Accounting principle research - Instalment sales




SUBJECT

PROJECT 1
Accounting Principle Research

INSTALLMENT SALES
LECTURER: BUI PHUONG UYEN

STUDENTS OF KT1012

1. Phan Nguyễn Ngọc Xuân Mỹ 101537
2. Võ Ngọc Trang Đài 101419
3. Tô Nguyễn Khánh Linh 101470
4. Phạm Trung Hiếu 101568




2012– 2013

MINISTRY OF EDUCATION AND TRAINING
HOA SEN UNIVERSITY
FACULTY OF ECONOMICS AND COMMERCE










SUBJECT

PROJECT 1
Accounting Principle Research

INSTALLMENT SALES
LECTURER: BUI PHUONG UYEN

STUDENTS OF KT1012

1. Phan Nguyễn Ngọc Xuân Mỹ 101537
2. Võ Ngọc Trang Đài 101419
3. Tô Nguyễn Khánh Linh 101470
4. Phạm Trung Hiếu 101568

Note for faculty:
Date: ___/___/___

For the writer: (Signature & full name)


2012– 2013
MINISTRY OF EDUCATION AND TRAINING
HOA SEN UNIVERSITY
FACULTY OF ECONOMICS AND COMMERCE

Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page i

COMMENT OF LECTURER

MARK:

Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page ii

ABSTRACT
Installment sale is a method of sale that the buyer pays equal periodic payments with
interest instead of paying in full. In difficult economic times, the practice of having a lot
of money to buy valuable items for immediate consumption is not easy at all. Knowing
this fact, a series of installment sales company, finance company associated continuously
offer attractive programs to increase the power of consumers, as well as it helps sell the
business assets of great value easier. Thus, that is why it becomes very popular
nowadays. Because of its popularity, our group decided to make a research about it for
some reasons. First of all, all the information is useful for us in practice so it is worth
studying. Secondly we have a chance to understand and apply our old lessons that we
have just studied in Financial Accounting 1 and 2. The knowledge that we have learned
in class and information from the internet were used as data for use to carry out the
research successfully. Most of information in this research was written by our
understanding and the rest is on the Internet. The general conclusion can be that
installment sale is an essential activity for any business and its record is quite simple.
Besides that, it's still much to learn. So the information above is worth reading.


Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page iii

ACKNOWLEDGMENT
We’re all the students who are lack of academic knowledge. So we couldn’t accomplish
this project without help from our lecturer – Ms. Bui Phuong Uyen. Although she was so
busy at her work, she guided us enthusiastically. From finding and analyzing information
to writing a report, she gave us clear instructions. Her assistance has been very
meaningful for our research than ever before.
In addition, we’re indebted Mr. Ho Sy Tuy Duc for his help in advising and answering
our difficult questions. Though Mr. Duc wasn’t in charge of instructing the project, he
replied all our concerns.
Last but not least, we really appreciate our members who whole-heartedly paid a high
concentration as well as their zealous attitude in attempt to do this project.

Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page iv

CONTENT

COMMENT OF LECTURER i
ABSTRACT ii
ACKNOWLEDGMENT iii
CONTENT iv
TABLE OF FIGURES vi
INTRODUCTION vii
1. General terms related to installment sales 1
1.1. Party 1
1.2. Interpretation 1
2. Installment sale in terms of IAS 18 and VAS 14 3
2.1. International Accounting Standards 18 (IAS 18 – Revenue – Installment sales) . 3
2.1.1. Definition 3

2.1.2. Method of calculating and journalizing 5
2.1.2.1. For the buyers 5
2.1.2.2. For the sellers 7
2.2. Vietnamese Accounting Standards 14 (VAS 14 – Revenue and other incomes)12
2.2.1. Definition 12
2.2.2. Journalizing 13
2.2.2.1. For the buyers 13
2.2.2.2. For the sellers 14
2.3. Case 15
2.3.1. International accounting system 15
2.3.1.1. Case 1 – the buyers’ transactions 15
2.3.1.2. Case 2 – the sellers’ transactions 18
2.3.2. Vietnamese accounting system 21
3. Installment sales agreement and contract 22
4. Impacts on the financial statements 26
4.1. Balance sheet 26
4.2. Income Statement 28
4.3. Statement of cash flows 30
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page v

4.4. Notes to the financial statements 31
5. Forms of frauds and errors related to installment sales 31
5.1. Forms of frauds and errors 31
5.2. Misleading financial accounting 33
6. Facts – Adjusted policies on installment sales 36
6.1. Vietnamese policies 36
6.2. Global policies 37
CONCLUSION – RECOMMENDATIONS 40

