Using the installment sales method make summary

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Using the installment-sales method, make summary entries to record: (a) the installment sales and cash collections; (b) the cost of installment sales; (c) the unrealized gross profit; (d) the realized gross profit. Solution 18-129 (a) Installment Accounts Receivable .................................................. 800,000 Installment Sales .............................................................. 800,000 Cash ............................................................................................. 300,000 Installment Accounts Receivable ...................................... 300,000 (b) Cost of Installment Sales ($400,000 – $80,000) ........................... 320,000 Inventory ........................................................................... 320,000 (c) Installment Sales .......................................................................... 800,000 Cost of Installment Sales .................................................. 320,000 Deferred Gross Profit (60%) .............................................. 480,000 (d) Deferred Gross Profit (60% × $300,000) ...................................... 180,000 Realized Gross Profit on Installment Sales ....................... 180,000 18 - 40
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Revenue Recognition Ex. 18-130 —Installment sales. Finley Company sells office equipment. On January 1, 2011, Finley entered into an installment sale contract with Miller Company for a six-year period expiring January 1, 2017. Equal annual payments under the installment sale are $936,000 and are due on January 1. The first payment was made on January 1, 2011. Additional information is as follows: The cash selling price of the equipment, i.e., the amount that would be realized on an outright sale, is $4,584,000. The cost of sales relating to the equipment is $3,825,000. The finance charges relating to the installment period are $1,032,000 based on a stated interest rate of 9% which is appropriate. For tax purposes, Finley appropriately uses the accrual basis for recording finance charges. Circumstances are such that the collection of the installment sale is reasonably assured. The installment sale qualified for the installment method of reporting for tax purposes. Assume that the income tax rate is 30%. Instructions What income (loss) before income taxes should Finley appropriately record as a result of this transaction for the year ended December 31, 2011? Show supporting computations in good form. Solution 18-130 (Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is recognized in the year of sale, because collection of the receivable is reasonably assured.) Finley Company Computation of Income Before Income Taxes On Installment Sale Contract For the Year Ended December 31, 2011 Sales $4,584,000 Cost of Sales 3,825,000 Gross Profit 759,000 Interest Revenue (Schedule I) 328,320 Income before Income Taxes $1,087,320 Schedule I Computation of Interest Revenue on Installment Sale Contract Cash selling price (sales) $4,584,000 Payment made on January 1, 2011 936,000 Balance outstanding at 12/31/11 3,648,000 Interest rate 9% Interest Revenue $ 328,320 18 - 41
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Test Bank for Intermediate Accounting, Thirteenth Edition *Ex. 18-131 —Franchises. Pasta Inn charges an initial fee of $800,000 for a franchise, with $160,000 paid when the agreement is signed and the balance in four annual payments. The present value of the annual payments, discounted at 10%, is $507,200. The franchisee has the right to purchase $60,000 of kitchen equipment and supplies for $50,000. An additional part of the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is $1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.
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