A firm uses the instalment method of revenue recognition on an item with a cash selling price of $1,000 and cost of $600. During the year of sale, the firm received $250 from the customer. Therefore, the net instalment account receivable equals which of the following amounts at the end of the year of sale?
A) $750
B) $450
C) $300
D) $400

Question

Quizplus · Accepted Answer

The instalment method of revenue recognition involves recognizing revenue and cost of goods sold proportionately over the period of the installment agreement. In this case, the gross profit margin is $400 ($1,000 - $600) and the proportion of the item sold is 25% ($250 / $1,000). Therefore, the net instalment account receivable at the end of the year of sale is $450 ($1,000 - $400 x 25%).

A Firm Uses the Instalment Method of Revenue Recognition on an Item