -CD Corp. sold a piece of real estate on January 2, 2009 for $10,000,000. !t "ad
purc"ased t"e property in 2001 for $),00,000 in cas". At t"at time t"e land $as
$ort" $00,000. At t"e time of t"e sale, t"e carryin& 'alue of t"e %uildin& $as
$#,00,000.
*"e terms of t"e sale $ere as follo$s:
+o$npayment $ 00,000
,ote -ecei'a%le $ 9,00,000
!nterest rate 12/
0en&t" of mort&a&e 20 years
Annual payment $ 1,11,9)) due at end of eac" year
*"e sale "as %een consummated, t"e seller1s recei'a%le is not su%2ect to future
su%ordination, and t"e seller "as no continuin& in'ol'ement $it" t"e property. 3o$e'er,
%ecause t"e initial in'estment is inade4uate, t"e seller must use t"e installment met"od to
account for t"is sale.
-E56!-E+: Journal entries needed in 2009, and 2010