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Installment Method & Cost Recovery

On December 15, 2011, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2012, and December 15, 2013. Ignore interest charges. Rigsby has a December 31 year-end.

In 2011, Rigsby would recognize realized gross profit of:
$500,000.
$0.
$900,000.
$100,000.

In 2012, Rigsby would recognize realized gross profit of:
$0.
$450,000.
$300,000.
$400,000

Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2010. Collections on this sale were $20,000 in 2010, $15,000 in 2011, and $20,000 in 2012.

In 2012, Reliable would recognize gross profit of:
$0.
$6,000.
$8,000.
$20,000.

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Solution Summary

On December 15, 2011, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2012, and December 15, 2013. Ignore interest charges. Rigsby has a December 31 year-end.

In 2011, Rigsby would recognize realized gross profit of:
$500,000.
$0.
$900,000.
$100,000.

In 2012, Rigsby would recognize realized gross profit of:
$0.
$450,000.
$300,000.
$400,000

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