Question 1 : A company incurred the following costs and received the following c
ID: 2459966 • Letter: Q
Question
Question 1: A company incurred the following costs and received the following collections from customers
Costs
Collections
2001
$120,000
-0-
2002
20,000
$ 80,000
2003
20,000
$ 40,000
2004
10,000
$100,000
2005
-0-
$ 8,000
(a) If the company used the cost recovery method of revenue recognition, the income that should be recognized in 2003 is ___________________ (show your calculation).
(b) If the cost recovery method continues to be used through 2004, the amount of 2004 income that should be recognized is ____________________ (show your calculation).
Question 2. A corporation, which began business on January 1, 2006, appropriately uses the instalment sales method of reporting for accounting purposes. The following data were available for the years 2006 and 2007:
2006
2007
Instalment sales.........................
$1,050
$1,260
Cost of instalment sales.................
840
945
Cash collected on 2006 instalment sales..
450
375
Cash collected on 2007 instalment sales..
600
What should be the balance in the deferred gross profit account on December 31, 2007?
Costs
Collections
2001
$120,000
-0-
2002
20,000
$ 80,000
2003
20,000
$ 40,000
2004
10,000
$100,000
2005
-0-
$ 8,000
Explanation / Answer
Solution 1:
Solution 2:
2007 deferred gross profit balance:
2006 initial gross profit ($1,050 - $840) $ 210
Less: Gross profit recognized in 2006 (90)
Gross profit recognized in 2007 (75)
2007 initial gross profit ($1260 - $945) 315
Less: Gross profit recognized in 2007 (150)
Balance in deferred gross profit account $210
2006 Cost recovery %:
$840
= 80% (gross profit % = 20%)
$1,050
2007 Cost recovery %:
$945
= 75% (gross profit % = 25%)
$1260
2006 gross profit:
Gross profit recognized in 2006 = 450 X 20% = $90
2007 gross profit:
Cash collection from 2006 sales of $375 x 20% = $ 75
+ Cash collection from 2007 sales of $600 x 25% = 150
Total 2007 gross profit $225
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