Anibonita Company began operations in 2013. It sells goods on installment sales
ID: 2502347 • Letter: A
Question
Anibonita Company began operations in 2013. It sells goods on installment sales contracts; these transactions are considered to be exceptional, so it uses the installment method to recognize gross profit. The following is a summary of the installment sales, costs of installment sales, operating expenses, and collections for 2013 and 2014:
Required:
To find Gross Profit, I did 80,000 sales - 52,000 cost of installment= $28,000, and the same for 2014 (90,000-59,400=30600). Should I have deducted operating expenses as well? Please Help! Feedback was provided below:
The installment method of recognizing revenue for installment sales is generally only acceptable in cases where there is a high degree of uncertainty over future collections, such that there is no reasonable basis for estimating the degree of collectability.
You should use the following steps to complete this exercise:
Hide Using the installment method to recognize gross profits, prepare 2013 and 2014 condensed income statements for Anibonita.ANIBONITA COMPANY Condensed Income Statements 2013 and 2014 For Year Ended
December 31
2013 For Year Ended
December 31
2014 Gross profit $ $ Operating expenses Net income $ $
To find Gross Profit, I did 80,000 sales - 52,000 cost of installment= $28,000, and the same for 2014 (90,000-59,400=30600). Should I have deducted operating expenses as well? Please Help! Feedback was provided below:
Anibonita Company began operations in 2013. It sells goods on installment sales contracts; these transactions are considered to be exceptional, so it uses the installment method to recognize gross profit. The following is a summary of the installment sales, costs of installment sales, operating expenses, and collections for 2013 and 2014: Using the installment method to recognize gross profits, prepare 2013 and 2014 condensed income statements for Anibonita. To find Gross Profit, I did 80,000 sales - 52,000 cost of installment= $28,000, and the same for 2014 (90,000-59,400=30600). Should I have deducted operating expenses as well? Please Help! Feedback was provided below:Explanation / Answer
OK under the installment method you just recognize revenues as the cash is collected. based on the gross profit ratio for the sales in question. The 2013 gross profit ratio was 28,000/80,000= 0.35 and for 2014 30,600/90,000=0.34
So since 42,000 of 2013 sales was collected in 2013 you would have 42,000 of sales, 42,000*.35= 14,700 of gross profit. Suntract operating expenses of 13,000 to get net profit of 1,700. For 2014 you would have sales of 21,000 from 2013 and 21,000*.35 = 7,350 of gross profit. From 2014 cash collections you would have 41,000 of sales and 41,000*.34= 13,940 of gross profit. So sales for 2014 would be 21,000+41,000= 62,000 and gross profit would be 7,350 +13,940= 21,290 of total gross profit. Subtract operating expenses of 15,000 from this to get 6,290 of net income.
Hope this helps.