Please help! – I am having trouble with one of the Becker questions from Chapter 2 – Accounting for Installment Sales – Q1
The problem I am having is understanding how to calculate deferred gross profit on year 3 sales.
According to Becker it is saying we should multiply 50% x $30,000. But why do we multiply it by $30,000?
I am thinking hat we should multiply it by $60,000 (installment Receivable at year ned on Year 3 sales).
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?
Answer:
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].
BEC 5.31
FAR 86
REG 84
AUD 78
.