Question

Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is unable to reliably predict bad debts. During 2014, Coaster sold equipment costing $4,800,000 for $7,200,000. The terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments for 2014 were made on schedule. Round answers to two places. Assuming that Coaster uses the installment-sales method of accounting for its installment sales, what amount of realized gross profit will Coaster report in its income statement for the year ended December 31, 2014

Answer 1

Answer:

$1,120,000

Explanation:

As per the installment-sales method of accounting, we first calculate the gross profit % and then apply this % to the total amount collected in sales by the end of the period. The calculations are as follows.

Sales                                                                         $7,200,000

Less: Cost of sales                                                   ($4,800,000)

Gross profit                                                               $2,400,000

Gross profit % ($2,400,000 / $7,200,000)             33.33%

Down payment (20% x $7,200,000)                       $1,440,000

Installments during 2014                                          $1,920,000

(80% x $7,200,000 x 4/12)                                

Total amount collected                                             $3,360,000

Gross profit recognized (33.33% x $3,360,000)     $1,120,000