Cowden Properties sold a condominium to Ms.Roberts for $90,000.Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000.The contract for sale required Ms.Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example.Under the installment method, how much net profit would Cowden recognize in year 1?
A)$1,667
B)$2,667
C)$3,333
D)$3,667
E)$5,000

Question

Quizplus · Accepted Answer

Using the installment method, Cowden will recognize a portion of the profit each year based on the ratio of the payment received in that year to the total selling price ($90,000). In year 1, Cowden will recognize profit equal to the percentage of the total profit that corresponds to the $5,000 payment. That percentage is calculated as (5,000 / 90,000) = 5.56%. Therefore, Cowden will recognize profit of $1,667 in year 1 (5.56% of the total profit of $50,000 [$90,000 - ($40,000 + $20,000)]).

Cowden Properties Sold a Condominium to Ms