Knudsen Company sold $300,000 to customers on account during 2011, and collected $187,500 during the year. The company properly uses the installment sales method of revenue recognition due to the uncertainty of collection of these installment receivables. The company has determined that cost of sales for the $300,000 of sales was $240,000.
What is the correct balance of the company's Deferred Gross Profit account at the end of 2011, after the recognition of revenue for that year?

Question

Quizplus · Accepted Answer

The Deferred Gross Profit account is a contra-asset account that is used to reduce the balance of the Accounts Receivable account. The balance of the Deferred Gross Profit account at the end of the year is equal to the difference between the gross profit on the installment sales and the amount of gross profit that has been recognized in the income statement. In this case, the gross profit on the installment sales is $60,000 ($300,000 - $240,000), and the amount of gross profit that has been recognized in the income statement is $22,500 ($187,500 x 12.5%). Therefore, the balance of the Deferred Gross Profit account at the end of the year is $37,500 ($60,000 - $22,500).

Knudsen Company Sold $300,000 to Customers on Account During 2011