Ford Appliance Center records revenue on the installment sales method. The following information is available for the first two years of business.
$\begin{array}{lrr}&\text { Year } 1&\text { Year } 2\
\text { Sales } & \$ \overline{200,000} & \$ 2 \overline{50,000} \
\text { Cost of goods sold } & 140,000 & 162,500 \
\text { Cash collections: } & & \
\quad \text { Year 1 sales } & 100,000 & 80,000 \
\quad \text { Year 2 sales } & & 130,000
\end{array}$
-Which one of the following entries properly records realized gross profit on installment sales of Year 1 in Year 2?
A) DR Deferred gross profit-Year 1$\quad$$\quad$60,000
DR Deferred gross profit-Year 2$\quad$$\quad$87,500
CR Realized gross profit on installment sales$\quad$$\quad$147,500
B) DR Deferred gross profit Adjustment to Accounts $\quad$$\quad$24,000
Receivable-Year 1
CR Recognized gross profit on installment
sales-Year 1 $\quad$$\quad$24,000
C) DR Installment sales revenue$\quad$$\quad$69,500
CR Realized gross profit on installment sales$\quad$$\quad$69,500
D) DR Installment sales revenue$\quad$$\quad$87,500
CR Realized gross profit on installment sales$\quad$87,500

Question

Ford Appliance Center records revenue on the installment sales method. The following information is available for the first two years of business.
$\begin{array}{lrr}&\text { Year } 1&\text { Year } 2\
\text { Sales } & \$ \overline{200,000} & \$ 2 \overline{50,000} \
\text { Cost of goods sold } & 140,000 & 162,500 \
\text { Cash collections: } & & \
\quad \text { Year 1 sales } & 100,000 & 80,000 \
\quad \text { Year 2 sales } & & 130,000
\end{array}$
-Which one of the following entries properly records realized gross profit on installment sales of Year 1 in Year 2?
A) DR Deferred gross profit-Year 1$\quad$$\quad$60,000
DR Deferred gross profit-Year 2$\quad$$\quad$87,500
CR Realized gross profit on installment sales$\quad$$\quad$147,500
B) DR Deferred gross profit Adjustment to Accounts $\quad$$\quad$24,000 
Receivable-Year 1
CR Recognized gross profit on installment 
sales-Year 1 $\quad$$\quad$24,000 
C) DR Installment sales revenue$\quad$$\quad$69,500
CR Realized gross profit on installment sales$\quad$$\quad$69,500
D) DR Installment sales revenue$\quad$$\quad$87,500
CR Realized gross profit on installment sales$\quad$87,500

Quizplus · Accepted Answer

The gross profit for Year 1 sales is calculated as sales minus cost of goods sold (\$200,000 - \$140,000 = \$60,000), which is a 30% gross profit rate (\$60,000 / \$200,000). In Year 2, \$80,000 was collected on Year 1 sales. The realized gross profit on these collections is 30% of \$80,000, which equals \$24,000. This is the amount that should be recognized as realized gross profit for Year 1 sales in Year 2, matching option B.

Ford Appliance Center Records Revenue on the Installment Sales Method