EXERCISE 18-23 (10–15 minutes)

(a) Realized gross profit recognized in 2013 under the

installment-sales method of accounting is $83,000.
When gross profit is expressed as a percentage of cost,
it must be converted to percentage of sales to compute
the realized gross profit under the installment-sales
method of accounting. Thus, 2012 and 2013 gross profits
as a percentage of sales are 20% and 21.875%
respectively.

2013 2013
Sale Gross Profit Collections Realized
Year Percentage Profit
2012 .25/(1.00 + .25) = 20% $240,000 $48,000
2013 .28/(1.00 + .28) = 160,000 35,000
21.875%
TOTAL $83,000

(Note to instructor: The problem provides gross profit as a

percent of cost.)

(b) The balance of “Deferred Gross Profit” could be reported

on the balance sheet for 2013:

1. As a current liability on the theory that it is related

to Installment Accounts Receivables that are
normally treated as current assets;

2. As a deferred credit between liabilities and

stockholders’ equity. This treatment is criticized
because there is no obligation to outsiders; or

3. As an adjustment or offset to the related Installment

Accounts Receivable. This is because the deferred
gross profit is a part of revenue from installment
sales not yet realized. The related receivable will be
overstated unless the deferred gross profit is
deducted.
 On the other hand, the amount of deferred gross
profit has no direct relationship with the estimated
collectibility of the accounts receivable.

It is not a settled matter as to the proper classification

of “deferred gross profit” on the balance sheet when the
installment-sales method of accounting is used to
measure income. As indicated in the text, the FASB in
Statement of Financial Accounting Concepts No. 6
indicates that it conceptually is an asset valuation. We
support the FASB position.

(c) Gross profit as a percent of sales in 2012 is 20% (as

computed in (a) above); gross profit therefore is $96,000
($480,000 X .20) and the cost of 2012 sales is $384,000
($480,000 – $96,000). Because the amounts collected in
2012 ($130,000) and 2013 ($240,000) do not exceed the
total cost of $384,000, no profit is recognized in 2012 or
2013 on 2012 sales. Also, no profit is recognized on 2013
sales since the collections of $160,000 do not exceed the
total cost of $484,375 [$620,000 X (1 – .21875)].

EXERCISE 18-23 (10–15 minutes)

(a) Realized gross profit recognized in 2013 under the

installment-sales method of accounting is $83,000. When
gross profit is expressed as a percentage of cost, it must
be converted to percentage of sales to compute the
realized gross profit under the installment-sales method of
accounting. Thus, 2012 and 2013 gross profits as a
percentage of sales are 20% and 21.875% respectively.
EXERCISE 18-23 (Continued)

2013 2013
Sale Gross Profit Collections Realized
Year Percentage Profit
2012 .25/(1.00 + .25) = 20% $240,000 $48,000
2013 .28/(1.00 + .28) = 160,000 35,000
21.875%
TOTAL $83,000

(Note to instructor: The problem provides gross profit as a

percent of cost.)

(b) The balance of “Deferred Gross Profit” could be reported

on the balance sheet for 2013:

1. As a current liability on the theory that it is related

to Installment Accounts Receivables that are
normally treated as current assets;

2. As a deferred credit between liabilities and

stockholders’ equity. This treatment is criticized
because there is no obligation to outsiders; or

3. As an adjustment or offset to the related Installment

Accounts Receivable. This is because the deferred
gross profit is a part of revenue from installment
sales not yet realized. The related receivable will be
overstated unless the deferred gross profit is
deducted.
On the other hand, the amount of deferred gross
profit has no direct relationship with the estimated
collectibility of the accounts receivable.

It is not a settled matter as to the proper classification

of “deferred gross profit” on the balance sheet when the
installment-sales method of accounting is used to
measure income. As indicated in the text, the FASB in
Statement of Financial Accounting Concepts No. 6
 indicates that it conceptually is an asset valuation. We
support the FASB position.

