Cost Recovery Method Problem -
On January 1, 2015, Janine Company sold real estate that cost $95,114 to Conaway Company for $120,000. Conaway agreed to pay the purchase over three years by making three end-of-year equal payments of $52,557 that include 15% interest. Shortly after the sale, Janine Company learns distressing news about Conaway's financial circumstances and because collection is so uncertain decides to account for the sale using the cost recovery method.
Instructions -
1) Applying the cost-recovery method, prepare a schedule showing the amounts of cash collected, the increase (decrease) in deferred interest revenue, the balance of the receivable, the balance of the unrecovered cost, the gross profit realized, and the interest revenue realized for each of the three years assuming the payments are made as agreed
2) Prepare the journal entries for the three years.