On August 31, 2016, the Silva Company sold merchandise to the Bendix Corporation

Question

On August 31, 2016, the Silva Company sold merchandise to the Bendix Corporation for $600,000. Terms of the sale called for a down payment of $120,000 and four annual installments of $120,000 due on each August 31, beginning August 31, 2017. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The book value of the merchandise on Silva's books on the date of sale was $360,000. The perpetual inventory system is used. The company's fiscal year-end is December 31 Required 1. Complete the table below by entering the amount of gross profit to be recognized in each of the five years of the installment sale applying each of the following methods: a. Point of delivery revenue recognition. b. Installment sales method. c. Cost recovery method. 8/31/16 8/31/17 8/31/18 8/31/19 8/31/20 Cash collections Gross profit recognized a. Point of delivery method b. Installment sales method C. Cost recovery method

Explanation / Answer

Total profit = $600,000 – 360,000 = $240,000 Installment sales method: Gross profit % = $240,000 ÷ $600,000 = 40% 8/31/2016 8/31/2017 8/31/2018 8/31/2019 8/31/2020 Cash collections $120,000 $120,000 $120,000 $120,000 $120,000 Gross profit recognized a. Point of delivery method $240,000 - 0 - - 0 - - 0 - - 0 - b. Installment sales method $48,000 $48,000 $48,000 $48,000 $48,000      (40% x cash collected) c. Cost recovery method - 0 - - 0 - - 0 - $120,000 $120,000 Point of Delivery Installment Sales Cost Recovery Debit Credit Debit Credit Debit Credit Installment receivable 600,000     Sales revenue 600,000 Cost of goods sold 360,000     Inventory 360,000 To record sale on 8/31/16. Installment receivable 600,000 600,000     Inventory 360,000 360,000     Deferred gross profit 240,000 240,000 To record sale on 8/31/16. Cash 120,000 120,000 120,000     Installment receivable 120,000 120,000 120,000 Entry made each Aug. 31. Deferred gross profit 48,000     Realized gross profit 48,000 To record gross profit. (entry made each Aug. 31) Deferred gross profit 120,000     Realized gross profit 120,000 To record gross profit. (entry made 8/31/19 & 8/31/20) Balance Sheet (Partial) Point of Delivery Installment Sales Cost Recovery December 31,2016 Assets Installment receivables                480,000                480,000             480,000 Less: Deferred gross profit                         -                 (192,000)           (240,000) Installment receivables, net $            480,000 $             288,000 $         240,000     December 31,2017 Assets Installment receivables                360,000                360,000             360,000 Less: Deferred gross profit                         -                 (144,000)           (240,000) Installment receivables, net $            360,000 $             216,000 $         120,000

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

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