On July 1, 2013, the Foster Company sold inventory to the Slate Corporation for
ID: 2426007 • Letter: O
Question
On July 1, 2013, the Foster Company sold inventory to the Slate Corporation for $308000. Terms of the sale called for a down payment of $77000 and three annual installments of $77000 due on each July 1, beginning July 1, 2014. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $125900. The company uses the perpetual inventory system. Required: 1. Compute the amount of gross profit to be recognized from the installment sale in 2013, 2014, 2015, and 2016 using point of delivery revenue recognition. Ignore interest charges. 2. Repeat requirement 1 applying the installment sales method. 3. Repeat requirement 1 applying the cost recovery method.Explanation / Answer
1) Gross profit by point of delivery revenue recognition:
Under this method Revenue is recognized at the time of delivery of goods or when the ownership of goods is transferred so By this method goods are delivered in 2013 only so revenue as well as gross profit will recognized in 2013.
Gross profit = Sales - COGS = $308,000 - $ 125,900 = $182,100.
And in rest of the years no gross profit will be realized.
2) Installment method.
Under this method the revenue and gross profit will be recognized on the basis of installment received. Total gross profit will be $410,000 - $ 143,500 = $266,500 only but will be recognized on the basis of installment received.
Gross profit %age = $182,100/$308,000 = 59.12%
Gross profit will be recognized = Installment received X Gross profit %age
2013 = $77,000 X 59.12% = 45,525
2014 = $77,000 X 59.12% = 45,525
2015 = $77,000 X 59.12% = 45,525
2016= $77,000 X 59.12% = 45,525
3) Cost recovery Method
Under cost recovery method the gross profit is realized when cost of the goods are recovered as the cost recovered, gross profit is recognized in books
Particulars
Cost Left
Installment received
Cost Left
Gross Profit realized
2013
$125,900
$77,000
$48,900
Nil
2014
$48,900
$77,000
0
$28,100
2015
0
$77,000
0
$77,000
2016
0
$77,000
0
$77,000
Total
$182,100
Particulars
Cost Left
Installment received
Cost Left
Gross Profit realized
2013
$125,900
$77,000
$48,900
Nil
2014
$48,900
$77,000
0
$28,100
2015
0
$77,000
0
$77,000
2016
0
$77,000
0
$77,000
Total
$182,100
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