Question

Braddock Inc. had the following long-term receivable account balances at December 31, 2016.

Note receivable from sale of division $1,500,00

Note receivable from officer $400,000

Transactions during 2017 and other information relating to Braddocks long-term recievables were as follows.

1. On July 1, 2017, Braddock sold a parcel of land to Splinter Company for $200,000 under an installment sale contract. Splinter made a $60,000 cash down payment on July 1, 2017, and signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and interest on the note will be $45,125 payable on July 1, 2018, through July 1, 2021. The land could have been sold at an established cash price of $200,000. The cost of the land to Braddock was $150,000. Circumstances are such that the collection of the installments on the note is reasonably assured.

a) Prepare all necessary journal entries related to this installment contract for 2017.

b) Prepare the July 1, 2018 journal entry related to this installment contract.

c) How much interest revenue would Braddock report related to this installment contract in 2017?

d) What is the current portion of this installment contract as of 12/31/2017?

Answer 1

a) Prepare all necessary journal entries related to this installment contract for 2017.

Particulars Debit Credit

1. Long Term Receivables 200,000

To Installment Sales 200,000

(On Sale of Land for $200,000 under Installment Sales method)

2. Cost of Goods Sold 150,000

To Inventory 150,000

(Cost of Land sold transferred from Inventory to Cost of Goods Sold.)

3. Cash 60,000

To Long Term Receivable 60,000

(On Receipt of $60,000 for sale of Land.)

4. Note Receivable 140,000

To Long Term Receivable 140,000

(Note received for Balance Receivable for sale of Land.)

5. Installment Sales 35,000

To Deferred Gross Profit 35,000

(Gross Profit (Sale value - Cost of Land) deferred for the amount yet to receive).

Calculation for deffered Amount

Sale of Land - 200,000

Less: Cost of Land - 150,000

Gross profit - 50,000

Gross Profit % - 50,000*100/ 200,000 = 25%

Cash received in 2017 - 60,000, there gross profit for 2017 is 25% of 60,000 = 15,000.

Gross Profit to be deferred = 50,000 - 15,000 = 35,000

b) Prepare the July 1, 2018 journal entry related to this installment contract.

Particulars Debit Credit

1. Cash 45,125

To Note Receivable 35,000

To Interest Income 10,125

(Receipt of First installment of Note)

4 Equal installments of Interest and Principal therefore Principal is $140,000. divided by 4 = 35,000.

Hence, Principal included in installment is $35,000 and balance $10,125 is Interest

2. Deferred Gross Profit 8,750

To Installment Sales 8,750

( Gross Profit recognised as revenue on Receipt amount)

Calculation - Gross profit percentage of received Amount

25% of 35,000 = 8,750

c) How much interest revenue would Braddock report related to this installment contract in 2017?

Ans. NIL, as interest will be recognised when the installment is received and the installment is due to be received from 1 July 2018.

d) What is the current portion of this installment contract as of 12/31/2017?

Ans. Amount to be classified under Current Asset is $35,000 and Long term is $105,000.