Hart Co., which began operations on January 1, 2015, appropriately uses the inst

Question

Hart Co., which began operations on January 1, 2015, appropriately uses the installment-sales method of accounting. The following information pertains to Hartz's operations for the year 2015: Installment sales $2,400,000 Regular sales 960,000 Cost of installment sales 1,440,000 Cost of regular sales 576,000 General and administrative expenses 192,000 Collections on installment sales 576,000

The deferred gross profit account in Hartz's December 31, 2015 balance sheet should be

a. $230,400. b. $384,000. c. $729,600. d. $960,000.

Explanation / Answer

Compute the gross profit of the sales.

Gross profit = Installment sales - Cost of Installement sales = $2,400,000 - $1,440,000.

= $960,000.

Gross profit percentage = Gross Preoft / Installement sales = $960,000/$2,400,000 = 0.40 or 40%.

Gross profit to be recognized = Cash Collected * Gross profit percentage

= $576,000 * 0.40

= $230,400.

Gross profit to be recognised is $230,400.

deferred gross profit = Total Gross profit on installment sales - gross profit recognized

= $960,000 - $230,400

= $729,600.

Therefore, the correct answer is option C.

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