Chapter 2 Section 3: Accounting for Installment Sales

Question 1

When is the installment method used?

Answer 1

Only when there is no reasonable basis for estimating the degree of collectibility

Question 2

When is revenue recognized under the installment method?

Answer 2

When cash is collected

Question 3

What is the formula for gross profit?

Answer 3

GP = Sale - COGS

Question 4

What is the formula for gross profit percentage?

Answer 4

GP % = GP/Sales price

Question 5

What is the formula for earned gross profit?

Answer 5

Cash collections x GP percentage

Question 6

What is the formula for deferred gross profit?

Answer 6

Installment receivable x GP percentage

Question 7

How is deferred gross profit beyond 12 months handled?

Answer 7

Classified as a current asset

Question 8

When is profit recognized using the cost recovery method?

Answer 8

After all costs have been recovered.
At the time of sale, the expected profit is recorded as a deferred gross profit. Apply collections to COGS, and then recognize it as revenue.

Question 9

When is the cost recovery method used?

Answer 9

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