Question:
Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual
inventory system is used. Information related to installment sales for 2013 and 2014 is as follows:
Required:
1. Calculate the amount of gross profit that would be recognized each year from installment sales.
2. Prepare all necessary journal entries for each year.
3. Repeat requirements 1 and 2 assuming that Ajax uses the cost recovery method to account for its
installment sales.
Answer:
Requirement 1
2013 cost recovery % :
$180,000
= 60% (gross profit % = 40%)
$300,000
2014 cost recovery %:
$280,000
= 70% (gross profit % = 30%)
, $400,000
2013 gross profit:
Cash collection from 2013 sales = $120,000 x 40% = $48,000
2014 gross profit:
Cash collection from 2013 sales = $100,000 x 40% = $ 40,000
+ Cash collection from 2014 sales = $150,000 x 30% = 45,000
Total 2014 gross profit $85,000
Requirement 2
2013
Installment receivables.......................................................................... 300,000
Inventory.......................................................................................... 180,000
Deferred gross profit......................................................................... 120,000
To record installment sales
Cash ..........................................................................120,000
Installment receivables..................................................................... 120,000
To record cash collections from installment sales
Deferred gross profit.............................................................................. 48,000
Realized gross profit......................................................................... 48,000
Ajax Company appropriately accounts for certain sales using the installment sales method. The perpetual
inventory system is used. Information related to installment sales for 2013 and 2014 is as follows:
Required:
1. Calculate the amount of gross profit that would be recognized each year from installment sales.
2. Prepare all necessary journal entries for each year.
3. Repeat requirements 1 and 2 assuming that Ajax uses the cost recovery method to account for its
installment sales.
Answer:
Requirement 1
2013 cost recovery % :
$180,000
= 60% (gross profit % = 40%)
$300,000
2014 cost recovery %:
$280,000
= 70% (gross profit % = 30%)
, $400,000
2013 gross profit:
Cash collection from 2013 sales = $120,000 x 40% = $48,000
2014 gross profit:
Cash collection from 2013 sales = $100,000 x 40% = $ 40,000
+ Cash collection from 2014 sales = $150,000 x 30% = 45,000
Total 2014 gross profit $85,000
Requirement 2
2013
Installment receivables.......................................................................... 300,000
Inventory.......................................................................................... 180,000
Deferred gross profit......................................................................... 120,000
To record installment sales
Cash ..........................................................................120,000
Installment receivables..................................................................... 120,000
To record cash collections from installment sales
Deferred gross profit.............................................................................. 48,000
Realized gross profit......................................................................... 48,000
