On September 1, Year 1, Rodriguez Company sells inventory costing $240,250 for $

Question

On September 1, Year 1, Rodriguez Company sells inventory costing $240,250 for $775,000. The sales agreement states that the buyer will pay $150,000 down and 25 equal monthly installment payments, with the first payment beginning on October 1, Year 1. Required Compute the amount of gross profit to be recognized for each of the three years. Note: Assume that since collection is not assured (significant uncertainty), the company has decided to use the installment sales method of recognizing revenue. Year 1 Year 2 Year 3: Clear Undo Help

Explanation / Answer

Cost of inventory=$240,250.

Sales price=$775,000 -$240,250.

=$534,750.

Received in the first year=$150,000.

Balance to be received in 25 months in equal instalments=$534,750./25

=$21,390.

The amount received in balance 4 months of year 1=$21,390 *4

=$85,560.

So, the amount of sale consideration received in year 1=$150,000+$85,560.

=$235,560.

Amount received in year 2 =$21390*12

=$256,680.

Amount received in year 3 is balance 25-4-12 months =9 months.

=$21390*9

=$192,510.

% of sales consideration received in year 1=$235,560./$775,000

=30.39%

Gross profit on the transaction for the year 1=($775,000-$240,250)*30.39%

=$162,536.4.

Income to be recognized in year 2=($775,000-$240,250)*$256,680./$775,000

=$171,109.2

Income to be recognized in year 3=($775,000-$240,250)*$192,510./$775,000

=$132,831.9

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