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installment question


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#1 sherry628

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Posted 23 June 2014 - 04:05 PM

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].

 

I don't understand why we should use $30,000 instead of $60,000 when calculating the deferred gross profit for year 3.  What do these two amounts--$60,000 and $30,000 mean here? Can any one help me? 



#2 justme

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Posted 25 June 2014 - 11:41 PM

Sherry628,

 

I will attempt to answer your question concerning why the $30000 should be used instead of the $60000.  I believe it's because it's the ending A/R.

 

Deferred G.P. = Ending A/R * G.P.%

 

So the ending A/R for year 3 in year 4 was $30000.

 

Anyone else care to confirm or correct my answer?  :)