FAR-Installment Sales Method

Question 1

When is the installment sales method used?

Answer 1

When collection is not reasonably assured. Profit and gross profit is recognized as cash is collected

Question 2

What are the two formulas for the installment sales method?

Answer 2

1. Gross Profit Realized: Cash Collected*Gross Profit Percentage
2. Deferred Gross Profit: Receivable Balance*Gross Profit Percentage

Question 3

Under the installment sales method, how is Cash Collected calculated when the amount is unknown?

Answer 3

GP Realized /GP% = Cash Collected

Question 4

Under the installment sales method, how is the Receivable Balance calculated when it is unknown?

Answer 4

Deferred Gross Profit/GP %

Question 5

Which income recognition method is more conservative than the installment sales method

Answer 5

Cost Recovery Method

Question 6

What is the Cost recovery method and how is it used, and when is profit realized?

Answer 6

It is used when collection is not assured and there is no basis for determining whether or not is is collectible. Profit is not realized until all costs are recovered.

Question 7

Are down-payments included in calculations for gross profit?

Answer 7

Yes. However, interest payments are not included in calculations for gross profit.