12. Indicate below whether the installment sale method of accounting can apply t
ID: 2437508 • Letter: 1
Question
12. Indicate below whether the installment sale method of accounting can apply to each of these transactions (answer “yes” = installment method possible or “no” = installment method not allowed):
_____ Sale of 12-acre tract of land held as inventory by a real estate developer where payment will be received in 2 years.
_____ Sale of business equipment where payment is due after year end.
_____ Sale of commercial building subject to seller note (where payment is to be received in future years).
_____ Sale of single parcel of land held as an investment where a taxable loss resulted.
_____ Sale of building subject to a contingent sales price that may not be ultimately received.
Explanation / Answer
Under the installment sale method, the profit on the sale is recognized when the cash from the sale is received. It is thus a conservative approach to revenue recognition and is applied only when the risks and rewards in the goods sold are not completely transferred from the seller to the buyer or when there is some uncertainty regarding the sales price that will be collected.
In view of the above, the applicability of the installment sale method for the transactions is as under:
No Sale of 12-acre tract of land held as inventory by a real estate developer where payment will be received in 2 years. No Sale of business equipment where payment is due after year end. Yes Sale of commercial building subject to seller note (where payment is to be received in future years) No Sale of single parcel of land held as an investment where a taxable loss resulted. Yes Sale of building subject to a contingent sales price that may not be ultimately received.Related Questions
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