Answer to Question #217149 in Accounting for Wadu

Question

he Ethelco Appliance Company recorded installment sales of Br600,000 in 2002. A record was kept of the different articles sold on the installment basis. At the end of the year the total cost of goods sold on the installment basis was calculated at Br405,000. The total collections on installment sales for the year were Br360,000. The estimated value of the merchandise repossessed was Br24,000, and balances owed on the repossessions were Br40,000. Perpetual inventory accounts were maintained. Instructions Prepare the journal entries required for the data above, including the entries: To set up the total realizable gross profit at the end of the year, To record the cash collections To record the repossessions, and To record the realized gross profit

Answer 1

Solution:

Determine the gross profit to record:

Installment sales =     600,000

Cost of goods sold =  405,000

Gross profit =            195,000

Gross profit margin = $\frac{195,000}{600,000} \times100 = 32.5\%$

 

Cash received =                                             360,000

Realized gross profit$(360,000\times32.5\%)$ =    117,000

Deferred gross profit (195,000 – 117,000) =  78,000

The journal entries are as follows:

Dr. Installment accounts receivable               600,000

           Cr. Installment sales                                                 600,000

 

Dr. Cost of installment sales                          405,000

           Cr. Inventory                                                            405,000

 

Dr. Cash                                                         360,000

           Cr. Installment accounts receivable                         360,000

 

Dr. Installment sales                                       600,000

           Cr. Cost of installment sales                                      405,000

           Cr. Deferred gross profit                                            195,000

 

Dr. Deferred gross profit                                117,000

           Cr. Realized gross profit                                            117,000

 

Dr. Realized gross profit                                117,000

           Cr. Income summary                                                  117,000

 

Dr. Reposed inventory                                      24,000

           Cr. Installment accounts receivable                             24,000

 

Dr. Installment accounts receivable                40,000

           Cr. Unreposed inventory                                              40,000