Question

1. On December 15, 2011, Rigsby Sales Co. sold a tract of land that cost $3,600,000

for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2012, and December 15, 2013. Ignore interest charges. Rigsby has a December 31 year-end.

Required:

1. What amount of “Deferred Gross Profit” should be reported by Rigsby would in its 2012 Balance Sheet?
2. What amount of “realized gross profit” would Rigsby recognize in 2012 ?

Answer 1

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Rigsby Sales Co.	Amount $	Note
Sale value of land	4,500,000.00	A
Cost of land	3,600,000.00	B
Profit on sale of land	900,000.00	C=A-B
Profit %	20.00%	D=C/A
Down payment in 2011	500,000.00	E
Profit recognized in 2011	100,000.00	F=E*D
(20% of $ 500,000)
Balance payable	4,000,000.00	G=A-E
($ 4,500,000- $ 500,000)
1st instalment in 2012	2,000,000.00	H=G/2
Gross profit to be realized in 2012	400,000.00	I=H*D
(20% of $ 2,000,000)
Deferred Gross profit to be reported in 2012	400,000.00	J=C-F-I
($ 900,000 (total profit)- $ 100,000 (recognized in 2011)- $ 400,000 (recognized in 2012).