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Installment Sale and Loss of Inventory

Problem 1.
Tappan industrial sells machinery on the installment plan.On September 1 2005, Tappan entered into an installment sale
contract with Western Productions for a six year period. Equal annual payments under the installment sale are $187,500
and are due on August 31 of each year beginning in 2006.

Additional Information:
a) The cost of the machinery sold was $637,500.
b) The implicit interest rate on the installment sale is 10%.

Compute the income or loss before taxes that Tappan should record for the year ended December 31, 2005, as a result of the
above transaction, assuming that circumstances are such that the collection of the installments due under the contract

1) is reasonably assured
2) cannot be reasonably assured.

Problem 2.

Northstar Sales Corp. was organized on january 1, 2004. On December 31, 2005, the company lost most of its inventory
in a warehouse fire just before the year-end count of inventory was taken. Data from the records disclosed the following:

2004 2005
Inventory, January 1 $0.0 $173,120.0
Purchases during the year $860,000.0 $692,000.0
Purchases returns and allowance during the year $46,120.0 $64,600.0
Sales during the year $788,000.0 $836,000.0
sales returns and allowances during the year $16,000.0 $20,000.0

On january 1 2005 Northstar pricing policy was changed so that the gross profit rate would be 3 percentage points higher
than the one earned in 2004.

Salvaged undamaged merchandise was marked to sell at $24000 while damaged merchandise marked to sell at $16000
had an estimated net realizable value of $3600

Required: determine the company's inventory loss due to the fire that occurred on December 31 2005


Solution Summary

This solution calculates the interest rate and and present value as well as determines the company's inventory loss due to the fire in 2005. All steps and formulas are shown enclosed in an Excel file.