Consider the following information about Rigsby Sales Company. On December 15, 2

Question

Consider the following information about Rigsby Sales Company. On December 15, 2016, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the instalment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual instalments payable on December 15, 2017, and December 15, 2018. Ignore interest charges. Rigsby has a December 31 year-end. 1. Show your calculation of how much gross profit, if any, Rigsby would recognize at December 31, 2016. 2. Show your calculation of how much gross profit, if any, Rigsby would recognize for 2017. 3. Show how Rigsby would report this sale on its December 31, 2016, Balance Sheet:

Explanation / Answer

Answer 1. Gross Profit Margin = Gross Profit / Sales Gross Profit = 4,500,000 (Sales) - 3,600,000 (Cost of Land) = 900,000 Gross Profit Margin = 900,000 / 4,500,000 = 20% Gross Profit to be Recogniszed in 2016 = 20% of $500,000 (Down payment) = $100,000 Answer 2. Gross Profit to be Recogniszed in 2017 = 20% of $2,000,000 (Down payment) = $400,000 Answer 3. Installment Receivable          4,000,000 Less: Deferred Gross Profit           (800,000) Installment Receivables (Net)          3,200,000

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