Answer:
a. Charter should recognize $80,000 as gross profit in 2013; and Charter should recognize $92,500 as gross profit in 2014.
b. The balance in the deferred gross profit account at the end of 2013 should be $105,000; and the balance in the deferred gross profit account at the end of 2014 should be $120,500.
Explanation:
Note: The data in this question are merged together. They are therefore sorted before answering the question. Kindly see the attached pdf file for the represented complete question with the sorted data.
The explanation to the answers is now given as follows:
Installment sales method can be described as a revenue recognition technique where a business postpone profit on a sale until when the cash is received from the buyer. A proportion of the profit based on gross profit percentage is then recorded as a profit for the period when the cash is received from the buyer.
This method can be applied to this question as follows:
Gross profit in 2013 = Installment sales in 2013 - Cost of installment sales in 2013 = $370,000 - $185,000 = $185,000
Gross profit percentage in 2013 = (Gross profit in 2013 / Installment sales in 2013) * 100 = ($185,000 / $370,000) * 100 = 0.50 * 100 = 50%
Gross profit in 2014 = Installment sales in 2014 - Cost of installment sales in 2014 = $360,000 - $252,000 = $108,000
Gross profit percentage in 2014 = (Gross profit in 2014 / Installment sales in 2014) * 100 = ($108,000 / $360,000) * 100 = 0.30 * 100 = 30%
a. How much gross profit should Charter recognize in 2013 and 2014 from installment sales?
<u>Gross to recognize in 2013:</u>
Gross recognized in 2013 in respect of 2013 instalment sales = Cash collections in 2013 on installment sales during 2013 * Gross profit percentage in 2013 = $160,000 * 50% = $80,000
Therefore, Charter should recognize $80,000 as gross profit in 2013.
<u>Gross to recognize in 2014:</u>
Gross recognized in 2014 in respect of 2013 instalment sales = Cash collections in 2014 on installment sales during 2013 * Gross profit percentage in 2013 = $110,000 * 50% = $55,000
Gross recognized in 2014 in respect of 2014 instalment sales = Cash collections in 2014 on installment sales during 2014 * Gross profit percentage in 2014 = $125,000 * 30% = $37,500
Total gross profit to recognize in 2014 = Gross recognized in 2014 in respect of 2013 instalment sales + Gross recognized in 2014 in respect of 2014 instalment sales = $55,000 + $37,500 = $92,500
Therefore, Charter should recognize $92,500 as gross profit in 2015.
b. What should be the balance in the deferred gross profit account at the end of 2013 and 2014?
<u>For 2013:</u>
Balance in the deferred gross profit in respect of 2013 account at the end of 2013 = Gross profit in 2013 - Gross recognized in 2013 in respect of 2013 installment sales = $185,000 - $80,000 = $105,000
Therefore, the balance in the deferred gross profit account at the end of 2013 should be $105,000.
<u>For 2014:</u>
Balance in the deferred gross profit account in respect of 2013 at the end of 2014 = Balance in the deferred gross profit in respect of 2013 account at the end of 2013 - Gross recognized in 2014 in respect of 2013 installment sales = $105,000 - $55,000 = $50,000
Balance in the deferred gross profit in respect of 2014 account at the end of 2014 = Gross profit in 2014 - Gross recognised in 2014 in respect of 2014 installment sales = $108,000 - $37,500 = $70,500
Total balance in the deferred gross profit account at the end of 2013 = Balance in the deferred gross profit account in respect of 2013 at the end of 2014 + Balance in the deferred gross profit in respect of 2014 account at the end of 2014 = $50,000 + $70,500 = $120,500
Therefore, the balance in the deferred gross profit account at the end of 2014 should be $120,500.