On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000.

On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000. The book value of the land on Apache's books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual payments of $150,000 plus interest at an appropriate interest rate due on each July 1 beginning in 2012. Apache has no significant obligations to perform services after the sale.

Requirements:

a. How much gross profit will Apache recognize in both 2011 and 2012 assuming point of delivery profit recognition?

b. How much gross profit will Apache recognize in both 2011 and 2012 applying the installment sales method?

c. How much gross profit will Apache recognize in both 2011 and 2012 applying the cost recovery method?

Solutions

Expert Solution

2011 gross profit = $3,000,000 - 1,200,000

= $1,800,000

2012 gross profit = 0

2011 Cost recovery % = Cost ÷ Sales:

$1,200,000 / $3,000,000

= 40% (implying a gross profit % = 60%)

2011 gross profit = 2011 cash collection of $150,000 x 60% = $90,000

2012 gross profit = 2012 cash collection of $150,000 x 60% = $90,000

No gross profit will be recognized in either 2011 or 2012. Gross profit will not be recognized until the entire $1,200,000 cost of the land is recovered. In this case, it will take 8 payments to recover the cost of the land ($1,200,000 ÷ $150,000 = 8), so gross profit recognition will equal 100% of the cash collected beginning with the ninth installment payment.

2011 gross profit = $1,800,000

2012 gross profit = $0

2011 gross profit = $90,000

2012 gross profit = $90,000

No gross profit will be recognized in either 2011 or 2012.

Renze Joy Candido answered 1 year ago

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