Chapter 2 Accounting for Installment Sales

Question 1

How do you calculate deferred gross profit under installment method of revenue recognition?

Answer 1

Find the gross profit rate(gross profit/sales). Multiply this rate by the installments receivable.

Question 2

When is it proper to recognize revenue prior to the sale of merchandise?

Answer 2

Revenue can be recognized prior to the completion of a long-term project but generally not prior to merchandise sale, especially not one recognized on the installment method.

Question 3

According to the installment method of accounting, when is gross profit on an installment sale recognized?

Answer 3

Under the installment method, total gross profit is deferred until cash payments are received. Realized gross profit equals the gross profit percentage on the sale times the cash received.

Question 4

When is the cost recovery method appropriate to use?

Answer 4

It is appropriate to use when there is no reasonable basis for estimating collectability.

Question 5

Why is cash a critical event for income recognition in installment method and cost-recovery method?

Answer 5

Uder the cost recovery method, revenue is recognized after cash equaling the cost of the item is collected. Under the installment method, gross profit is recognized as a gross profit percentage times the cash collected from the sale

Question 6

How do you calculate gross profit percentage if you have deferred gross profit and accounts receivable?

Answer 6

You use the same forumula just reverse engineer it. Defered gross profit = AR * gross profit %.

Question 7

When can/should the installment sales method be used?

Answer 7

When it is impossible to establish a reasonable bad debt percentage.

Question 8

Under cost recovery method when is gross profit recognized?

Answer 8

Gross profit on the sale is deferred until the cost of the item sold is collected.