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kooza26
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Joined: 21 Mar 2011
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Posted: 21 Mar 2011 at 15:10 \| IP Logged

Hello, this is my first post on this forum. I am currently using Wiley to study for the CPA exam. The book seems a little confusing with some of its explanations...

I have been working on this question for a while now and can't seem to figure it out. It is from Wiley CPA review (financial reporting)

Given:
Installment A/R 12/31/11 - $800,000
Deferred Gross Profit 12/31/11 - 560,000
Gross Profit % = 40%

Determine cash collections and realized gross profit.

the explanation in the book seems confusing to me.. I have been trying to use the formulas I memorized, but its not working out..

Thanks

danion8
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Posted: 21 Mar 2011 at 15:59 \| IP Logged

sales = 560,000/40% = 560,000/.4 = 1,400,000

Deffered GP Divided by GP % gives the sales amount.

Collections = Sales -AR (in this case installments receivable)

= 1,400,000 - 800,000 = 600,000

Collections = 600,000

Realized GP = Colections X GP %

600,000 X 40% = 240,000

Realized GP = 240,000

Hope this helps.

kooza26
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Posted: 21 Mar 2011 at 16:44 \| IP Logged

danion8 wrote:

sales = 560,000/40% = 560,000/.4 = 1,400,000

Deffered GP Divided by GP % gives the sales amount.

Collections = Sales -AR (in this case installments receivable)

= 1,400,000 - 800,000 = 600,000

Collections = 600,000

Realized GP = Colections X GP %

600,000 X 40% = 240,000

Realized GP = 240,000

Hope this helps.

Hey,

Thanks for the quick reply. The main problem I have is with the formula. The formula to calculate deferred gross profit according to the book is

Deferred Gross Profit = Ending Installment Receivable X Gross Profit %.

So according to this formula Deferred Gross Profit/Gross Profit % would give you Installment Receivable, not Sales. Why is this formula used to determine Sales in this particular problem?

At first I though this might be an error in the book, however since you solved it the same way this is not the case.

annam726
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Posted: 22 Mar 2011 at 01:40 \| IP Logged

The issue with this question is that the $560,000 in deferred gross profit is the UNADJUSTED balance, which means its wrong and you need to figure out what it should be. If the ending A/R is $800,000 then the deferred gross profit should be $320,000 (40% times the A/R). This means that there is $240,000 sitting in deferred when it really needs to be in revenue.

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kooza26
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Posted: 22 Mar 2011 at 15:03 \| IP Logged

annam726 wrote:

Thanks for the reply! it is much clearer to me now. I did read that it said unadjusted in parenthesis, however for some reason I did not know how to go about it.

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