Folio Corp. Folio Corp. sold a paper machine to Library Inc. on January 1, 2007. The sale price of the machine was $4,000,000 and the machine cost $3,200,000 for Folio to manufacture. Library will make four payments at the end of each year, beginning with 2007, of $1,261,883 each. The four payments of $1,261,883 when discounted at 10% have a present value of $4,000,000. An amortization table appears below:
If Folio Corp. is certain that it will collect all four payments from Library Inc. what amount of gross profit should Folio recognize in 2007 from the sale?
A) $0
B) $861,883
C) $172,377
D) $800,000

Question

Folio Corp. Folio Corp. sold a paper machine to Library Inc. on January 1, 2007. The sale price of the machine was $4,000,000 and the machine cost $3,200,000 for Folio to manufacture. Library will make four payments at the end of each year, beginning with 2007, of $1,261,883 each. The four payments of $1,261,883 when discounted at 10% have a present value of $4,000,000. An amortization table appears below:
 If Folio Corp. is certain that it will collect all four payments from Library Inc. what amount of gross profit should Folio recognize in 2007 from the sale?
A) $0 
B) $861,883 
C) $172,377 
D) $800,000

Quizplus · Accepted Answer

The gross profit should be recognized in proportion to the percentage of completion of the sale. Since Library Inc. will make four payments of equal amounts over four years, the percentage of completion for each year will be 25% (1/4). 
Therefore, the gross profit that should be recognized in 2007 is: 
($4,000,000 sale price - $3,200,000 cost) x 25% = $200,000 x 4 = $800,000 
So, the correct answer is option D.