CHAPTER 5 Revenue Recognition and Profitability Analysis 315 Required: 1. What was the amount of cash collected on installment sales in 2016? 2. What amount of gross profit would be recognized if the company uses the installment sales method? Sanchez Development Company uses the installment sales method to account for some of its installment sales. On October 1, 2016, Sanchez sold a parcel of land to the Kreuze Corporation for $4 million. This amount was not considered significant relative to Sanchez’s other sales during 2016. The land had cost Sanchez $1.8 million to acquire and develop. Terms of the sale required a down payment of $800,000 and four annual payments of $800,000 plus interest at an appropriate interest rate, with payments due on each October 1 beginning in 2017. Kreuze paid the down payment, but on October 1, 2017, defaulted on the remainder of the contract. Sanchez repossessed the land. On the date of repossession the land had a fair value of $1.3 million. Required: Prepare the necessary entries for Sanchez to record the sale, receipt of the down payment, and the default and repossession applying the installment sales method. Ignore interest charges. On April 1, 2016, the Apex Corporation sold a parcel of underdeveloped land to the Applegate Construction Company for $2,400,000. The book value of the land on Apex’s books was $480,000. Terms of the sale required a down payment of $120,000 and 19 annual payments of $120,000 plus interest at an appropriate interest rate due on each April 1 beginning in 2017. Apex has no significant obligations to perform services after the sale. Required: 1. Prepare the necessary entries for Apex to record the sale, receipt of the down payment, and receipt of the first installment assuming that Apex is able to make a reliable estimate of possible uncollectible amounts (that is, profit is recognized upon delivery). Ignore interest charges. 2. Repeat requirement 1 assuming that Apex cannot make a reliable estimate of possible uncollectible amounts and decides to use the installment sales method for profit recognition. Access the FASB Accounting Standards Codification at the FASB website ( asc.fasb.org ). Required: Determine the specific citation for accounting for each of the following items: Circumstances indicating when the installment method or cost recovery method is appropriate for revenue recognition. Assume the same information as in Exercise E 5–18. Required: Determine the amount of revenue, cost, and gross profit or loss to be recognized in each of the three years under IFRS, assuming that using the percentage-of-completion method is not appropriate. Easywrite Software Company shipped software to a customer on July 1, 2016. The arrangement with the customer also requires the company to provide technical support over the next 12 months and to ship an expected software upgrade on January 1, 2017. The total contract price is $243,000, and Easywrite estimates that the individual fair values of the components of the arrangement if sold separately would be: Software $210,000 Technical support 30,000 Upgrade 30,000 Conveyer $20,000 Labeler 10,000 Filler 15,000 Capper 5,000 Total $50,000 E 5–32 Installment sales; default and repossession E 5–33 Real estate sales; gain recognition E 5–34 FASB codification research CODE E 5–35 Long-term contracts, Cost recovery method IFRS E 5–36 Revenue recognition; software Required: 1. Determine the timing of revenue recognition for the $243,000. 2. Assume that the $243,000 contract price was paid on July 1, 2016. Prepare a journal entry to record the cash receipt. Disregard the cost of the items sold. Richardson Systems sells integrated bottling manufacturing systems that involve a conveyer, a labeler, a filler, and a capper. All of this equipment is sold separately by other vendors, and the fair values of the separate equipment are as follows: E 5–37 Multipledeliverable arrangements
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