REFERRENCES a
APPENDIX b
1. International Accounting Standards (IAS) 18 b
2. Vietnamese Accounting Standards (VAS) 14 e
3. Installment sales agreement n
4. Installment sales income r
5. COSO 1992 s
6. SAX 2002 – SAX section 404 s
7. Reasons for differences between VAS and IAS s

Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page vi

TABLE OF FIGURES

Figure 1: Promissory note 2
Figure 2: Amortization of Installment Notes 6
Figure 3: Tax Evasion Amount 29
Figure 4: Sarbanes-Oxley Act 37

Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page vii

INTRODUCTION

In the economy which has many troubles, installment sale is very popular with people in
the world, especially in Viet Nam. Buyers can buy something they want without paying
in full for this item and sellers may have more customers if they have products for

installment. Thus, the economy will be improved.
However, installment sale still have disadvantages. It makes a company which have
installment sale will be hard to record all transactions occurred in the period. Besides,
customers can have a high interest payment when they buy something as installment.
Our group chooses this subject to make clearer about installment sales, how it impact on
the operation of the company and solutions to overcome those difficulties.
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 1

1. General terms related to installment sales
1.1. Party
The parties to this agreement are
 The seller
 The purchaser
1.2. Interpretation
 The purchase price: the amount of money needed to purchase.
 The balance of the purchase price: the purchase price minus the first payment.
 Sales price of a home $100,000
 Initial deposit $10,000
 Balance of purchase price $90,000
 Purchase price (total) $100,000
 Business day: A business day is considered every official working day of the week.
Another common term isworking day. Typically, these are the days between and
including Monday to Friday and do not include public holidays and weekends
 The effective date: Aneffective dateoras of dateis thedateupon which something is
considered to take effect.
 The final payment: That brings a balance to zero or completely satisfies an
obligation.
 The final payment date: the day that that brings a balance to zero or completely

satisfies an obligation.
 The first payment: the first payment in the Schedule.
 The first payment date: the date that incurs the first payment.
 The instalment: amount of money owed has been divided, so that can each part
happens or is paid at different times util the end or total is reached.
 The instalment due date: To avoid penalties, you must pay your instalments in full
before it passes to the due date.
 Principal: the original amount of a debt on which interest is calculated.
 Interest: money which is charged by a bank or other financial organization for
borrowing money.
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 2

 The interest rate: A rate which is charged or paid for the use of money. An interest
rate is often expressed as an annual percentage of the principal.
 Discount: a reduction in the purchase price.
 The promissory notes : A promissory note is a negotiable instrument, where in one
party (the maker or issuer) makes an unconditional promise in writing to pay a
determinate sum of money to the other.




1. The marker is the party making the promise to pay.
2. The payee is the party to whom the note is payable.
3. The face amount is the amount for which the note is written on its face.
4. The issuance date is the date a note is issued.
5. The due date or maturity date is the date the note is to be paid.
6. The term of a note is the amount of time between the issuance and due dates.

 Mortgage note: a note is secured by an asset.
 The signature date: the date upon which this agreement is signed by the party
signing last in time.
 VAT: Value Added Tax and is a sales tax charged. And it also depends on policy
relating to VAT of each nation. In Vietnam, VAT is always stable at 10% for almost
products and services, but in US or EURO countries, it is adjusted every year by the
government.
Figure 1: Promissory note
Source: Financial Accounting 12e by Warren, Reeve, Duchac
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 3

2. Installment sale in terms of IAS 18 and VAS 14
2.1. International Accounting Standards 18 (IAS 18 – Revenue – Installment
sales)
2.1.1. Definition
In United States income tax law, an installment sale is generally a "disposition of
property where at least one payment is to be received after the close of the taxable year in
which the disposition occurs." The term "installment sale" does not include, however, a
"dealer disposition" (as defined in the statute) or, generally, a sale of inventory. The
installment method of accounting provides an exception to the general principles of
income recognition by allowing a taxpayer to defer the inclusion of income of amounts
that are to be received from the disposition of certain types of property until payment in
cash or cash equivalents is received. The installment method defers the recognition of
income when compared with both the cash and accrual methods of accounting. Under the
cash method, the taxpayer would recognize the income when it is received, including the
entire sum paid in the form of a negotiable note. The deferral advantages of the
installment method are the most pronounced when comparing to the accrual method,
under which a taxpayer must recognize income as soon as he or she has a right to the

