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) is completed by the company. 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. 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 which is applicable to sales. 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 necessary journal entries of Company S to record the sale, receipt of the down payment, and the default and repossession applying the installment sales method.

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Sanchez Development Company uses the installment sales method to account for some of its installment sales.On October 1, 2018, Sanchez sold a parcel of land to the Kreuze Corporation for $4 million. This amount wasnot considered significant relative to Sanchez’s other sales during 2018. The land had cost Sanchez $1.8 millionto acquire and develop. Terms of the sale required a down payment of $800,000 and four annual payments of$800,000 plus interest at an appropriate interest rate, with payments due on each October 1 beginning in 2019.Kreuze paid the down payment, but on October 1, 2019, defaulted on the remainder of the contract. Sanchezrepossessed the land. On the date of repossession the land had a fair value of $1.3 million.Required:Prepare the necessary entries for Sanchez to record the sale, receipt of the down payment, and the default andrepossession applying the installment sales method. Ignore interest charges.On April 1, 2018, the Apex Corporation sold a parcel of…

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Chapter 5, Problem 5.28E

To determine

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) is completed by the company.

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. 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 which is applicable to sales.

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 necessary journal entries of Company S to record the sale, receipt of the down payment, and the default and repossession applying the installment sales method.

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