[tingtuzii]

Can someone help me clarify how ‘Deferred gross profit’ will be presented on balance sheet? When you are asked to calculate deferred gross profit in Dec.31, year 4, balance sheet, should i calculate it only for the current year or for both year 3 or year 4? in other word, is deferred gross profit account an accumulative account?

In the attached Becker question, i can not figure it out why year 3 deferred gross profit is considered. It only asked the year 4 deferred gross profit. so confusing!!!!

Lang Co. uses the installment method of revenue recognition. The following data pertain to Lang’s installment sales for the years ended December 31, Year 3 and Year 4:

Year 3 Year 4

Installment receivables at year-end on Year 3 sales $ 60,000 $ 30,000

Installment receivables at year-end on Year 4 sales – 69,000

Installment sales 80,000 90,000

Cost of sales 40,000 60,000

What amount should Lang report as deferred gross profit in its December 31, Year 4, balance sheet?

a. $33,000

b. $38,000

c. $23,000

d. $43,000

Choice “b” is correct.

Gross profit = Sales − Cost of sales

Year 3: [$80,000 − $40,000] = $40,000

Year 4: [$90,000 − $60,000] = $30,000

Gross profit rate = Gross profit / Sales

Year 3: [$40,000/$80,000] = 50%

Year 4: [$30,000/$90,000] = 33.3%

Deferred gross profit = GP rate x AR

on Year 3 sales @ 12/31/Y4 = $15,000 [50% x $30,000]

on Year 4 sales @ 12/31/Y4 = $23,000 [33.3% x $69,000]

Total deferred gross profit to be reported = $38,000 [$15,000 + $23,000].

[EuroAddict]

I think the reason they include year is is b/c with installment sales you take into account previous income recognized.

ie: If year 3 recognized 50k and year 4 is 60k, you subtract the 50 from 60 ending up at 10.

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[Anonymous]

To answer your questions…

Balance sheet:

Installment Sales Receivable XXX <- how much you are owed

Less Deferred Gross Profit XXX <- the profit you will make if you are paid

Net Installment Sales Receivable XXX <- the amount you will lose (your cost) if you are not paid

If you are asked “What is the deferred profit at the end of the year?”, there are different ways you might get the answer, depending on the information given to you. In the problem you posted, you need to calculate the profit margin on year 3 sales and year 4 sales. Then you apply those percentages to the “installment receivables at year end on year 3 sales” and “installment receivables at year end on year 4 sales.”

You said, “i can not figure it out why year 3 deferred gross profit is considered.” I am not sure exactly what you mean by that. The deferred gross profit at the end of year 3 is NOT considered. But you do need to know the profit margin on year 3 sales.

Yes, deferred profit is a balance sheet account. But that doesn't matter for solving this problem.

I hope that made sense and was helpful in some way.

[pfitz092]

I looked at this multiple choice question earlier today. I think the easiest, most simplified way to understand is as follows:

Both the $30,000 (related to yr 3 sales) and the $69,000 (related to yr 4 sales) are both still in Installment Receivable (an asset account) as of the end of year 4. Said another way, you have $99,000 in Installment Receivable as of 12/31/4, it's just comprised of some receivables that relate to year 3 installment sales, and some related to year 4 installment sales.

The reason they separate them out is so that you can multiply each balance by its respective gross profit ratio (50% and 33.33% in this case).

If you look at the column headers in the original question, both the $30,000 and $69,000 are as of Dec 31 Year 4, not year 3.

[Author]

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