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janeqq
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Posted: 09 Feb 2009 at 00:05 \| IP Logged

On Dec 31,1998, A sold an equipment to B for $1800, the equipment had a carrying value of $1200, B paid $300 cash on Dec 31,1998 and signed a $1500 note bearing interest at 10% payable in five annual installments of $300. A accounts for the sale under installment method. On Dec 31, 1999, B paid $300 principal and $150 interest. For the year ended Dec 31, 1999, what total amount of revenue should A recognize from the sale and financing?

The answer is $250. First, 1800-1200=600, then 600/1800=1/3, then 300*1/3=100, finally 100+150=250.

I don't quite understand as it asks how much revenue is recognized. I thought that the $600 (from 1800-1200) should be gross profit, and the total revenue is $1800, right?

Please help if anyone could explain, thanks a lot.

divyagovil1
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Posted: 09 Feb 2009 at 00:59 \| IP Logged

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

When each payment is received from the customer, a portion of gross profit on the sale is recognized (based on the gross profit percentage in the year of the sale), so that by the final payment the entire gross profit is recorded.

Thus, gross profit for $600 is recognized over a period of time as revenue when "principal" is received every year on the basis of the gross profit %.

Thus, revenue for year ended 1999 would be :-

Gross profit on principal of $300 = $100

Interest separately 150

Total $250

Hope this helps ! Good Luck!

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janeqq
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Posted: 09 Feb 2009 at 01:57 \| IP Logged

got it, thanks divyagovil1

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