Question

Sell2All, Inc. accounts for its revenues under the installment sales method. In year​ 1, Sell2All sold inventory with a cost of​ $300,000 for​ $400,000 and collected​ $100,000. In year​ 2, Sell2All sold inventory with a cost of​ $500,000 for​ $750,000 and collected​ $400,000, including​ $100,000 related to the year 1 sales and​ $300,000 related to the year 2 sales. What amount of earned gross profit should Sell2All report on its December​ 31, year 2 balance sheet?

A.$400,000

B.​$100,000

C.​$125,000

D.​$133,200

Answer 1

Solution:

The correct answer is C. $125,000

Sell2All Inc. should report earned gross profit of $125,000 as at December 31^st, year 2 balance sheet.

 

Calculate gross profit margin:

Gross profit margin=$\frac{Revenue - Cost\; of\; sales}{Revenue} \times 100$

Year 1 Gross profit = $\frac{400,000 - 300,000}{400,000}\times 100 = 25\%$

Year 1 earned gross profit = Amount collected $\times$ gross profit margin

= 100,000$\times$ $25\%$ = $\$25,000$

Year 2 earned gross profit = 400,000 $\times$ $25\%$ = $\$100,000$

Total gross profit earned to be recorded on the year 2 balance sheet as at December 31^st = 25,000 + 100,000 = $\$125,000$