[This is a variation of E 5–25 focusing on journal entries.]
On July 1, 2018, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each July 1, beginning July 1, 2019. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $120,000. The company uses the perpetual inventory system.
Required:
1. Prepare the necessary journal entries for 2018 and 2019 assuming revenue recognition upon delivery. Ignore interest charges.
2. Repeat requirement 1 applying the installment sales method.
3. Repeat requirement 1 applying the cost recovery method.
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, 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: The journal entries for 2018 and 2019 assuming revenue recognition upon delivery.
Explanation of Solution
In the year 2018 (Revenue recognition upon delivery)
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Installment receivables | $300,000 | |||
Sales revenue | $300,000 | |||
(To record installment sales) |
Table (1)
- 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 |
Cost of goods sold | $120,000 | |||
Inventory | $120,000 | |||
(To record cost of installment sales) |
Table (2)
- Cost of goods sold is an expense. There is a decrease in liability value. Therefore, it is debited.
- Inventory is an asset. There is a decrease in assets value. Therefore, it is credited.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $75,000 | |||
Installment receivables | $75,000 | |||
(To record cash collections from installment sales) |
Table (3)
- 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.
In the year 2019 (Revenue recognition upon delivery)
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $75,000 | |||
Installment receivables | $75,000 | |||
(To record cash collections from installment sales) |
Table (4)
- 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.
Requirement – 2

To prepare: The journal entries for 2018 and 2019 assuming revenue recognized under installment sales method.
Explanation of Solution
In the year 2018 (Installment sales method)
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Installment receivables | $300,000 | |||
Inventory | $120,000 | |||
Deferred gross profit | $180,000 | |||
(To record installment sales) |
Table (5)
- 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 | $75,000 | |||
Installment receivables | $75,000 | |||
(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.
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Deferred gross profit | $45,000 | |||
Realized gross profit | $45,000 | |||
(To record gross profit recognize from installment sales) |
Table (7)
- 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.
In the year 2019 (Installment sales method)
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $75,000 | |||
Installment receivables | $75,000 | |||
(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 | $45,000 | |||
Realized gross profit | $45,000 | |||
(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.
Requirement – 3

To prepare: The journal entries for 2018 and 2019 assuming revenue recognized under cost recovery method.
Explanation of Solution
In the year 2018 (Cost recovery method)
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Installment receivables | $300,000 | |||
Inventory | $120,000 | |||
Deferred gross profit | $180,000 | |||
(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 | $75,000 | |||
Installment receivables | $75,000 | |||
(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.
In the year 2019 (Cost recovery method)
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $75,000 | |||
Installment receivables | $75,000 | |||
(To record cash collections from installment sales) |
Table (12)
- 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 | $30,000 | |||
Realized gross profit | $30,000 | |||
(To record gross profit recognize from installment sales) |
Table (13)
- 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.
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Chapter 5 Solutions
INTERMEDIATE ACCOUNTING RMU 9TH EDITION
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