Charter Corporation, which began business in 2016, appropriately uses the instal

Question

Charter Corporation, which began business in 2016, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales made during 2016 and 2017: 2016 2017 Installment sales Cost of installment sales Cash collections on installment sales during: $380,000 $370,000 190,000 259,000 2016 2017 170,000 20,000 130,000 Required: 1. How much gross profit should Charter recognize in 2016 and 2017 from installment sales? 2016 2017 Gross profit 2. What should be the balance in the deferred gross profit account at the end of 2016 and 2017? 2016 2017 Balance in deferred gross profit account

Explanation / Answer

2016 2017 Installment sales $380,000 $370,000 Less : Cost of Installment sales $190,000 $259,000 Gross Profit $190,000 $111,000 Gross Profit % 50% 30% Answer 1 Gross profit recognised in 2016 = Cash collection in 2016 * Gross profit % in 2016 Gross profit recognised in 2016 = $170000*50% = $85000 Gross profit recognised in 2017 - Cash collections in 2017 from 2016 sales * Gross profit % in 2016 = $120000*50% = $60,000 - Cash collections in 2017 from 2017 sales * Gross profit % in 2017 = $130000*30% = $39,000 Gross profit recognised in 2017 $99,000 Answer 2 Balance in deferred gross profit account in 2016 = Gross profit in 2016 - recognised gross profit in 2016 = $190000 - $85000 = $105000 Balance in deferred gross profit account in 2017 = Gross profit in 2016 - Profit Recognised in 2016 & 2017 = $190000 - $85000 - $60000 = $45,000 = Gross profit in 2017 - Profit Recognised in 2017 = $111000 - $39000 = $72,000 Balance in deferred gross profit account in 2017 $117,000

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