oct31class (1) - Installment Sales Method The installment...

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Unformatted text preview: Installment Sales Method The installment sales method recognizes the gross profit by applying the gross profit percentage on the sale to the amount of cash actually collected. E 5-2: Installment sales method Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2011 and 2012: 1. How much gross profit should Charter recognize in 2011 and 2012 from installment sales? E 5-2: Installment sales method Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2011 and 2012: 1. How much gross profit should Charter recognize in 2011 from installment sales? 2011: ($360,000 234,000)/$360,000 = 35% gross profit 2011 gross profit: Cash collection from 2011 sales of $150,000 x 35% = $52,500 E 5-2: Installment sales method Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2011 and 2012: 1. How much gross profit should Charter recognize in 2012 from installment sales? 2012: ($350,000 245,000)/$350,000 = 30% gross profit 2012 gross profit: Cash collection from 2011 sales of $100,000 x 35% = $ 35,000 + Cash collection from 2012 sales of $120,000 x 30% = 36,000 Total 2012 gross profit $ 71,000 2. What should be the balance in the deferred gross profit account at the end of 2011 and 2012? 2. What should be the balance in the deferred gross profit account at the end of 2011 and 2012? 2011 deferred gross profit balance: 2011 initial gross profit ($360,000 234,000) $126,000 Less: Gross profit recognized in 2011 (52,500 ) Balance in deferred gross profit account $73,500 2012 deferred gross profit balance: 2011 initial gross profit ($360,000 234,000) $ 126,000 Less: Gross profit recognized in 2011 (52,500) Gross profit recognized in 2012 (35,000) 2012 initial gross profit ($350,000 245,000) 105,000 Less: Gross profit recognized in 2012 (36,000 ) Balance in deferred gross profit account $107,500 Cost Recovery Method The cost recovery method defers all gross profit recognition until cash equal to the cost of the item sold has been collected. Cost Recovery Method: Example The sales agreement requires the customer to make four equal annual payments of $200,000, beginning November 1, 2011. The land cost $560,000 to develop. The companys fiscal year ends on December 31. Date Cash Collected Cost Recovery Gross Profit Recognized Nov. 1, 2011 $ 200,000 $ 200,000 $ - Nov. 1, 2012 200,000 200,000 - Nov. 1, 2013 200,000 160,000 40,000 Other types of delays (deferrals) 1. Multiple elements (bundles) 2. Right of return Software and Other Multiple-Deliverable Arrangements If a sale includes multiple elements (software, future upgrades, post-contract...
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This note was uploaded on 11/20/2011 for the course FINANCE 640,722 taught by Professor Chabiyo,reeves during the Fall '11 term at Ohio State.

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oct31class (1) - Installment Sales Method The installment...

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