Accounting for Installment Sales

Question 1

Gross profit

Answer 1

Sales - COGS

Question 2

GP %

Answer 2

GP / Sales Price

Question 3

Earned GP

Answer 3

Cash collection x GP %

Question 4

Deferred GP

Answer 4

Installment Receivable x GP %

Question 5

Cost recovery method used

Answer 5

when receivables are collected over an extended period and there is no reasonable basis for estimating their collectibility

Question 6

J/E to record sale under cost recovery method

Answer 6

Cost Recovery Rec
Inventory
Deferred GP

Question 7

Under the installment method, total gross profit is

Answer 7

deferred until cash payments are received. Realized gross profit equals the gross profit percentage on the sale times the cash received.

Question 8

Under the cost recovery method, revenue is recognized

Answer 8

after cash equaling the cost of the item is collected.

Question 9

Under the installment method, gross profit is recognized

Answer 9

as a gross profit percentage times the cash collected from the sale.

Question 10

The installment sales method should only be used when

Answer 10

it is impossible to establish a reasonable bad debt percentage. It is probable that some amount will be collected, but the amount cannot be projected.