Carperter Company has used the installment method of accounting since it began operations at the beginning of 2015. The following information pertains to its operations for 2015: $$\begin{array} { l r }
\text { Installment sales } & \$ 2,800,000 \
\text { Cost of installment sales } & 1,960,000 \
\text { Collections of installment sales } & 1,120,000 \
\text { General and administrative expenses } & 280,000
\end{array}$$ The amount to be reported on the December 31, 2015 balance sheet as Deferred Gross Profit should be
A) $ 336,000.
B) $ 504,000.
C) $ 672,000.
D) $1,680,000.

Question

Carperter Company has used the installment method of accounting since it began operations at the beginning of 2015. The following information pertains to its operations for 2015: $$\begin{array} { l r } 
\text { Installment sales } & \$ 2,800,000 \
\text { Cost of installment sales } & 1,960,000 \
\text { Collections of installment sales } & 1,120,000 \
\text { General and administrative expenses } & 280,000
\end{array}$$ The amount to be reported on the December 31, 2015 balance sheet as Deferred Gross Profit should be
A) $ 336,000.
B) $ 504,000.
C) $ 672,000.
D) $1,680,000.

Quizplus · Accepted Answer

Deferred Gross Profit is calculated as the gross profit on installment sales not yet realized, i.e., on the portion of sales for which cash has not been collected. Gross profit on sales is calculated as sales minus the cost of those sales. For Carpenter Company, the gross profit on installment sales is $2,800,000 - $1,960,000 = $840,000. The percentage of gross profit is $840,000 / $2,800,000 = 30%. Collections were $1,120,000, so the uncollected portion is $2,800,000 - $1,120,000 = $1,680,000. Therefore, the deferred gross profit is 30% of $1,680,000, which equals $504,000.

Carperter Company Has Used the Installment Method of Accounting Since