income.
1

You cannot use the installment method to report a loss. You can choose to report all your
gain in the year of sale.
The installment sales method cannot be used for the following
2
:
 Sale of inventory. The regular sale of inventory of personal property does not
qualify as an installment sale even if you receive a payment after the year of sale.
 Dealer sales. Sales of personal property by a person who regularly sells or
othersise disposes of the same type of personal property on the installment plan are not
installment sales.
This rule also applies to real property held for sale to customers in the ordinary course of
a trade or business. However, the rule does not apply to an installment sale of property
used or produced in farming.


1
Based on
2
Based on
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 4

 Special rule. Dealers of time-shares and residential lots can treat certain sales as
installment sales and report them under the installment method if they elect to pay a
special interest charge.
 Stock or securities. You cannot use the installment method to report gain from the

sale of stock or securities traded on an established securities market. You must report the
entire gain on the sale in the year in which the trade date falls
 Installment obligation. The buyer’s obligation to make future payments to you
can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of
the buyer’s debt to you.
 General rules. If a sale qualifies as an installment sale, the gain must be reported
under the installment method unless you elect out of using the installment method.
 Sale at a loss. If your sales results in a loss, you cannot use the installment
method. If the loss is on an installment sale of business or investment property, you can
deduct it only in the tax year of sale.
 Unstated interest. If your sale calls for payments I a later year and the sales
contract provides for little or no interest, you may have to firgue unstated interest, even if
you have a loss.
The sellers may issue installment note which is a debt that requires the borrower to make
equal periodic payments to the lender for the term of the note. At the end of the note’s
term, the principal will have been repaid in full. Each note payment includes the
following
3
:
 Payment off a portion of the amount intially borrowed, called the principal.
 Payment of interest on the outstanding balance.
When it comes to purchasing transactions, for buyers, installment notes are often used to
purchase specific assets such as equipment, and are often secured by the purchased asset.
When a note is secured by an asset, it is called a mortgage note. If the borrower fails to
pay a mortgage note, the lender has the right to take possession of the pledged asset and
sell it to pay off the debt. Mortgage notes are typically issued by an individual bank.
Individuals typically use mortgage notes when buying a house or car.


3

Based on Chapter 14 – Long-term liabilities – Bonds and Notes - page 636 - Financial Accounting 12e –
Warren – Reeve - Duchac
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 5

2.1.2. Method of calculating and journalizing
2.1.2.1. For the buyers
 Issuing an installment note (Based on Financial Accounting 12e – by Warren –
Reeve – Duchac)
When an installment note is issued, an entry is recorded debiting Cash and crediting
Notes Payable.
To illustrate, assume that Lewis Company issue a $24,000, 6%, five-year installment note
that has annual payments of $5,689. The first note payment consists of $1,440 of interest
and $4,258 of principal repayment.
To record the issuance of the installment note, we have an entry is as follows:
Cash 24,000
Notes Payable 24,000
Issued $24,000 of installment note for cash
 Annual payment (Based on Financial Accounting 12e – by Warren – Reeve –
Duchac)
The preceding note payable requires Lewis Company to repay the principle and interest
in equal payments of $5,689 beginning December 3, 2010 for each of the next five year.
Unlike bonds, however, each installment note payment includes an interest and principal
component.
The interest portion of an installment note payment is computed by multiplying the
interest rate by the carrying amount (book value) of the note at the beginning of the
period. The principal portion of the payment is then computed as the difference between
the total installment note payment (case paid) and the interest component. These
computations are illustrated in the figure as follows:

Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 6


1. The January 1, 2010, carrying value (column A) equals the amount borrowed
from the bank. The January 1 balance in the following years equals the December
31 balance from the prior year.
2. The note payment (column B) remains constant at $5,698, the annual cash
payments required by the bank.
3. The interest expense (column C) is computed at 6% of the installment not
carrying amount at the beginning of each year. As a result, the interest expense
decreases each year.
4. Notes payable decreases each year by the amount of the principal repayment
(column D). The principal repayment is computed by subtracting the interest
expense (column C) from the total payment (column B). The principal repayment
(column D) increases each year as the interest expense decreases (column C).
5. The carrying amount on December 31 (column E) of the note decreases from
$24,000, the initial amount borrowed, too $0 at the end of the five years.
The entry to record the first payment on December 31, 2010, is as follows:
2010





