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Flashcards in installment sales and percentage of completion and treasury stock Deck (6)
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1

Installment method of revenue recognition: A firm sells goods with a total sales value of $80,000. The cost of the items sold is $60,000. During the year, the firm collects $25,000. The firm is uncertain about collecting the remaining sales price and elects to use the installment method of revenue recognition. The entries and balance sheet disclosure for the seller are shown below for this method.

Installment method of revenue recognition: A firm sells goods with a total sales value of $80,000. The cost of the items sold is $60,000. During the year, the firm collects $25,000. The firm is uncertain about collecting the remaining sales price and elects to use the installment method of revenue recognition. The entries and balance sheet disclosure for the seller are shown below for this method. The gross profit percentage is 25%: ($80,000 − $60,000)/$80,000.
During the year:

Installment accounts receivable 80,000
Installment sales 80,000

Cost of goods sold 60,000
Inventory 60,000

Cash 25,000
Installment ar 25,000

End of year adjusting entries:

The income statement accounts are closed, gross profit is deferred, and a portion of the gross profit is recognized.

Installment sales 80,000
Deferred gp (contra receivable) 20,000

Cost of goods sold 60,000
Deferred gp(.25 × $25,000 cash) 6,250

Recognized gross profit (to income statement) 6,250

2

A contractor begins construction of a building for a client. The contract price is $10,000. Data for two years follows. The estimated remaining cost is updated at the end of each year. The project is incomplete at the end of year 2 because costs remain for completion after year 2. Each year for each contract, four different types of journal entries are recorded.
Year 1 Year 2
Cost incurred in Year $2,000 $4,000
Estimated remaining cost to complete at end of year 6,000 1,500
Progress billings in year 1,000 3,500
Collections on billings in year800 3,000

year 1
CIP (inventory) 2,000
Materials, cash etc. 2,000

Accounts receivable 1,000
Billings 1,000

Cash 800
Accounts receivable 800

Construction in progress 500
Construction expenses 2,000
Construction revenue 2,500

$2,500 revenue = 25%($10,000). The project is 25% complete allowing 25% of the total revenue to be recognized. The $2,000 of construction expense is the cost incurred in the period. The $500 profit can be directly computed as the percentage of completion times the total estimated profit: .25($10,000 − $8,000) = $500. The $500 profit is recorded in the inventory account because it represents the increase in the value of the inventory. When $500 of profit is recognized, the net assets of the seller must also increase.

Year 2Profit recognized in Year 2 = total estimated profit through Year 2
− profit recognized in previous periods
= .80($10,000 − $7,500) − $500
= $1,500
Adjusting entry for percentage of completion only:

Construction in progress 1,500
Construction expenses 4,000
Construction revenue 5,500

$5,500 = .80($10,000) − $2,500 revenue in Year 1

3

description of the cost method

At purchase, treasury stock is debited for cost. The contributed capital in excess of par account that was credited when the stock was issued is not affected. Reissuances credit the treasury stock account at cost, and the difference between the purchase price and reissue price is recorded in contributed capital from treasury stock.

4

Journal entry example: (The par of common stock is $5, original issuance price was $20, a total of 700 shares have been issued, and retained earnings is $4,000.)

Purchase 200 shares of treasury stock for $25 a share:

Treasury stock (cost) 200 × $25 5,000
Cash 5,000

Reissue 50 shares of treasury stock for $30 a share (greater than cost):

Cash 50 × $30 1,500
apic-ts ($30 − $25)50 250*
Treasury stock 50 × $25 1,250#
* Excess of reissue price over cost of treasury stock

Reissue 50 shares of treasury stock for $18 a share (less than cost):

Cash 50 × $18 900
apic-ts 250*
Retained earnings 100#
Treasury stock 50 × $25 1,250

* Reduces the balance to zero

# The total excess of cost over reissue price is 50($25 − $18) = $350. The contributed capital from treasury stock account accounts for $250 of that amount. The remainder is taken from retained earnings.

5


Journal entry example -- The initial data for the cost method (previous lesson) is used (par of common stock is $5, original issuance price was $20, a total of 700 shares have been issued, and retained earnings is $4,000) but, the transactions in this section are not the same as for the cost method so that the main aspects of the par method can be shown.

Purchase 100 shares of treasury stock for $15 a share (less than original price):

Treasury stock (par) 100 × $5 500
apic -exces of par ($20 − $5)100 1,500
apic-ts ($20-$15)100 500
Cash 1,500

Purchase 100 shares of treasury stock for $22 a share (greater than original price):

Treasury stock 100 × $5 500
apic -exces of par($20 − $5)100 1,500
epic-ts ($22 − $20)100 200
Cash 100 × $22 2,200

Reissue 150 shares of treasury stock for $18 a share:

Cash 150 x $18 2,700
apic-excess of par($18 − $5)150 1,950
Treasury stock 150 × $5 750

6

Description of the par value method

-- At purchase, the treasury stock account is debited for par value, and the contributed capital in excess of par account that was credited when the stock was issued is debited for the original amount recorded. Reissuances are treated as a regular issuance of stock except that treasury stock is credited, rather than common stock.