On December 15, 2016, Rigsby Sales Co. Sold a tract of land that cost $3,600,000

Question

On December 15, 2016, Rigsby Sales Co. Sold a tract of land that cost $3,600,000 for $5,000,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $440,000 with the balance in two equal installments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end.

At December 31, 2017, Rigsby would report in its balance sheet:

A. Realized gross profit of $440,000
B. Deferred gross profit of $638,400
C. Realized gross profit of $638,400
D. Cost of installment sales $1,641,600

Please show explanation, thank you!

Explanation / Answer

Rigsby Sales Co. Amount in $ Tract of Land cost 3600000 Sales Price 5000000 Gross Profit 1400000 Gross Profit Percentage 28 Down payment 440000 In 2016 Gross Profit Realised 123200 In 2017 Gross Profit Realised 638400 At December 31, 2017, Rigsby would report in its balance sheet: Deferred Gross Profit 638400 The deferred Gross Profit concept arises when a business uses the Installment sales approach to recognizing its sales transactions.Under the installment method only the gross profit of those sales for which cash payment has been received are recgnised.All gross profit associated with uncollected receivable are shown on the balance sheet as an offset to receivables where they remain until customer payment are received. The deferred amt of gross profit is stated on the balance sheet as as offset to the accounts receivale amount.

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