Cpa Review- Far 2-3 (Accounting For Installment Sales)

Front 1

Accounting for Installment Sales

Back 1

-The installment method of accounting is used only when there is no reasonable basis for estimating the degree of collectibility. Under installment accounting, revenue is not recognized at the time a sale is made but rather when cash is actually collected.*

Hint 1

*Installment Sales = Cash Method
*Percentage of Completion = Accrual Method

Front 2

Problem Solving Formulas

Back 2

1. Gross Profit = Sales - COGS
2. Gross Profit % = Gross Profit ÷ Sales Price
3. Earned Gross Profit = Cash Collections x Gross Profit %
4. Deferred Gross Profit = Installment Receivable x Gross Profit %

Front 3

Balance Sheet Presentation

Back 3

-Deferred Gross Profit is a contra asset that decreases the balance of accounts receivable
-First credit "Deferred Gross Profit" to record the installment sale.
-To record the profit on collection, debit "Deferred Gross Profit" and credit "Realized Gross Profit on Installment Sales."*

Hint 3

*Debiting the deferred gross profit takes it off of the B/S and crediting the realized gross profit on installment sales puts it onto the I/S.

Front 4

Cost Recovery Method

Back 4

-Under the cost recovery method, no profit is recognized on a sale until all costs have been recovered.
1. At the time of sale, the expected profit is recorded as deferred gross profit.

Hint 4

2. Cash collections are first applied to the recovery of product costs.
3. Collections after all costs have been recovered are recognized as profit.

Front 5

Cost Recovery Method- Comparison to Other Methods

Back 5

-Similar to the installment sales method in that it may only be used when receivables are collected over an extended period and there is no reasonable basis for estimating their collectibility.*

Hint 5

*Because no profit is recognized until all costs have been recovered, the cost recovery method is the most conservative method of revenue recognition.