Question

1. PLEASE ANSWER AT LEAST ONE OF THE FOLLOWING PROBLEMS

Installment sales.

Sawyer Furniture Company concluded its first year of operations in which it made sales of $800,000, all on installment. Collections during the year from down payments and installments totaled $300,000. Purchases for the year totaled $400,000; the cost of merchandise on hand at the end of the year was $80,000.

Instructions

Using the installment-sales method, make summary entries to record:

(a)   the installment sales and cash collections;

(b)   the cost of installment sales;

(c)   the unrealized gross profit;

(d)   the realized gross profit.

2. PLEASE ANSWER AT LEAST ONE OF THE FOLLOWING PROBLEMS

Percentage-of-completion method.

Penner Builders contracted to build a high-rise for $14,000,000. Construction began in 2010 and is expected to be completed in 2013. Data for 2010 and 2011 are:

                                                                                                     2010                2011

            Costs incurred to date                                                $1,800,000      $5,200,000

            Estimated costs to complete                                        7,200,000        4,800,000

Penner uses the percentage-of-completion method.

Instructions

(a)   How much gross profit should be reported for 2010? Show your computation.

(b)   How much gross profit should be reported for 2011?

(c)   Make the journal entry to record the revenue and gross profit for 2011.

Answer 1

1) Given :

Total sales made - 8,00,000

Purchases - 4,00,000

Inventory - 80,000 , Hence cost of installment sales is 3,20,000 therefore profit is 4,80,000

Cash collection - 3,00,000

% of sales realised =3,00,000/8,00,000 = 60%

Hence recognised profit = 3,00,000 *60% = 1,80,000

unrecognised profit = 5,00,000*60% = 3,00,000

The summarized journal entry be as follows

a) Installment Receivables 8,00,000 Dr.

To Installment Sales 8,00,000 Cr.

Cash 3,00,000 Dr.

To Installment Receivables   3,00,000 Dr.

b)Cost of installment Sales 3,20,000 Dr.

To Inventory (Goods sold on installment) 3,20,000 Cr.

c)Installment Sales 8,00,000 Dr.

To Cost of installment Sales 3,20,000 Cr.

To Defered Profit 4,80,000 Cr.

d) Defered Profit 1,80,000 Dr.

To Realised Profit/Income summary 1,80,000 cr.

2.a) Gross profit for 2010:

Percentage of completion method (POCM) = Costs incurred till date/(Costs incurred till date+Estimated cost to complete)

= 1,800,000/(1,800,000+7,200,000)

= 20%

Therefore, revenue to be recorded = 14,000,000*20% = 2,800,000

Therefore, gross profit = 2,800,000-1,800,000 = 1,000,000

2.b. Similarly, POCM = 5,200,000/(5,200,000+4,800,000) = 52%

Therefore, revenue to be recorded = 7,280,000

Gross Profit = 2,080,000

2.c. Revenue entry

Construction in progress( gross profit)   2,080,000 Dr.

Cost incurred     5,200,000 Dr.

To Revenue 7,280,000 Cr.