Installment Sales Examples (doc)

Installment SalesExample & Homework ProblemExample:

1.ABC Corp. sold a piece of real estate on January 2, 2009 for $5,000,000. It had purchased the property in 2002 for $4,500,000 in cash. At that time the land was worth $450,000 and the remainder was attributed to the building. At the time of the sale, the carrying value of the building was $3,650,000.

The terms of the sale were as follows:Downpayment$ 250,000Note Receivable$4,750,000Interest rate10%Length of mortgage20 yearsAnnual payment $ 557,933 due at end of each year

The sale has been consummated, the seller's receivable is not subject to future subordination, and the seller has no continuing involvement with the property. However, because the initial investment is inadequate, the seller must use the installment method to account for this sale.

REQUIRED: Journal entries needed in 2009, 2010.

Solution to Installment Accounting Example1.Gross profit percentage = 18% [(5,000-3650-450)/5000 or $900,000 deferred gross profit divided by $5,000,000 selling price1/2/09Cash

250,000

Notes Receivable4,750,000

Acc'd Depreciation 400,000

Land

450,000

Building

4,050,000

Deferred gross profit on installment sale of land

900,000

12/28/09Cash

557,933

Interest revenue

475,000

Notes receivable

82,933

12/31/09Deferred gross profit {(82,933+250,000)*18%}59,928

Gain on installment sale of land

59,928

12/31/10Cash

557,933

Interest Revenue

466,707

Note receivable

91,227

12/31/10Deferred gross profit (18% * 91,227)16,421

Gain on installment sale of land

16,421

Homework Problem: 2.RVO Corp. sold a piece of real estate on January 2, 2009 for $10,000,000. It had purchased the property in 2001 for $6,500,000 in cash. At that time the land was worth $500,000. At the time of the sale, the carrying value of the building was $4,500,000.

The terms of the sale were as follows:Downpayment$ 500,000Note Receivable$ 9,500,000Interest rate12%Length of mortgage20 yearsAnnual payment $ 1,115,866 due at end of each year

The sale has been consummated, the seller's receivable is not subject to future subordination, and the seller has no continuing involvement with the property. However, because the initial investment is inadequate, the seller must use the installment method to account for this sale.

REQUIRED: Journal entries needed in 2009, and 2010Example

Installment Sales Example - amortization table

Selling price$5,000,000

Downpayment$250,000

Note receivable$4,750,000

Interest rate10%

Length of mortgage (annual)20

Annual payment$557,933.22

Carrying value of assets:

Land$450,000Selling price$5,000,000

Building$3,650,000Basis$(4,100,000)

$4,100,000Gross profit$900,000

GP %

18%

10.00%GROSSBALANCE

YEARPAYMENTINTERESTPRINCIPALBALANCEPROFITDEFERRED

REVENUERECOGNIZEDPROFIT

$5,000,000$900,000

DWNPYMT$250,000$250,000$4,750,000$45,000$855,000

2009$557,933$475,000$82,933$4,667,067$14,928$840,072

2010$557,933$466,707$91,227$4,575,840$16,421$823,651

2011$557,933$457,584$100,349$4,475,491$18,063$805,588

2012$557,933$447,549$110,384$4,365,107$19,869$785,719

2013$557,933$436,511$121,422$4,243,685$21,856$763,863

2014$557,933$424,369$133,564$4,110,121$24,042$739,822

2015$557,933$411,012$146,921$3,963,200$26,446$713,376

2016$557,933$396,320$161,613$3,801,587$29,090$684,286

2017$557,933$380,159$177,774$3,623,812$31,999$652,286

2018$557,933$362,381$195,552$3,428,261$35,199$617,087

2019$557,933$342,826$215,107$3,213,154$38,719$578,368

2020$557,933$321,315$236,618$2,976,536$42,591$535,776

2021$557,933$297,654$260,279$2,716,257$46,850$488,926

2022$557,933$271,626$286,307$2,429,949$51,535$437,391

2023$557,933$242,995$314,938$2,115,011$56,689$380,702

2024$557,933$211,501$346,432$1,768,579$62,358$318,344

2025$557,933$176,858$381,075$1,387,504$68,594$249,751

2026$557,933$138,750$419,183$968,322$75,453$174,298

2027$557,933$96,832$461,101$507,221$82,998$91,300

2028$557,933$50,722$507,220

Teresa P. Gordon: Teresa P. Gordon:PLUGGED ROUNDING ERROR HERE$0$91,300$0

$11,408,660$6,408,670$5,000,000$900,000

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