Financial Reporting II

Question 1

What are the four formulas used to calculate installment sales?

Answer 1

1) Gross profit = Sale - Cost of goods sold
2) Gross profit percentage = Gross profit / Sales price
3) Earned gross profit = Cash collections x Gross profit percentage
4) Deferred gross profit = Installment rec. x Gross profit percentage

Question 2

What is the Gross Profit Percentage formula used for installment sales?

Answer 2

Gross profit percentage = Gross profit / Sales price

Question 3

What is the Earned Gross Profit formula used for installment sales?

Answer 3

Earned Gross Profit = Cash collections x Gross profit percentage

Question 4

What is the Deferred Gross Profit formula used to calculate installment sales?

Answer 4

Deferred gross profit = Installment receivable x Gross profit percentage

Question 5

Assume that TAG Company began operations on January , Year 1, had $400,000 in installment sales in Year 1 and a December 31, Year 1, balance in installment accounts receivable of $150,000. TAG Company had $300,000 as its cost of goods sold.

What journal entries would TAG Company use to record these transactions during Year 1?

Answer 5

Journal entry to record the installment sale:

DR Install. sale accts. rec. $400,000

CR Inventory $300,000

CR Deferred gross profit (contra-receivable) $100,000

Journal entry to recognize cash collection:

DR Cash $250,000

CR Install. sale accts. rec. $250,000

Journal entry to record profit on collection:

DR Deferred gross profit $62,500

CR Realized gross profit on installments sales $62,500