Tài liệu Accounting principle research installment sales

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 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 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 COMMENT OF LECTURER ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. ................................................................................................................................................. MARK: ................... Page i Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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. Page ii Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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. Page iii Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 CONTENT COMMENT OF LECTURER ............................................................................................ i ABSTRACT......................................................................................................................ii ACKNOWLEDGMENT ................................................................................................. iii CONTENT ..................................................................................................................... iv TABLE OF FIGURES..................................................................................................... vi INTRODUCTION .......................................................................................................... vii 1. 2. General terms related to installment sales ................................................................ 1 1.1. Party ................................................................................................................. 1 1.2. Interpretation ..................................................................................................... 1 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 2.2. 2.1.2.1. For the buyers ..................................................................................... 5 2.1.2.2. For the sellers ...................................................................................... 7 Vietnamese Accounting Standards 14 (VAS 14 – Revenue and other incomes)12 2.2.1. Definition ................................................................................................. 12 2.2.2. Journalizing.............................................................................................. 13 2.3. 2.2.2.1. For the buyers ................................................................................... 13 2.2.2.2. For the sellers .................................................................................... 14 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 Page iv Project 1: Accounting Principles Research INSTALLMENT SALES 4.4. 5. Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 Notes to the financial statements ..................................................................... 31 Forms of frauds and errors related to installment sales ........................................... 31 5.1. Forms of frauds and errors............................................................................... 31 5.2. Misleading financial accounting ...................................................................... 33 Facts – Adjusted policies on installment sales ........................................................ 36 6. 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 Page v Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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 Page vi Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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. Page vii Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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  Initial deposit $10,000  Balance of purchase price $90,000  Purchase price (total) $100,000 $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. Page 1 Project 1: Accounting Principles Research INSTALLMENT SALES  Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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. Figure 1: Promissory note Source: Financial Accounting 12e by Warren, Reeve, Duchac 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. Page 2 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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 2 Based on http://en.wikipedia.org/wiki/Installment_sale& Based on http://www.irs.gov/publications/p537/ar02.html#en_US_2011_publink1000221591 Page 3 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012  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 following3:  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 Page 4 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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: Page 5 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 Figure 2: Amortization of Installment Notes Source: Financial Accounting 12e by Warren, Reeve, Duchac 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 Page 6 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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 Paid 5,698 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 4th – Spiceland – Sepe - Tomassini Page 7 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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: 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 $1,200,000 $1,300,000 Installment sales Cost on installment goods sold $840,000 $884,000 Gross profit $360,000 $416,000 Gross profit percentage 30% 32% $300,000 $600,000 Cash collections On 2009 installment sales 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. Page 8 Project 1: Accounting Principles Research INSTALLMENT SALES  Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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 30% Multiplied by year 2009 gross profit percentage $180,000 Gross profit recognized Component relating to 2010 sales Cash collections in 2010 from 2010 sales $340,000 32% Multiplied by year 2010 gross profit percentage $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 Less: Deferred gross profit on installment sales of current (270,000) 416,000 (307,200) year Gross profit recognized on current year's sales Plus: Gross profit recognized on installment sales of prior Page 9 90,000 108,800 180,000 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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 Page 10 Project 1: Accounting Principles Research INSTALLMENT SALES Lecturer: Bui Phuong Uyen Group 1 – Class KT1012 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 Page 11