D is corrent. As this is the first year of operations, all $140,000 is from year 1 sales. In the absence of any defaults and repossessions during the year, this represents the total gross profit (GP) for year 1. Therefore, the total debits to installment AR for year 1 sales (1) can be computed by dividing the deferred GP by the GP ratio, or $350,000 ($140,000/40%). Next, cash collections (2) can be calculated as: $350,000 total debits - $200,000 ending balance = $150,000 cash collections. Finally, GP realized in year 1 (3) would be 40% times cash collections of $150,000 for $60,000 GP realized.
A is incorrect. As this is the first year of operations, all $140,000 is from year 1sales. In the absence of any defaults and repossessions during the year, this represents the total gross profit (GP) for year 1. Therefore, the total debits to installment AR for year 1 sales (1) can be computed by dividing the deferred GP by the GP ratio, or $350,000 ($140,000/40%). Next, cash collections (2) can be calculated as: $350,000 total debits - $200,000 ending balance = $150,000 cash collections. Finally, GP realized in year 1 (3) would be 40% times cash collections of $150,000 for $60,000 GP realized.
C is incorrect. As this is the first year of operations, all $140,000 is from year 1 sales. In the absence of any defaults and repossessions during the year, this represents the total gross profit (GP) for year 1. Therefore, the total debits to installment AR for year 1 sales (1) can be computed by dividing the deferred GP by the GP ratio, or $350,000 ($140,000/40%). Next, cash collections (2) can be calculated as: $350,000 total debits - $200,000 ending balance = $150,000 cash collections. Finally, GP realized in year 1 (3) would be 40% times cash collections of $150,000 for $60,000 GP realized.
B is incorrect. As this is the first year of operations, all $140,000 is from year 1 sales. In the absence of any defaults and repossessions during the year, this represents the total gross profit (GP) for year 1. Therefore, the total debits to installment AR for year 1 sales (1) can be computed by dividing the deferred GP by the GP ratio, or $350,000 ($140,000/40%). Next, cash collections (2) can be calculated as: $350,000 total debits - $200,000 ending balance = $150,000 cash collections. Finally, GP realized in year 1 (3) would be 40% times cash collections of $150,000 for $60,000 GP realized.
