Accounting for Installment Sales

Question 1

Cash Method

Answer 1

recognize revenue when cash comes in

Question 2

when is it used

Answer 2

when there is no reasonable basis for estimating the degree of collectibility

Question 3

Steps

Answer 3

4

Question 4

Step 1

Answer 4

Gross Profit = sales -cogs

Question 5

Step 2

Answer 5

Gross profit percentage = gross profit / sale price

Question 6

Step 3

Answer 6

Earned gross profit = cash collections * gross profit percentage

Question 7

Collections

Answer 7

Sale on installment - ending installment accounts receivable

Question 8

Deferred gross profit

Answer 8

ending installment accounts receivable * gross profit percentage

Question 9

why is there deferred gp

Answer 9

because gp is not recognized till cash is actually received
deferred gp year 4 included deferred gp from year 3 that has still not been recognized * percentage + deferred gp year 4 * percentage

Question 10

B/S presentation

Answer 10

Accounts receivable - deferred gp = balance

deferred gp is a contra assets account

Question 11

JE

Answer 11

Excel; example on page 33

Question 12

Cost recovery method

Answer 12

no profit recognized till all costs have been recovered;
at the time of sale expected profit on the sale of this good is recorded in deferred gross revenue
when you receive cash they are first applied to the recovery of product costs
collections after all the costs have been recovered are released and recorded as profit

Question 13

Journal entries

Answer 13

Excel

Question 14

Comparing the two

Answer 14

both are similar and can only be used when receivables are collected over an extended period of time and there is no reasonable basis for estimating collectibilility

Question 15

cost recovery method

Answer 15

most conservative method of revenue recognition