[grahz]

Hi, I have a question about installment sales. I’m studying becker’s final review, and step #4 makes no sense to me. Here’s what they wrote:

*****

INSTALLMENT SALES METHOD (Cash basis)

Under the revenue recognition principle, revenue is recognized when the earnings process is complete, and

the earnings process is not complete until collection of the sales price is reasonably assured.

If no reasonable estimate can be made of the amount that will be collected, the installment method can be

used. As such, gross profit is not recognized until the cash is actually collected.

4 Steps

1. Gross profit = Sales – Cost of goods sold

2. Gross profit % = Gross profit / Sales

3. Earned gross profit =Cash collections x Gross profit %

4. Deferred gross profit =Installment receivables x Gross profit %

*****

I looked at my old accounting textbook, and it says “deferred gross profit = installment receivables – earned gross profit”. I agree with my old textbook – so is becker wrong? Or am I understanding the method incorrectly? Thanks!

It begins with a 75!!!

[Spur]

Ninja Notes say Dgp= A/R X GP%. I think what they mean by “installment recievables” is A/R.

FAR - Bad Fail '11, Fail '12, Fail '13, PASS It's a miracle!
AUD - Fail, PASS!!!!!!!!!!!!!!!!!!!!!!!
BEC - PASS!!!!!!!!
REG - PASS!!!!!!!! And I'm done!

[Anonymous]

@grahz : review the becker JOurnal entries.. it will make more sense. in terms of understanding ..

either you can calucalte Deferred GP—> Deferred gross profit =Installment receivables x Gross profit %

or by old text book.

but to speed up the calcualtion in MCQs – use the becker formula..

[MCLKT]

It's six of one half dozen the other.

Same thing, you are just getting to it differently.

I thought of it as CASH = NOW so if you use the collections x GP% you are claiming (recognizing) the income now.

AR = LATER if you are using the Uncollected Portion (AR) x GP% you are deferring the income for later.

Your text is stating the LATER version. Deferring your receivables less anything you have already earned (recognized).

If that way makes sense to you, and the others are confusing, then go with what you know. Just make sure you work many questions and you come to the same answer.

And be sure to know it front, back and upside down because they can give you bits and pieces and force you to back into some numbers using algebraic formulas.

A:[73]97 F:[74]85 R:86 B:[74]82
*NINJA 10 Pt. COMBO & Yaeger*

[MCLKT]

@Spur I agree with you. The installment receivables is the same as AR.

If I remember correctly you have to keep different jobs separate so you use the AR related to the installment job separate from other AR or other jobs.

A:[73]97 F:[74]85 R:86 B:[74]82
*NINJA 10 Pt. COMBO & Yaeger*

[grahz]

Thanks all! I understand it's a shortcut now, it was a strange shortcut to me. I also mistyped my old textbooks method for calculating deferred gross profit. In case anyone was interested, it SHOULD be:

Cash Collected (not Installment rRceivables)

Less Realized or Earned Gross Profit

==========================

Deferred Gross Profit

It begins with a 75!!!

[Author]

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