C is corrent. Under the installment method, gross profit is deferred at the time of sale and is recognized by applying the gross profit rate to subsequent cash collections. Therefore, at each year-end, deferred gross profit can be computed by multiplying the gross profit percentage by the AR balance. The gross profit percentage for each year is computed by dividing that year’s gross profit by installment sales.| Year 1 | Year 2 | | Installment sales (A) | $80,000 | $90,000 | | Cost of sales | (40,000) | (60,000) | | Gross profit (B) | $40,000 | $30,000 | | Gross profit % (B ÷ A) | 50% | 33 1/3% |
The 12/31/Y2 deferred gross profit is computed by multiplying the gross profit percentages by the year-end receivables resulting from that year’s sales.| | Year 1 | Year 2 | | 12/31/Y2 AR from year 1 sales | $30,000 | | | 12/31/Y2 AR from year 2 sales | | $69,000 | | | x 50% | x 33 1/3% | | | $15,000 | $23,000 |
Therefore, 12/31/Y2 deferred GP is $38,000 ($15,000 + $23,000).A is incorrect. Under the installment method, gross profit is deferred at the time of sale and is recognized by applying the gross profit rate to subsequent cash collections. Therefore, at each year-end, deferred gross profit can be computed by multiplying the gross profit percentage by the AR balance. The gross profit percentage for each year is computed by dividing that year’s gross profit by installment sales. | Year 1 | Year 2 | | Installment sales (A) | $80,000 | $90,000 | | Cost of sales | (40,000) | (60,000) | | Gross profit (B) | $40,000 | $30,000 | | Gross profit % (B ÷ A) | 50% | 33 1/3% |
The 12/31/Y2 deferred gross profit is computed by multiplying the gross profit percentages by the year-end receivables resulting from that year’s sales.| | Year 1 | Year 2 | | 12/31/Y2 AR from year 1 sales | $30,000 | | | 12/31/Y2 AR from year 2 sales | | $69,000 | | | x 50% | x 33 1/3% | | | $15,000 | $23,000 |
Therefore, 12/31/Y2 deferred GP is $38,000 ($15,000 + $23,000). B is incorrect. Under the installment method, gross profit is deferred at the time of sale and is recognized by applying the gross profit rate to subsequent cash collections. Therefore, at each year-end, deferred gross profit can be computed by multiplying the gross profit percentage by the AR balance. The gross profit percentage for each year is computed by dividing that year’s gross profit by installment sales. | Year 1 | Year 2 | | Installment sales (A) | $80,000 | $90,000 | | Cost of sales | (40,000) | (60,000) | | Gross profit (B) | $40,000 | $30,000 | | Gross profit % (B ÷ A) | 50% | 33 1/3% |
The 12/31/Y2 deferred gross profit is computed by multiplying the gross profit percentages by the year-end receivables resulting from that year’s sales.| | Year 1 | Year 2 | | 12/31/Y2 AR from year 1 sales | $30,000 | | | 12/31/Y2 AR from year 2 sales | | $69,000 | | | x 50% | x 33 1/3% | | | $15,000 | $23,000 |
Therefore, 12/31/Y2 deferred GP is $38,000 ($15,000 + $23,000). B is incorrect. Under the installment method, gross profit is deferred at the time of sale and is recognized by applying the gross profit rate to subsequent cash collections. Therefore, at each year-end, deferred gross profit can be computed by multiplying the gross profit percentage by the AR balance. The gross profit percentage for each year is computed by dividing that year’s gross profit by installment sales. | Year 1 | Year 2 | | Installment sales (A) | $80,000 | $90,000 | | Cost of sales | (40,000) | (60,000) | | Gross profit (B) | $40,000 | $30,000 | | Gross profit % (B ÷ A) | 50% | 33 1/3% |
The 12/31/Y2 deferred gross profit is computed by multiplying the gross profit percentages by the year-end receivables resulting from that year’s sales.| | Year 1 | Year 2 | | 12/31/Y2 AR from year 1 sales | $30,000 | | | 12/31/Y2 AR from year 2 sales | | $69,000 | | | x 50% | x 33 1/3% | | | $15,000 | $23,000 |
Therefore, 12/31/Y2 deferred GP is $38,000 ($15,000 + $23,000). |
