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 uncertain that it will collect all four payments from Library Inc. and uses the installment method of accounting for revenue recognition 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 uncertain that it will collect all four payments from Library Inc. and uses the installment method of accounting for revenue recognition 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

Folio Corp. should recognize gross profit on the installment method based on the proportion of cash received to the total contract price. In this case, the total contract price is $4,000,000 and the cash received in 2007 is $1,261,883, which represents 31.547% of the total contract price. Therefore, Folio should recognize gross profit of 31.547% of the gross profit on the sale, which is $800,000 - $3,200,000 = $600,000.

Gross profit to be recognized = 31.547% x $600,000 = $189,883

Therefore, the correct answer is (C) $172,377, which is the closest option to the calculated gross profit of $189,883.