B is corrent. When using the installment sales method, the balance of the deferred gross profit account represents the gross profit not yet recognized because the related receivable has not yet been collected. The formula below expresses this relationship.
Deferred GP = GP rate × Accounts Receivable
This equation can be rearranged as follows:
Deferred GP / GP rate = Accounts Receivable
Therefore, the installment accounts receivable balance at 12/31/Y2 can be computed as follows:
| From year 1 sales: | $120,000 / 30% | = | $ 400,000 |
| From year 2 sales: | $440,000 / 40% | = | 1,100,000 |
| Total | | | $1,500,000 |
A is incorrect. When using the installment sales method, the balance of the deferred gross profit account represents the gross profit not yet recognized because the related receivable has not yet been collected. The formula below expresses this relationship.
A is incorrect. When using the installment sales method, the balance of the deferred gross profit account represents the gross profit not yet recognized because the related receivable has not yet been collected. The formula below expresses this relationship.
A is incorrect. When using the installment sales method, the balance of the deferred gross profit account represents the gross profit not yet recognized because the related receivable has not yet been collected. The formula below expresses this relationship.
