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Installment Method & Cost Recovery

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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

$2.19
See Also This Related BrainMass Solution

Installment Sales Method and Cost Recovery Method

(Installment-Sales Method and Cost Recovery) Kenny Corp., a capital goods manufacturing business that started on January 4, 2007, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales. The following data were taken from the 2007 and 2008 records.

2007 2008

Installment sales $480,000 $620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2007 $140,000 $240,000
Cash collections on sales of 2008 0 $180,000

Instructions

(a) Compute the amount of realized gross profit to be recognized on the 2008 income statement, prepared using the installment-sales method.

(b) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2008.

(c) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.

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