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accounting-installment sales journal entry

Question: On 12/31/07, Company A sold equipment for $1,800,000. The equipment had a carrying amount of $1,200,000. At the time of the sale the buyer paid $300,000 cash and signed a $1,500,000 note bearing interest of $1,500,000 note bearing interest at 10% payable in five annual installments of $300,000. Company A accounts for the sale under the INSTALLMENT METHOD. On 12/31/08 the buyer paid $300,000 principal and $150,000 interest. What are the journal entries for Company A at the time of the sale? I am note sure whether the interest should be included in the Installment Receivables / Deferred Gross Profit amounts or if interest is entered separately. This is a CPA question that asks about the amount of revenue that should be recognized on 12/31/08 but I need clarity on how to do the journal entries.
Started by Heather Garcia ( Rose State College )
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Answer:
Under the installment method, Company A would record the sale on 12/31/07 with two journal entries.

The first journal entry would debit the cash account for $300,000 and credit the installment receivables account for $1,500,000. This represents the note receivable that the company has accepted in exchange for the equipment.

The second journal entry would debit the equipment account for $1,200,000, debit the deferred gross profit account for $600,000, and credit the sales account for $1,800,000. This represents the difference between the sales price and the carrying amount of the equipment, which is recorded as deferred gross profit.

The journal entries relating to the payment made on 12/31/08 would consist of two parts:

The first journal entry would debit the interest expense account for $150,000 and credit the cash account for $150,000. This represents the payment of the interest on the note receivable.

The second journal entry would debit the cash account for $300,000 and credit the installment receivables account for $300,000. This represents the repayment of part of the principal on the note receivable.

Answered by john16

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