Hey, can someone please help me understand the installment sales method. Enclosed is the question from becker.
ince there is no reasonable basis for estimating the degree of collectibility, Astor Co. uses the installment method of revenue recognition for the following sales:
Year 2 Year 1
Sales $ 900,000 $ 600,000
Collections from:
Year 1 sales 100,000 200,000
Year 2 sales 300,000 –
Accounts written off:
Year 1 sales 150,000 50,000
Year 2 sales 50,000 –
Gross profit percentage 40% 30%
What amount should Astor report as deferred gross profit in its December 31, Year 2, balance sheet for the Year 1 and Year 2 sales?
a.
$250,000
b.
$225,000
c.
$160,000
d.
$150,000
Explanation
Choice “a” is correct. The total deferred gross profit equals the deferred gross profit from Year 1 sales plus the deferred gross profit from Year 2 sales.
Year 2 Year 1
Sales $ 900,000 $ 600,000
Collections:
Year 1 sales (300,000)
Year 2 sales (300,000)
Written off:
Year 1 sales (200,000)
Year 2 sales (50,000)
Installment receivable 550,000 100,000
GP % 40% 30%
Deferred gross profit $ 220,000 $ 30,000
Total deferred gross profit = $30,000 + $220,000 = $250,000
Choices “d”, “c”, and “b” are incorrect. The total deferred gross profit equals the deferred gross profit from Year 1 sales plus the deferred gross profit from Year 2 sales.
My Doubt : Why do we have to deduct the writeoff amount ? Why can we not take the collections amount and calculate gross profit on it,?
Thanks
BEC - 78
AUD - 69,72,78
FAR - 73, 77
REG - 74, 74, April 20(Monday). Not anymore (Fingers Crossed xxxxx)
.