
Requirement – 1
The revenue recognition principle
The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.
Installment sales method:
Under the installment sales, the revenue and costs are recognized only when the payment of cash is received from customer. Two composed components are involved in the each payment of cash, and components of sales are as follows:
- Partial recovery of the cost from sales
- Component of gross profit
These components are determined by the percentage of gross profit.
Cost recovery method:
Under the cost recovery method, gross profit is recognized when the cost of the sales is recovered. Where there is an extremely high degree of uncertainty in the installment sales, then this method can be used.
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
To prepare: A table showing the amount of gross profit to be recognized in each five years of the installment sales.
Requirement – 1

Explanation of Solution
The following tables showing the amount of gross profit to be recognized in each five years of the installment sales:
(a) Point of delivery revenue recognition
Particulars | 08/31/2016 | 08/31/2017 | 08/31/2018 | 08/31/2019 | 08/31/2020 |
Cash collection | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 |
Point of deliver method | $200,000 (1) | $0 | $0 | $0 | $0 |
Table (1)
(b) Installment sales method
Particulars | 08/31/2016 | 08/31/2017 | 08/31/2018 | 08/31/2019 | 08/31/2020 |
Cash collection | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 |
Installment sales method (3) | $40,000 | $40,000 | $40,000 | $40,000 | $40,000 |
Table (2)
(c) Cost recovery method
Particulars | 08/31/2016 | 08/31/2017 | 08/31/2018 | 08/31/2019 | 08/31/2020 |
Cash collection | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 |
Cost recovery method (given) | $0 | $0 | $0 | $100,000 | $100,000 |
Table (3)
Working note:
1. Calculation of total profit:
Given,
Sale is $500,000
Book value is $300,000
Now, calculate the total profit:
2. Calculation of gross profit percentage:
Given,
Sale is $500,000
Total profit is $200,000 (1)
Now, calculate the gross profit percentage:
Hence, the calculated gross profit percentage is 40%.
3. Calculate the gross profit under installment sales
Here,
Cash collection is $100,000
Gross profit percentage is 40%
Requirement – 2
To prepare: The
Requirement – 2

Explanation of Solution
The journal entry to record the recognized revenue in each five years of the installment sales are as follows:
Point of deliver method:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Installment receivables | $500,000 | |||
Sales revenue | $500,000 | |||
(To record sales revenue) |
Table (4)
- Installment receivable is liability. There is a decrease in asset value. Therefore, it is debited.
- Sales revenue is revenue. There is an increase in value of
stockholder’s equity. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cost of goods sold | $300,000 | |||
Inventory | $300,000 | |||
(To record cost of inventory) |
Table (5)
- Cost of goods sold is expense, and there is decrease in the value of stockholder’s equity. Therefore, it is debited.
- Inventory is an asset. There is a decrease in asset value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $100,000 | |||
Installment receivables | $100,000 | |||
(To record cash collections from installment sales) |
Table (6)
- Cash is an asset. There is an increase in asset value. Therefore, it is debited.
- Installment receivable is a liability. There is an increase in liability value. Therefore, it is credited.
Installment sales method:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Installment receivables | $500,000 | |||
Inventory | $300,000 | |||
Deferred gross profit | $200,000 | |||
(To record installment sales) |
Table (7)
- Installment receivable is a liability. There is a decrease in asset value. Therefore, it is debited.
- Inventory and deferred gross profits are assets. There is a decrease in assets value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $100,000 | |||
Installment receivables | $100,000 | |||
(To record cash collections from installment sales) |
Table (8)
- Cash is an asset. There is an increase in asset value. Therefore, it is debited.
- Installment receivable is a liability. There is an increase in liability value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Deferred gross profit | $40,000 | |||
Realized gross profit | $40,000 | |||
(To record gross profit recognize from installment sales) |
Table (9)
- Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
- Realized gross profit is a liability. There is an increase in liability value. Therefore, it is credited.
Cost recovery method:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Installment receivables | $500,000 | |||
Inventory | $300,000 | |||
Deferred gross profit | $200,000 | |||
(To record installment sales) |
Table (10)
- Installment receivable is a liability. There is a decrease in asset value. Therefore, it is debited.
- Inventory and deferred gross profits are assets. There is a decrease in assets value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $100,000 | |||
Installment receivables | $100,000 | |||
(To record cash collections from installment sales) |
Table (11)
- Cash is an asset. There is an increase in asset value. Therefore, it is debited.
- Installment receivable is a liability. There is an increase in liability value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Deferred gross profit | $100,000 | |||
Realized gross profit | $100,000 | |||
(To record gross profit recognize from installment sales on 2019 and 2020) |
Table (12)
- Deferred gross profits are assets. There is an increase in assets value. Therefore, it is debited.
- Realized gross profit is a liability. There is an increase in liability value. Therefore, it is credited.
Therefore, the journal entries of revenue recognition under point of delivery, installment sales and cost recovery method are recorded.
Requirement – 3
To prepare: The partial
Requirement – 3

Explanation of Solution
The partial balance sheet for the end of the 2016 and 2017 are as follows:
Partial balance sheet for the year ended 2016
Assets | Point of delivery | Installment sales |
Installment receivables | $400,000 | $400,000 |
Less: Deferred gross profit | ($160,000) | |
Installment receivables | $240,000 |
Table (13)
Partial balance sheet for the year ended 2017
Assets | Point of delivery | Installment sales | Cost recovery |
Installment receivables | $300,000 | $300,000 | $300,000 |
Less: Deferred gross profit | ($120,000) | ($200,000) | |
Installment receivables | $180,000 | $100,000 |
Table (14)
Therefore, the partial balance sheet under point of delivery, installment sales and cost recovery method for the year ended 2016 and 2017 are prepared.
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