On January 1, 2014, Orton Co. sold a used machine to King, Inc. for $1,050,000. On this date, the machine had a depreciated cost of $735,000. King paid $150,000 cash on January 1, 2014 and signed a $900,000 note bearing interest at 10%. The note was payable in three annual installments of $300,000 plus interest beginning January 1, 2015. Orton appropriately accounted for the sale under the installment-sales method. King made a timely payment of the first installment on January 1, 2015 of $390,000, which included interest of $90,000 to date of payment. At December 31, 2015, Orton has deferred gross profit of

Question

Quizplus · Accepted Answer

Under the installment-sales method, gross profit is recognized in proportion to the cash collected from the buyer. The gross profit percentage is calculated as follows:

Gross Profit Percentage = Gross Profit / Total Contract Price
Gross Profit Percentage = ($1,050,000 - $735,000) / $1,050,000
Gross Profit Percentage = 30%

Orton has recognized 30% of the contract price as gross profit in 2014, which is $315,000 ($1,050,000 x 30%). The cash collected in 2014 was $150,000, leaving a deferred gross profit of $165,000 ($315,000 - $150,000).

In 2015, King paid $390,000, of which $90,000 was interest. The remaining $300,000 was applied to reduce the note payable balance to $810,000 ($900,000 - $300,000). Orton recognized 30% of the $300,000 cash received in 2015 as gross profit, which is $90,000 ($300,000 x 30%). The total recognized gross profit in 2015 is $90,000, leaving a deferred gross profit of $75,000 ($165,000 - $90,000).

Therefore, the deferred gross profit at December 31, 2015 is $180,000 ($165,000 + $75,000), which corresponds to Choice C.