Dec.
31
Interest Expense

1,440



Notes Payable

4,258



Cash


5,698


Paid principal and interest on installment
note



Figure 2: Amortization of Installment Notes
Source: Financial Accounting 12e by Warren, Reeve, Duchac
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 7

The entry to record the second payment on December 31, 2011, is as follows:
2011

Dec.
31
Interest Expense

1,185



Notes Payable

4,513



Cash


5,698


Paid principal and interest on
installment note

As the prior entries shoe, the cash payment is the same in each year. The interest and
principal repayment, however, change each year. This is because the carrying amount
(book value) of the note decreases each year as principal is repaid, which decreases
the interest component the nest period.
The entry to record the final payment on December 31, 2014, is as follows:
2014





Dec.
31
Interest Expense

324



Notes Payable

5,374



Cash


5,698

Paid principal and interest on installment
note




2.1.2.2. For the sellers
―The installment sales and cost recovery methods are only used in unusual
circumstances.‖
4

When it comes to the sellers’ view, one of the most important transactions is how to
calculate and record revenue. According to installment regulation, there are two way of
calculate and journalize revenue for the sellers. These are installment sales method and
cost recovery method, which is presented respectively in this part.
 Installment sales method
o Calculating


4
Chapter 5 – Intermediate Accounting 4
th
– Spiceland – Sepe - Tomassini
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 8

The installment sales method is used to recognize revenue after the sale has occurred and
when sales are stipulated under much extended cash collection terms. In general, when

the risk of not being able to collect is reasonably high and when there is no reasonable
basis for estimating the proportion of installment accounts, revenue recognition is
deferred, and the installment sales method is used. The installment sales method is
typically used to account for sales of consumer durables, retail land sales, and retirement
property. Under the cost, another method to recognize income after the sale is made, no
profit is recognized until all the costs are recovered.
Due to the fact that installment transactions related to revenue significantly regard the
sellers, this method will focus on the installment sale method under the sellers’ view.
The installment sales method recognizes revenue and income proportionately as cash is
collected. The amount recognized in any period is thus based on two factors:
1. The gross profit percentage:
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

2. The amount of cash collected on installment accounts receivable.
Below is an example of calculation of installment sales for years 2009 and 2010.

2009
2010
Installment sales
$1,200,000
$1,300,000
Cost on installment goods sold
$840,000
$884,000
Gross profit
$360,000
$416,000
Gross profit percentage
30%

32%
Cash collections


On 2009 installment sales
$300,000
$600,000
On 2010 installments sales

$340,000
 2009 income from installment sales calculation:
The income recognized in 2009 equals cash collections in 2009 multiplied by the gross
profit percentage in 2009 and is calculated as follows:
$300,000×30% = $90,000
Such income is shown on the 2009 income statement as 2009 income from installment
sales.
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 9

 2009 Deferred Gross Profit calculation:
The deferred gross profit is an A/R contra-account and is the difference between gross
profit and recognized income and is calculated as follows:
$360,000 − $90,000 = $270,000
The deferred gross profit is thus deferred and recognized in income in subsequent
periods, i.e. when the installment receivables are collected in cash.
 2010 income from installment sales is $288,800 and calculated as follows:
Total 2010 installment sales income

Gross profit recognized
Component relating to 2009 Sales

Cash collections in 2010 from 2009 sales
$600,000
Multiplied by year 2009 gross profit percentage
30%
Gross profit recognized
$180,000
Component relating to 2010 sales

Cash collections in 2010 from 2010 sales
$340,000
Multiplied by year 2010 gross profit percentage
32%

$108,800
Total installment sales income recognized in 2010
$288,800
A more comprehensive table would clearly show gross profit and deferred income
recognized for each year: 2009 and 2010.

2009
2010
Installment sales
$1,200,000
$1,300,000
Cost of installment goods sold
($840,000)
(884,000)

Gross profit
360,000
416,000
Less: Deferred gross profit on installment sales of current
year
(270,000)
(307,200)
Gross profit recognized on current year's sales
90,000
108,800
Plus: Gross profit recognized on installment sales of prior

