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WILDSTARCARD
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Joined: 17 May 2009
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Posted: 01 Jul 2009 at 02:10 \| IP Logged

Asp Co. appropriately uses the installment method of revenue recognition to account for its credit sales. The following was abstracted from Asp's Dec 31, 2002 financial statements

   2002    2001

Sales         & nbsp;     1,500,000       1,000,000

A/R:
2002 sales         900,000
2001 sales         540,000    600,000

Deferred gross profit:
2002 sales         252,000
2001 sales         108,000          ; 120,000

What was Asp's gross profit percentage for 2002 sales?

20%
25%
28%
40%

Can someone solve this for me with a simple explanation and equations used? Thanks!

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rumboj
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Posted: 01 Jul 2009 at 04:40 \| IP Logged

For me, this question required some algebra...

Okay, we know that the installment sales method determines GP realized in the current period based on cash collected in the current period * a GP %. Therefore:

Total GP (which is the total sales*GP %)=GP realized in the current period (which is cash collected in the current period*GP%) + Deferred GP

We know the total sales (1,500,000), we know the Cash collected (1,500,000 in sales-900,000 remaining in A/R=600,000) and we know the Deferred GP (252,000) so all we need to do is plug them into an equation and solve for the unknown:

Let x=GP % and substitute it in the formula above.

1,500,000x=600,000x + 252,000

1,500,000x-600,000x=252,000

900,000x=252,000

x=252,000/900,000

x=0.28 OR 28%

Maybe someone can come up with a simpler explanation...

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WILDSTARCARD
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Posted: 01 Jul 2009 at 05:24 \| IP Logged

Rumbol,

I need faster way when taking the exam. I noticed that your answer and my thinking was the same:

That (deferred gross profit)/(AR) for 2002 = 252/900 = 28% gross profit % which is correct answer.

Is this a coincidence or is there a relation which I can't put my finger to? If this is not a coincidence and all you had to do was divide, what's the logic behind it?

Deferred gross profit is profit that has not been realized since AR has not been paid. So the opposite of that is Realized gross profit divided by AR (that would have been all collected) is the gross profit percentage. Is that relationship correct?

Thanks!

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kj_nyc
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Posted: 01 Jul 2009 at 09:05 \| IP Logged

The 900 A/R simply represents the portion of the 1,500 sales that have not yet been collected. Profit is recognized in proportion to cash collected. Conversely, profit is deferred in proportion to sales not yet collected. (deferred gross profit)/(sales not yet collected) = 252/900 = 28%

WILDSTARCARD
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Posted: 01 Jul 2009 at 15:32 \| IP Logged

kj_nyc wrote:

Thanks for the clarification. I appreciate it!

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