[cpa1988]

Why is the $270,000 gain used to calculate GP percentage? What about the $150,000 cash collection?

On January 2, Year 1, Blake Co. sold a used machine to Cooper, Inc. for $900,000, resulting in a gain of $270,000. On that date, Cooper paid $150,000 cash and signed a $750,000 note bearing interest at 10%. The note was payable in three annual installments of $250,000 beginning January 2, Year 2. Blake appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 2, Year 2, of $325,000, which included accrued interest of $75,000. What amount of deferred gross profit should Blake report at December 31, Year 2?

a. $172,500

b. $180,000

c. $225,000

d. $150,000

Explanation

Choice “d” is correct. Deferred gross profit is computed by multiplying the balance in the receivable account by the gross profit percentage.

Receivable ($750,000 − $250,000) $ 500,000

Gross profit % ($270,000 ÷ $900,000) 30%

Deferred gross profit $ 150,000

Choice “a” is incorrect. Deferred gross profit is computed by multiplying the balance in the receivable account by the gross profit percentage.

Choice “b” is incorrect. Deferred gross profit is computed by multiplying the balance in the receivable account by the gross profit percentage.

Choice “c” is incorrect. The total of deferred gross profit plus deferred interest earned is $225,000 but interest is not the question, just deferred gross profit.

[mla1169]

The solution already accounts for the $150k payment, because the receivables balance started at $750k instead of $900k. (900k sale minus $150k cash at time of sale equals the $750k)

FAR- 77
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BEC -75

Massachusetts CPA (non reporting) since 3/12.

[confusedcandidate]

You do use the 150,000 to help calculate the REMAINING deferred gross profit. The profit from the sale is 270,000 which is 30% of the total sale. 30% of 150k is 45,000 and 30% of 250,000 is 75000.

270,000-45000-75000=150,000, D

(The method posted above me is easier actually. 900-150-250=500. 500*.3=150)

Weekends are meaningless to a CPA candidate

[Author]

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