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Baxter Land Sale revenue recognition for installment sales

Q: Baxter Land Corporation made a number of sales in 2004 and 2005 that required the use of the instalment method of revenue recognition. The following information regarding the sales is available:

2004 2005 2006
Instalment Sales $200,000 150,000 -0-
Cost of instalment sales 160,000 112,500 -0-
Collection on 2004 sales 40,000 50,000 60,000
Collection on 2005 sales 30,000 75,000

Baxter uses a perpetual inventory system.

1. Give the journal entries related to instalment sales for the years 2004 to 2006.

2. What is the year-end balance in instalment accounts receivable (net of any deferred gross margin) for 2005, 2005, and 2006?

3. Discuss the conceptual rationale for netting the deferred gross margin against the instalment receivable.


Solution Preview

You did a very good job in preparing the entries and mostly because your explanations are understandable and complete. Your calculations are accurate on an entry by entry basis. I want to verify the total amount receivable on all contracts, and then prove the reportable income in total for the three years.

1. The gross installment receivables should be 200,000 - 40,000 + 150,000 - 50,000 - 30,000 - 60,000 - 75,000 = 95,000. I tagged your entries and they work.
2. Reportable income should be [(40,000 + 50,000 ...

Solution Summary

The solution involved a review of student-prepared data for installment sales of land by Baxter Land Corporation. The solution includes journal entries and discussion about the accounting treatment of several concepts of installment sales of real estate.

A proof is also presented for contract sale receivables and recognized revenue for the three years.