Parnell Industries
Parnell Industries sold a copy machine to Ranger Inc. on January 1, 2012. The sale price of the machine was $4,000,000 and the machine cost $3,200,000 for Parnell to manufacture. Ranger will make four payments at the end of each year, beginning with 2012, 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 Parnell Industries is certain that it will collect all four payments from Ranger Inc.what amount of gross profit should Parnell recognize in 2012 from the sale?
A) $0
B) $861,883
C) $172,377
D) $800,000

Question

Parnell Industries
Parnell Industries sold a copy machine to Ranger Inc. on January 1, 2012. The sale price of the machine was $4,000,000 and the machine cost $3,200,000 for Parnell to manufacture. Ranger will make four payments at the end of each year, beginning with 2012, 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 Parnell Industries is certain that it will collect all four payments from Ranger Inc.what amount of gross profit should Parnell recognize in 2012 from the sale?
A) $0 
B) $861,883 
C) $172,377 
D) $800,000

Quizplus · Accepted Answer

The gross profit should be recognized using the percentage-of-completion method, based on the percentage of the total contract price that has been earned in the current year.

In this case, since Parnell Industries sold the copy machine for $4 million and the cost of manufacturing was $3.2 million, the gross profit is $800,000. Therefore, choice D is the correct answer.

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