INSTALLMENT SALES Flashcards
On January 2, Year 1, Blake Co. sold a used machine to Cooper, Inc. for $900,000, resulting in a gain of $270,000. On that date, Cooper paid $150,000 cash and signed a $750,000 note bearing interest at 10%. The note was payable in three annual installments of $250,000 beginning January 2, Year 2. Blake appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 2, Year 2, of $325,000, which included accrued interest of $75,000. What amount of deferred gross profit should Blake report at December 31, Year 2?
a.
$150,000
b.
$225,000
c.
$180,000
d.
$172,500
On January 2, Year 1, Blake Co. sold a used machine to Cooper, Inc. for $900,000, resulting in a gain of $270,000. On that date, Cooper paid $150,000 cash and signed a $750,000 note bearing interest at 10%. The note was payable in three annual installments of $250,000 beginning January 2, Year 2. Blake appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 2, Year 2, of $325,000, which included accrued interest of $75,000. What amount of deferred gross profit should Blake report at December 31, Year 2?
a.
$150,000
b.
$225,000
c.
$180,000
d.
$172,500
On January 2, Year 1, Blake Co. sold a used machine to Cooper, Inc. for $900,000, resulting in a gain of $270,000. On that date, Cooper paid $150,000 cash and signed a $750,000 note bearing interest at 10%. The note was payable in three annual installments of $250,000 beginning January 2, Year 2. Blake appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 2, Year 2, of $325,000, which included accrued interest of $75,000. What amount of deferred gross profit should Blake report at December 31, Year 2?
a.
$150,000
b.
$225,000
c.
$180,000
d.
$172,500
Explanation
Choice “a” is correct. Deferred gross profit is computed by multiplying the balance in the receivable account by the gross profit percentage
Receivable ($750,000 − $250,000) $ 500,000
Gross profit % ($270,000 ÷ $900,000) 30%
Deferred gross profit $ 150,000
Entor Co. sold equipment to Pane Co. for $50,000. The equipment had a net book amount of $30,000. The collections were $20,000 in the first year, $15,000 in the next year, and $15,000 in the last year. What is the amount of gross profit for the third year if Entor used the installment-sales accounting method for the transaction?
a.
$15,000
b.
$0
c.
$6,000
d.
$5,000
Choice “c” is correct. When the installment sales method is used, gross profit is recognized when cash is collected. Earned gross profit is equal to cash collected multiplied by the gross profit percentage. Entor Co.’s gross profit percentage for this transaction is calculated as:
(Sales − Cost of goods sold) / Sales = ($50,000 − 30,000) / $50,000 = 40%
Year 3 earned gross profit would therefore be $6,000 ($15,000 × 40%)
