A 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. At the time of sale, gross profit of $500,000 is deferred ($1,000,000 – $500,000). The gross profit rate is 50% ($500,000 ÷ $1,000,000). Since year 1 collections on installment sales were $200,000, gross profit of $100,000 (50% x $200,000) is recognized in year 1. This recognition of gross profit would decrease the deferred gross profit account to a 12/31/Y1 balance of $400,000 ($500,000 – $100,000). Note that regular sales, cost of regular sales, and general and administrative expenses do not affect the deferred gross profit account.
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. At the time of sale, gross profit of $500,000 is deferred ($1,000,000 – $500,000). The gross profit rate is 50% ($500,000 ÷ $1,000,000). Since year 1 collections on installment sales were $200,000, gross profit of $100,000 (50% x $200,000) is recognized in year 1. This recognition of gross profit would decrease the deferred gross profit account to a 12/31/Y1 balance of $400,000 ($500,000 – $100,000). Note that regular sales, cost of regular sales, and general and administrative expenses do not affect the deferred gross profit account.
C 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. At the time of sale, gross profit of $500,000 is deferred ($1,000,000 – $500,000). The gross profit rate is 50% ($500,000 ÷ $1,000,000). Since year 1 collections on installment sales were $200,000, gross profit of $100,000 (50% x $200,000) is recognized in year 1. This recognition of gross profit would decrease the deferred gross profit account to a 12/31/Y1 balance of $400,000 ($500,000 – $100,000). Note that regular sales, cost of regular sales, and general and administrative expenses do not affect the deferred gross profit account.
D 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. At the time of sale, gross profit of $500,000 is deferred ($1,000,000 – $500,000). The gross profit rate is 50% ($500,000 ÷ $1,000,000). Since year 1 collections on installment sales were $200,000, gross profit of $100,000 (50% x $200,000) is recognized in year 1. This recognition of gross profit would decrease the deferred gross profit account to a 12/31/Y1 balance of $400,000 ($500,000 – $100,000). Note that regular sales, cost of regular sales, and general and administrative expenses do not affect the deferred gross profit account.
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