Problem:
(Installment-Sales Method and Cost Recovery)
Kenny Harrison Corp., a capital goods manufacturing business that started on January 4, 2004, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales. The following data were taken from the 2004 and 2005 records.
2004 2005
Installment sales $480,000 $620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2004 $140,000 $240,000
Cash collections on sales of 2005 -0- $180,000
The amounts given for cash collections exclude amounts collected for interest charges.
Instructions:
(1) Compute the amount of realized gross profit to be recognized on the 2005 income statement, prepared using the installment-sales method.
(2) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2005.
(3) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.