Question:
Wolf Computer Company began operations in 2013. The company allows customers to pay in
installments for many of its products. Installment sales for 2013 were $1,000,000. If revenue is
recognized at the point of delivery, $600,000 in gross profit would be recognized in 2013. If the company
instead uses the cost recovery method, $100,000 in gross profit would be recognized in 2013.
Required:
1. What was the amount of cash collected on installment sales in 2013?
2. What amount of gross profit would be recognized if the company uses the installment sales method?
Answer:
Requirement 1
Cost of goods sold ($1,000,000 – 600,000) $400,000
Add: Gross profit if using cost recovery method 100,000
Cash collected $500,000
Requirement 2
$ 600,000
Gross profit percentage = = 60%
$1,000,000
Cash collected x Gross profit percentage = Gross profit recognized
$500,000 x 60% = $300,000 gross profit
Wolf Computer Company began operations in 2013. The company allows customers to pay in
installments for many of its products. Installment sales for 2013 were $1,000,000. If revenue is
recognized at the point of delivery, $600,000 in gross profit would be recognized in 2013. If the company
instead uses the cost recovery method, $100,000 in gross profit would be recognized in 2013.
Required:
1. What was the amount of cash collected on installment sales in 2013?
2. What amount of gross profit would be recognized if the company uses the installment sales method?
Answer:
Requirement 1
Cost of goods sold ($1,000,000 – 600,000) $400,000
Add: Gross profit if using cost recovery method 100,000
Cash collected $500,000
Requirement 2
$ 600,000
Gross profit percentage = = 60%
$1,000,000
Cash collected x Gross profit percentage = Gross profit recognized
$500,000 x 60% = $300,000 gross profit
