F2: Accounting for Installment Sales – Flashcards

The installment method of revenue recognition is used when there is no reasonable basis for estimating the degree of collectivility.

Under installment accounting, revenue is not recognized at the time a sale is made, but rather when cash is actually collected.

Gross profit = Sale — Cost of goods sold

Gross profit percentage = Gross profit / Sales price

Earned gross profit = Cash collections x Gross profit percentage Earned gross profit = Cash collections x [Gross profit / Sales price]

Deferred gross profit = Installment receivable x Gross profit percentage Deferred gross profit = [Sales price — Cash collections] x [Gross profit / Sales Price]

. . . In proportion to the cash collection. Under the installment method, total gross profit is deferred until cash payments are received. Realized gross profit equals the gross profit percentage on the sale times the cash received.

. . . After cash collections equal to the cost of sales have been received. Under the cost recovery method (not the installment method), gross profit is not realized until cash is collected equal to the cost of the goods sold.

. . . On the date of sale. Under the accrual basis of accounting, all gross profit is recognized and realized at the time of the sale. (Accrual vs. Installment Method): Recognition is deferred under the installment method.