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I am having trouble to understand why the deferred gross profit on year 3 calculation used the installment receivables at year -end on year 3 sales of 30,000 instead of 60,000 in the following example. Please help. Thanks so much.
Lang Co. uses the installment method of revenue recognition. The following data pertain to Lang’s installment sales for the years ended December 31, Year 3 and Year 4:
Year 3 Year 4
Installment receivables at year-end on Year 3 sales $ 60,000 $ 30,000
Installment receivables at year-end on Year 4 sales – 69,000
Installment sales 80,000 90,000
Cost of sales 40,000 60,000
What amount should Lang report as deferred gross profit in its December 31, Year 4, balance sheet?
a. $33,000
b. $38,000
c. $23,000
d. $43,000
Choice “b” is correct.
Gross profit = Sales − Cost of sales
Year 3: [$80,000 − $40,000] = $40,000
Year 4: [$90,000 − $60,000] = $30,000
Gross profit rate = Gross profit / Sales
Year 3: [$40,000/$80,000] = 50%
Year 4: [$30,000/$90,000] = 33.3%
Deferred gross profit = GP rate x AR
on Year 3 sales @ 12/31/Y4 = $15,000 [50% x $30,000]
on Year 4 sales @ 12/31/Y4 = $23,000 [33.3% x $69,000]
Total deferred gross profit to be reported = $38,000 [$15,000 + $23,000].
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