Question:
On October 1, 2013, the Marshall Company sold a large piece of machinery to the Hammond
Construction Company for $80,000. The cost of the machine was $40,000. Hammond made a down
payment of $10,000 and agreed to pay the remaining balance in seven equal monthly installments of
$10,000, plus interest at 12% on the unpaid balance, beginning November 1.
Required:
1. Identify three alternative methods for recognizing revenue and costs for the situation described and
compute the amount of gross profit that would be recognized in 2013 using each method.
2. Discuss the circumstances under which each of the three methods would be used.
Answer:
Requirement 1
The three methods that could be used to recognize revenue and costs for this situation are (1) point of
delivery, (2) the installment sales method, and (3) the cost recovery method.
2013 gross profit under the three methods:
(1) point of delivery:
$80,000 – 40,000 = $40,000
(2) installment sales method:
$40,000
= 50% = gross profit %
On October 1, 2013, the Marshall Company sold a large piece of machinery to the Hammond
Construction Company for $80,000. The cost of the machine was $40,000. Hammond made a down
payment of $10,000 and agreed to pay the remaining balance in seven equal monthly installments of
$10,000, plus interest at 12% on the unpaid balance, beginning November 1.
Required:
1. Identify three alternative methods for recognizing revenue and costs for the situation described and
compute the amount of gross profit that would be recognized in 2013 using each method.
2. Discuss the circumstances under which each of the three methods would be used.
Answer:
Requirement 1
The three methods that could be used to recognize revenue and costs for this situation are (1) point of
delivery, (2) the installment sales method, and (3) the cost recovery method.
2013 gross profit under the three methods:
(1) point of delivery:
$80,000 – 40,000 = $40,000
(2) installment sales method:
$40,000
= 50% = gross profit %
