Ajax Company appropriately accounts for certain sales using the installment sale

Question

Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual inventory system is used. Information related to installment sales for 2013 and 2014 is as follows: 2013 2014 Sales $ 310,000 $ 410,000 Cost of sales 201,500 246,000 Customer collections on: 2013 sales 125,000 105,000 2014 sales 155,000 Required: 1. Calculate the amount of gross profit that would be recognized each year from installment sales. 2.1 Prepare all necessary journal entries for the year 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) 2.2 Prepare all necessary journal entries for the year 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) Assume that Ajax uses the cost recovery method to account for its installment sales. 3.1 Compute the following: 3.2 Prepare all necessary journal entries for the year 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.) 3.3 Prepare all necessary journal entries for the year 2014. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

Explanation / Answer

Solution:

Installment Sales Method:

Calculation of the amount of gross profit that would be recognized each year from installment sales:

Gross Profit Ratio = Gross Profit / Sales

Gross Profit Recognized:

Journal Entries for the year 2013:

Journal Entries for the year 2014:

Cost Recovery Method:

Note: The cost recovery method delays recognizing profit until the cash received is in excess of the cost of goods sold.

Calculation of Gross Profit:

Journal Entries for the year 2013:

Journal Entries for the year 2014:

2013 2014 Sales (a) 310,000 410,000 Less Cost of Sales 201,500 246,000 Gross Profit (b) 108,500 164,000 Rate of Gross Profit (b/a) 0.35 0.4 35% 40%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.