Summary Business Accounting

Question:

On July 1, 2013, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the

sale called for a down payment of $75,000 and three annual installments of $75,000 due on each July 1,

beginning July 1, 2014. Each installment also will include interest on the unpaid balance applying an

appropriate interest rate. The inventory cost Foster $120,000. The company uses the perpetual inventory

system.

Required:

1. Compute the amount of gross profit to be recognized from the installment sale in 2013, 2014, 2015,

and 2016 using point of delivery revenue recognition. Ignore interest charges.

2. Repeat requirement 1 applying the installment sales method.

3. Repeat requirement 1 applying the cost recovery method.



Answer:



Requirement 1

Year Income recognized

2013 $180,000 ($300,000 – 120,000)

2014 -0-

2015 -0-

2016 -0-

Total $180,000

Requirement 2

Cost recovery %:

$120,000

------------- = 40% (gross profit % = 60%)