Question

On December 15, 2021, Rigsby Sales Co. sold a tract of land that cost $3,300,000 for $5,000,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $450,000 with the balance in two equal annual installments payable on December 15, 2022, and December 15, 2023. Ignore interest charges. Rigsby has a December 31 year-end. In its December 31, 2021, balance sheet, Rigsby would report:

Answer 1

Answer:

$153,000

Explanation:

Under an installment sales method, the seller defers the recognition of gross profit on sale arising out of a transaction, unless money is actually received for such a transaction.

Rate of profit earned by Rigsby Sales Co. for sale of tract of land

= Sales proceeds - Cost

= $5,000,000 - $3,300,000

= $17,00,000

Rate of profit earned = $\frac{Profit}{Sales\ of\ Land}$ = $\frac{1,700,000}{5,000,000}$  = 34%

Money received during current year i.e 2021 =

Down payment of $450,000

Thus, the revenue to be recognized and to be reported as per installment sales method for year ending on Dec 31, 2021 would be,

= Rate of profit earned on the transaction × Receipts during the period

= 34% × $450,000

= $153,000