[Jasminekoko]

I am having trouble to understand why the deferred gross profit on year 3 calculation used the installment receivables at year -end on year 3 sales of 30,000 instead of 60,000 in the following example. Please help. Thanks so much.

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].

[Determined CPA]

Year 3:

Sales – Cost = Gross Profit

80,000-40,000=40,000

Gross profit/sales = GP%

40,000/80,000=.50

So year 3 gross profit percentage is 50%

Year 4:

Sales – Cost = Gross Profit

90,000-60,000=30,000

Gross profit/sales = GP%

30,000/90,000=.33

So year 3 gross profit percentage is 33.3%

This question is asking for the deferred gross profit in year 4.

Deferred gross profit = gross profit % times A/R

In year 4, there were 2 receivables – one was from sales in year 3 and one was from sales in year 4

you have to use the GP% that relates to the year of the receivable

So in this question, the receivable of 30,000 is from year 3 sales, so you will need to take that 30,000 * .5 = 15,000

Then you take the receivable of 69,000 from year 4 sales and times that by the .33 = 23,000

Total = 38,000

hope this helps.

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Jasminekoko]

Hi DeterminedCPA,

Thanks for your response. I got it. Thanks so much for your help. Is there a way I can ask you more questions directly? Thank you.

in the meantime, I am going to post questions on A71.

[Determined CPA]

If you post to the far review page I'll see it and help with everything I can! I am on this site far too much so I'll see anything you post 🙂

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Jasminekoko]

:-). Thanks.

[Author]

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