Question

4. M sold investment real estate to B in 2020 for $100,000. M purchased the property 5 years ago for $60,000. The terms of the sale indicated that B was to pay $20,000 to M in 2020, $50,000 in 2021, and the remaining balance of $30,000 in 2022. M elected to use the installment method to report the gain. Assuming the payments are made as agree upon, how much gain should M report for each year?

1. 2022

2. 2021

3. 2020

Answer 1

First understand about installment method .

Installment method of revenue recongnition in which gross profit is deferred untill cash from the sale is recevied.

Following journal entries are required at the time of sale.

Installment receivable	$100,000
installment sales		$100,000

cost of goods sold	$60,000
inventory		$60,000

The related revenue is deferred as follows.

Installment sales	$100,000
cost of goods sold	$60,000
Deferred gorss profit		$40,000($100,000-$60,000)

Now gorss profit on sale % = ($40,000/$100,000)*100= 40%

The collections are accounted for as follows.

2020

cash	$20,000
insallment receivable		$20,000
Deferred gross profit	$8000
Gross profit on installment		$8000

where $8000=$20,000*40%

2021

cash	$50,000
installment receivable		$50,000
Deferred gorss profit	$20,000
Gross profit on installment		$20,000

where $20,000=$50,000*40%

2022

cash	$30,000
installment receivble		$30,000
Deferred gorss profit	$12000
Gross profit on installment		$12000

Where $12000=$30,000*40%