Swift Corp., a capital goods manufacturing business that started on January 4, 2
ID: 2388759 • Letter: S
Question
Swift Corp., a capital goods manufacturing business that started on January 4, 2012, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales. The following data were taken from the 2012 and 2013 records.
2012 2013
Installment sales $480,000 $620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2012 $130,000 $240,000
Cash collections on sales of 2013 –0– $ 160,000
The amounts given for cash collections exclude amounts collected for interest charges.
Instructions
(a)
Compute the amount of realized gross profit to be recognized on the 2013 income statement, prepared using the installment-sales method. (Round percentages to three decimal places.)
(b)
State where the balance of Deferred Gross Profit would be reported on the financial statements for 2013.
(c)
Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.
(CIA adapted)
Explanation / Answer
a) Under installation sales method revenue and expense are recognized at the time of cash collection rather than at the time of sale
As of 2013,
Revenue = $160,000 +$240,000
Gross profit percentage = 28% for 2013 and 25% for 2012
Gross profit = $104,800
b)
The deferred gross profit is recognized in income in subsequent periods when the installment receivables are collected in cash.
c) Under Cost recovery method no gross profit is recognized until all the cost of the sales has been recovered.
Cost of sales in 2012 = 75% * $480000 = $360,000
Amount collected in 2012 &2013 = $370,000
Gross profit realised in 2013 = $10,000
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