180,000
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 10

years
Total gross profit recognized in the year
$90,000
$288,800
Installment sales and the related costs of goods sold must be tracked by individual year in
order to compute the gross profit percentage that applies to each year. Furthermore, the
accounting system must correctly match the cash collections with the specific sales year
so that the correct gross profit percentage is applied.
On the balance sheet, "the accounts receivable - installment sales" is classified as current
assets if it is due within 12 months of the balance sheet. Otherwise, it is classified as long
term assets.
Under the GAAP, the interest component of the periodic cash proceeds is computed
separately. In fact, interest payments are not considered when the recognized gross profit

is computed on installment sales. Certain procedures differentiate between principal and
interest payments on customer receivables.
o Journalizing
Back to the example above, the entries are mentioned as follows
Deferred gross profit is the difference between the selling price and the cost of inventory
Installment sales receivable 2009 1,200,000
Inventory 840,000
Deferred gross profit 360,000
During 2009, a company collected $300,000 on its installment sales
Cash 300,000
Installment sales receivable 2009 300,000
This entry below records the Realized Gross Profit by adjusting the Deferred Gross Profit
account in 2009
Deferred gross profit 2009 90,000 ($300,000 x 30%)
Realized gross profit 90,000
During 2010, Company sold $1,300,000 on installment and collected $600,000 on its
2009 installment sales and $340,000 on its 2010 installment sales
Installment sales receivable 2010 1,300,000
Inventory 884,000
Deferred gross profit 416,000
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 11

Cash 940,000
Installment sales receivable 2009 600,000
Installment sales receivable 2010 340,000
This entry below records the Realized Gross Profit by adjusting the Deferred Gross Profit
account in 2010.
Deferred gross profit 2009 180,000 ($640,000 x 30%)

Deferred gross profit 2010 108,880 ($340,000 x 32%)
Realized gross profit 288,880

Balance sheet in 2009
Installment sales receivable 2009: 900,000
Installment sales receivable 2010: 340,000
Installment account receivable: 1,240,000
Deferred gross profit 2009: 90,000
Deferred gross profit 2010: 307,200
Deferred gross profit: 397,200

 Cost recovery method
o Calculating
The cost recovery method does not recognize any income on a sale until the cost of the
item sold has been fully recovered through cash receipts. Once the seller has recovered
all costs, any subsequent cash receipts are included in income. The cost recovery method
is used when the uncertainty of collection of the sales price is so great that even use of the
installment method cannot be justified. The cost recovery method is the most
conservative of all revenue recognition methods.
Under the cost recovery method, both revenues and cost of sales are recognized at the
point of sale, but the related gross profit is deferred until all costs of sales have been
recovered. Each installment must also be divided between principal and interest, but
unlike the installment method where a portion of the principal recovers the cost of sales
and the remainder is recognized as gross profit, all of the principal is first applied to
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 12

recover the cost of the asset sold. After all costs of sales have been recovered, any
subsequent cash receipts are realized as gross profit.

o Journalizing
With the example as we analyzed above, however, there are also a few differences.
Deferred gross profit is the difference between the selling price and the cost of inventory
Installment sales receivable 2009 1,200,000
Inventory 840,000
Deferred gross profit 360,000
During 2009, a company collected $300,000 on its installment sales.
Cash 300,000
Installment sales receivable 2009 300,000
The entries are exactly the same as under the Installment Method as mentioned before,
however, there is no entry to realize gross profit. Because we have not collected cash in
excess of COGS yet, therefore no gross profit is recognized in 2009.
Here are the entries we would make in 2010 relating to 2009 sales.
Cash 600,000
Installment sales receivable 2009 600,000
Now, we have fully recovered the $840,000 cost during 2009, so the entire deferred gross
profit will be recognized.
Deferred gross profit 360,000
Realized gross profit 360,000
2.2. Vietnamese Accounting Standards 14 (VAS 14 – Revenue and other
incomes)
2.2.1. Definition
Installment is lending method that the term for paying principal and interest is all the
same. The amount of money for paying debt is also the same as agreement in the contract
and the interest need to pay in each term is based on the balance of outstanding principal
and the actual duration of the repayment period. Normally, a term debt can lengthen 1
month, 3 months, 6 months, even a year or more. It depends on a demand, financial
ability for paying a down payment or financial ability to pay periodically. Installment
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012

Page 13

sales are also applied in consumer lending, purchasing assets with high value. The
interest rate is agreed detailed in the contract between the buyers and sellers.
5

