Installment SalesExample & Homework ProblemExample: 1. ABC Corp. sold a piece of real estate on January 2, 2009 for $5,000,000. It had purchased the property in 2002 for $4,500,000 in cash. At that time the land was worth $450,000 and the remainder was attributed to the building. At the time of the sale, the carrying value of the building was $3,650,000. The terms of the sale were as follows:Downpayment $ 250,000Note Receivable $4,750,000Interest rate 10%Length of mortgage 20 yearsAnnual payment $ 557,933 due at end of each yearThe sale has been consummated, the seller's receivable is not subject to future subordination, and the seller has no continuing involvement with the property. However, because the initial investment is inadequate, the seller must use the installment method to account for this sale.REQUIRED: Journal entries needed in 2009, 2010.Solution to Installment Accounting Example1. Gross profit percentage = 18% [(5,000-3650-450)/5000 or $900,000 deferred gross profit divided by $5,000,000 selling price1/2/09 Cash 250,000Notes Receivable 4,750,000Acc'd Depreciation 400,000Land 450,000Building 4,050,000Deferred gross profit on installment sale of land 900,00012/28/09 Cash 557,933Interest revenue 475,000Notes receivable 82,93312/31/09 Deferred gross profit {(82,933+250,000)*18%} 59,928Gain on installment sale of land 59,92812/31/10 Cash 557,933Interest Revenue 466,707Note receivable 91,22712/31/10 Deferred gross profit (18% * 91,227) 16,421Gain on installment sale of land 16,421Homework Problem: 2. RVO Corp. sold a piece of real estate on January 2, 2009 for $10,000,000. It had purchased the property in 2001 for $6,500,000 in cash. At that time the land was worth $500,000. At the time of the sale, the carrying value of the building was $4,500,000. The terms of the sale were as follows:Downpayment $ 500,000Note Receivable $ 9,500,000Interest rate 12%Length of mortgage 20 yearsAnnual payment $ 1,115,866 due at end of each yearThe sale has been consummated, the seller's receivable is not subject to future subordination, and the seller has no continuing involvement with the property. However, because the initial investment is inadequate, the seller must use the installment method to account for this sale.REQUIRED: Journal entries needed in 2009, and
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