Installment (Lia)

download Installment (Lia)

of 23

Transcript of Installment (Lia)

  • 7/24/2019 Installment (Lia)

    1/23

    NSTALLMENT

    NSTALLMENT

    SALESSALES

  • 7/24/2019 Installment (Lia)

    2/23

    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

  • 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!

  • 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!

  • 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&!

  • 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'

  • 7/24/2019 Installment (Lia)

    7/23

    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

  • 7/24/2019 Installment (Lia)

    8/23

    Recognition of Profit in Period ofSale

    Recognition of Profit Periodically inproportion to collections

    December/ ' 01#

    $& Ad

  • 7/24/2019 Installment (Lia)

    9/23

    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

  • 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

  • 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&

  • 7/24/2019 Installment (Lia)

    12/23

    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

  • 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

    33

    ;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

  • 7/24/2019 Installment (Lia)

    14/23

    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

  • 7/24/2019 Installment (Lia)

    15/23

    #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

  • 7/24/2019 Installment (Lia)

    16/23

    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

  • 7/24/2019 Installment (Lia)

    17/23

    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&

  • 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

  • 7/24/2019 Installment (Lia)

    19/23

    -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

  • 7/24/2019 Installment (Lia)

    20/23

    >ncome ta( #!06

    >ncome Ta( payable #!06

    >S #!06

    >ncome Ta( #!06

    >S 8'!8?6

    RE 8'!8?6

  • 7/24/2019 Installment (Lia)

    21/23

    #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

  • 7/24/2019 Installment (Lia)

    22/23

    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

  • 7/24/2019 Installment (Lia)

    23/23

    'inancial Statement

    inancial Statement

    Kelton Co.Kelton Co.

    Balance SheetBalance SheetDecember 31,19!December 31,19!

    "ssets"ssets #iabilities $ S%#iabilities $ S%