The Jones Company makes sales on an installment basis. In 2016, it sells items with a cost of $20 million. The total sales price is $25 million. Ignoring interest payments, customers pay in five equal installments, of $5 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the installment method of accounting for this sale, the gross profit it will recognize in 2016 is
A) Zero
B) $1 million
C) $5 million
D) $25 million

Question

Quizplus · Accepted Answer

Under the installment method, profit is recognized as cash is collected. The gross profit percentage is calculated as total gross profit divided by total sales price, which is ($25 million - $20 million) / $25 million = 20%. In 2016, the company receives $5 million, so the gross profit recognized is 20% of $5 million = $1 million.

The Jones Company Makes Sales on an Installment Basis