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
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Chapter 5 Solutions
Intermediate Accounting
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- On April 1, 2022 Blo Inc. receives a 6-year $60,000 note in exchange for a parcel of land. The cost of the land was $35,000. Neither the market rate nor the fair value of the land can be determined. Notes of similar risk carry a 12% imputed rate of interest. The financial year ends December 31. a. The present value of the note is $Answer b. There was a (gain or loss) Answer on the sale of the land of $Answerarrow_forwardLuke Company sold some machinery to View Company on January 1, 2017, for which the cash selling price was $758,200. View entered into an installment sales contract with Lake at a 10% interest rate. The contract required payments of $200,000 a year over five years with the first payment due on December 31, 2017. Required: Prepare an amortization schedule that shows what portion of each $200,000 payment will be shown as interest income over the period 2017-2021.arrow_forwardRevenue recognition at a point in time On July 1, 2024, Apache Company, a real estate developer, sold a parcel of land to a construction company for $3,000,000. The book value of the land on Apache’s books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual payments of $150,000 plus interest at an appropriate interest rate due on each July 1 beginning in 2025. How much revenue will Apache recognize for the sale (ignoring interest), assuming that it recognizes revenue at the point in time at which it transfers the land to the construction company?arrow_forward
- 21. On January 1, 2019, Mariz Company acquired a tract of land for 21,000,000. The entity paid a 5,000,000 down payment and signed a non interest bearing note for the balance which is due on January 1, 2022. There was no established exchange price for the land and the note had no ready market. The prevailing interest rate for this type of note was 12%. The present value of 1 at 12% for 3 periods is .7118. What is the carrying amount of the notes payable on Dec. 31, 2019?arrow_forward(Imputation of Interest) Presented below are two independent situations.(a) On January 1, 2017, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2020, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2017, and the interest expense to be reported in 2017 related to this transaction.(b) On January 1, 2017, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type ofloan. Prepare the journal entry to record this transaction and…arrow_forwardOn January 1, 2023, Hornets Company sold land that originally cost P400,000 to the Egi Company. As payment, Egi gave Hornets a P600,000 note. The note bears an interest rate of 8% and is to be repaid in three annual installments of P200,000 plus interest on the outstanding balance. The first payment is due on December 31, 2023. The market price of the land is not reliably determinable. The prevailing interest rate for notes of this type is 8%. Question:32. Using the assumption of No. 30 (which is 12% interest rate for notes instead of 8%), what is the amortized cost of the note receivable at December 31, 2023? A. P600,000B. P400,000C. P379,355D. P290,003arrow_forward
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