 Borrowing without installment payment
The term of borrowing without installment payment consist of maturity value (included
both principal and interest value) is paid to the banks only one time when due date
comes. This kind is applied to credits which are small values and short—term payments.
 Borrowing with installment payment
Borrowers will pay maturity value (included both principal and interest value) to the
banks many times during the period. This kind is applied to credits which are high values.
2.2.2. Journalizing
2.2.2.1. For the buyers
When purchasing fixed assets under installment contract, journalizing transactions has to
follow:
 For purchasing tangible or intangible assets which are used immediately for
operating activities, speculation, operating lease:
Debit 211, 213, 217 (historical cost)
Debit 133 (VAT refund – if any)
Debit 242 – long-term prepaid expense (interest expense is the
difference between total payment and sum of the paid cash and VAT
(if any)
Credit 331 – Notes payable (total payment)
 Period payment
Debit 331 – Notes payable
Credit 111, 112 (maturity amount including principal and
interest)
 Recording periodically as an expense

Debit 635 – financial expenses
Credit 242 – long-term prepaid expenses



5

Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 14

2.2.2.2. For the sellers
VAT included
When purchasing merchandise under installment contract for the merchandise which
are VAT objectives and VAT deduction method, accountants will record the
transactions as follows:
Debit 131 – Notes Receivable
Credit 511 – Revenue (5111, 5112, 5117) (the sums of cash
payment immediately not VAT included)
Credit 333 – Taxes payable (3331)
Credit 3387 – Unearned revenue (the difference between the usual
price and total payment under installment sales)
When receiving cash payment:
Debit 111, 112
Credit 131 – Notes Receivable
Recording interest revenue periodically:
Debit 3387 – Unearned revenue
Credit 515 – Interest revenue
Example:
On 31/12/07, 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. On 31/12/08 the buyer paid $300,000 principal and
$150,000 interest. What are the journal entries for Company A?
31/12/2007
Debit 111 300,000
Debit 131 1,500,000
Credit 511 300,000
Credit 3331 30,000
Credit 3387 1,470,000
31/12/2008
- Recording cash payment
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 15

Debit 111 300,000
Credit 131 300,000
- Recording interest revenue
Debit 3387 150,000
Credit 515 150,000
2.3. Case
2.3.1. International accounting system
2.3.1.1. Case 1 – the buyers’ transactions
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The following transactions were completed by Simmons Inc., whose fiscal year is the
calendar year:
In 2012:
July 1. Issued $64,000,000 of 10-year, 12% callable bonds dated July 1, 2012, at

a market (effective) rate of 14%, receiving cash of $57,219,878. Interest is
payable semiannually on December 31 and June 30.
October 1. Borrowed $320,000 as a five-year, 6% installment note from Ibis Bank.
The note requires annual payments of $75,967, with the first payment
occurring on September 30, 2013.
December 31 Accrued $4,800 of interest on the installment note. The interest is payable
on the date of the next installment note payment.
31 Paid the semiannual interest on the bonds. The bond discount is amortized
annually in a separate journal entry.
31 Recorded bond discount amortization of $339,006, which was determined
using the straight-line method
31 Closed the interest expense account.
In 2013:
June 30 Paid the semiannual interest on the bonds.
September 30 Paid the annual payment on the note, which consisted of interest of
$19,200 and principal of $ 56,767.


6
Based on PR 14-4A Chapter 14 – Long-term liabilities – Bonds and Notes - Financial Accounting 12e –
Warren – Reeve - Duchac
Project 1: Accounting Principles Research Lecturer: Bui Phuong Uyen
INSTALLMENT SALES Group 1 – Class KT1012
Page 16

December 31 Accrued $3,948 of interest on the installment note. The interest is
payable on the date of the next installment note payment.
31 Paid the semiannual interest on the bonds. The bond discount is
amortized annually in a separate journal entry.
31 Recorded bond discount amortization of $ 678,012, which was

determined using the straight-line-method.
31 Closed the interest expense account.
In 2014:
June 30 Recorded the redemption of the bonds, which were called at 98. The
balance in the bond discount is $ 5,424,098 after payment of interest
and amortization of discount has been recorded. (Record the
redemption only)
September 30 Paid the second annual payment on the note, which consisted of
interest of $ 15,794 and principal of $ 60,173.
Instructions
1. Journalize the entries to record the foregoing transactions
2. Indicate the amount of the interest expense in (a) 2012 and (b) 2013
3. Determine the carrying amount of the bonds as of December 31, 2013.

Solution
In 2012
July 1 Cash 57,219,878
Discount on Bonds Payable 6,780,122
Bonds Payable 64,000,000

Oct. 1 Cash 320,000
Notes Payable 320,000

Dec. 31 Interest Expense 4,800
Interest Payable 4,800