(111)

Contracts,

Dr.

$11,283.00

(112)

Purchase,

Cr.

4,450.00

(113)

Gains,

Cr.

5,220.00

(114)

Townley, J. R.,

Cr.

470.00

This is a small subdivision property which is handled on a selling contract, the owner receiving $166.66 for each lot; 50% of gross receipts being paid to him from month to month, the concern paying all expenses and the profits on cancellations being divided equally between the owner and the concern. In this case, Purchase account is credited with $166 on each lot shown in the usual way, and each month a journal entry is made in the following form:

Torbay Heights Purchase.................... $......

To Torbay Heights, J. R. Townley...... $......

For 50% of the gross receipts during the month of..............on this property.

Mr. Townley's account is charged with cash payments as they are made to him. The balance of the Purchase account is therefore a liability contingent on the completion of the contracts, while Townley's account shows the actual liability existing at any time, and which at the date of the balance sheet amounted to $470, and is carried in the "Accounts Payable" column.

There is one particular complication in this account which does not appear upon its face. Among the open contracts several are included which are really dead, but which the concern has not cared to cancel inasmuch as the terms of the original agreement have expired and they hope to find some other purchasers and thus realize their profit.

The analysis of the sub-ledger shows that the balance of the open contracts represents in all 60 lots, the average selling price being $369.16, and the average profit $202.50. The unearned profit is therefore as follows: $11,283 / $22,150 X 60 X $202.50 = $6,189.09

It will be noticed that this is a larger amount than that shown in the Gains account, but, in view of the fact that there is a good prospect of the concern's re-selling the cancelled contracts, this amount is allowed to remain in the reserve, no part of it being carried to Gains.