FAR 2 Installment sales

Question 1

Installment sale

• Gross profit
• Gross profit %
• Earned gross profit
• Deferred gross profit

Answer 1

• Gross profit = Sale - Cost of goods sold
• Gross profit % = Gross profit / Sales price
• Earned gross profit = Cash collections x Gross profit %
• Deferred gross profit = Installment receivable x Gross profit %

Question 2

Installment sale

Journal entries

Answer 2

• Record the sale:

Installment sale AR

           Inventory 

             Deferred gross profit 

• Cash collection:

Cash

           Installment AR 

• Profit on collection:

Deferred gross profit

        Realized gross profit

Question 3

Cost Recovery Method

Answer 3

No profit is recognized on a sale until all cash have been recovered.

At the time of sale:

• the expected profit on the sale is recorded as deferred gross profit.
• cash collections are first applied to the recovery of product costs.
• collections after all costs have been recovered are recognized as profit.

Question 4

Cost Recovery Method

Journal entries

Answer 4

• Sale under the cost recovery method:

Cost recovery receivable

                Inventory

                 Deferred gross profit  

Collection Y1:

Cash

          Cost recovery receivable 

Collection Y2:

Cash

        Cost recovery receivable

Deferred gross profit

         Realized gross profit on cost recovery sale

Question 5

Installment method and cost recovery method

Answer 5

Both similar in the way that they may be only used when receivables are collected over an extended period and there is no reasonable basis for estimating their collectibility.