115)Braun, Inc. appropriately uses the installment-sales method of accounting to

Question

115)Braun, Inc. appropriately uses the installment-sales method of accounting to recognize income in its financial statements. Some pertinent data relating to this method of accounting include:

What amount of installment accounts receivable should be presented in Braun's December 31, 2015 balance sheet?

2014 2015 Installment sales $750,000 $720,000 Cost of installment sales 570,000 504,000 Gross profit $180,000 $216,000 Rate of gross profit 24% 30% Balance of deferred gross profit at year end: 2014 $108,000 $ 36,000 2015 198,000 Total $108,000 $234,000

Explanation / Answer

An overview of the installment method is that someone using it defers the gross margin on a sale transaction until the actual receipt of cash. When accounts receivable are eventually collected, a portion of the deferred gross profit from the following calculation is recognized:   Gross profit % x Cash collected

Accounts receivable at the end of 2015 for sales made in 2014

= Gross profit deferred at the end of 2015/gross profit percentage

= $36000 / 24%

= $150000

Accounts receivable at the end of 2015 for sales made in 2015

= Gross profit deferred at the end of 2015/gross profit percentage

= $198000 / 30%

= $660000

Balance of accounts receivable at the end of 2015 = $150000+$660000 = $810000

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