(c) Gross profit as a percent of sales in 2012 is 20% (as

computed in (a) above); gross profit therefore is $96,000
($480,000 X .20) and the cost of 2012 sales is $384,000
($480,000 – $96,000). Because the amounts collected in
2012 ($130,000) and 2013 ($240,000) do not exceed the
total cost of $384,000, no profit is recognized in 2012 or
2013 on 2012 sales. Also, no profit is recognized on 2013
sales since the collections of $160,000 do not exceed the
total cost of $484,375 [$620,000 X (1 – .21875)].
EXERCISE 18-24 (15–20 minutes)

(a) Computation of gross profit realized—cost-recovery

method:

Original Balance of Gross

Cash Cost Unrecovered Profit
Year Receive Recovere Cost Realize
d d d
Beginning — — $150,000 —
balance
2012 $120,00 $120,00 30,000 $0
0 0
2013 90,000 30,000 0 60,000
2014 40,000 0 0 40,000

(b) Computation of gross profit realized—installment-sales

method:
Gross profit rate: ($250,000 – $150,000) ÷ $250,000 =
40%
2012 Gross profit realized: $120,000 X 40% = $48,000
2013 Gross profit realized: $ 90,000 X 40% = $36,000
2014 Gross profit realized: $ 40,000 X 40% = $16,000
EXERCISE 18-15 (25–30 minutes)

(a) 1. Gross profit recognized in 2012:

Contract price.....................................
$1,200,000
Costs:
Costs to date................................ $280,000
Estimated additional costs.......... 520,000
800,000
Total estimated profit.........................
400,000
Percentage completion to date
($280,000/$800,000)....................... X
35%
Gross profit recognized in 2012.......... $
140,000

Gross profit recognized in 2013:

Contract price.....................................
$1,200,000
Costs:
Costs to date................................ $600,000
Estimated additional costs.......... 200,000
800,000
Total estimated profit.........................
400,000
Percentage completion to date
($600,000/$800,000)....................... X
75%
Total gross profit recognized..............
300,000
Less: Gross profit recognized in 2012
140,000
Gross profit recognized in 2013.......... $
160,000
EXERCISE 18-15 (Continued)

2. Construction in Process ($600,000 – $280,000)

320,000
Materials, Cash, Payables...................
320,000

Accounts Receivable ($500,000 – $150,000)

350,000
Billings on Construction in Process....
350,000

Cash ($320,000 – $120,000).......................200,000

Accounts Receivable...........................
200,000

Construction in Process............................160,000
Construction Expenses..............................320,000
Revenue from Long-Term Contracts....
480,000*

*$1,200,000 X [($600,000 – $280,000) ÷ $800,000]

(b) Income Statement (2013)—

Gross profit on long-term construction contract
$160,000
Balance Sheet (12/31/13)—
Current assets:
Receivables—construction in process........
$180,000*
Inventories—construction in process totaling
$900,000** less billings of $500,000......
$400,000

**$180,000 = $500,000 – $320,000

**Total cost to date$600,000

2012 Gross profit 140,000
2013 Gross profit 160,000
$900,000
EXERCISE 18-6 (15–20 minutes)

(a) Uddin could recognize revenue at the point of sale based

upon the time of shipment because the books are sold
f.o.b. shipping point. Because of the return policy one
might argue in favor of the cash collection basis. Because
the returns can be estimated, one could argue for
shipping point less estimated returns.
EXERCISE 18-6 (continued)

(b) Based on the available information and lack of any

information indicating that any of the criteria in GAAP
were not met, the correct treatment is to report revenue
at the time of shipment as the gross amount less the
12% normal return factor. This is supported by the legal
test of transfer of title and the criteria in GAAP. One could
be very conservative and use the 30% maximum return
allowance.

(c) Accounts Receivable............................ 15,000,000

Sales Revenue (Texts)....................
15,000,000

Sales Returns and Allowances*........... 1,800,000

Allowance for Sales Returns and
Allowances ($15,000,000 X 12%)
1,800,000

(d) Sales Returns and Allowances*........... 200,000

Allowance for Sales Returns and
Allowances...................................... 1,800,000
Accounts Receivable.....................
2,000,000

Cash...................................................... 13,000,000
Accounts Receivable.....................
13,000,000

*A debit to Sales Revenue could also be made here.