Swift Corp., a capital goods manufacturing business that started on January 4, 2
ID: 2385949 • Letter: S
Question
Swift Corp., a capital goods manufacturing business that started on January 4, 2010, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales. The following data were taken from the 2010 and 2011 records.
2010
2011
Installment sales $480,000 $620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2010 $130,000 $240,000
Cash collections on sales of 2011 -0- $160,000
The amounts given for cash collections exclude amounts collected for interest charges. (If answer is zero, please enter 0, do not leave any fields blank.)
(a) Compute the amount of realized gross profit to be recognized on the 2011 income statement, prepared using the installment-sales method.
$
(c) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.
2010
2011
Explanation / Answer
Computation of realized gross profit to be recognized on the 2011 income statement
(a) Installment sales method Amount in $
Gross profit on cash collection of sales pertaining to year 2010 (a) 240,000
Gross profit % on sales relating to year 2010 (b) 25%
Therefore gross profit pertaining to year 2010 recognized in 2011 c = a*b 60,000
Gross profit on cash collection of sales pertaining to year 2011 (d) 160,000
Gross profit % on sales relating to year 2011 (e) 28%
Therefore gross profit pertaining to year 2011 f= (e*d) 44,800
Final answer: Therefore total gross profit tobe recongnized in 2011 104,800
Computaion of realized gross profit to be recognized on the 2011 income statement
(b) Cost recovery method Amount in $
Cost of goods sold of year 2010 = 480,000 - (480,000 * 25%)
= 360,000
Total cash collected in both the years, pertaining to goods sold in 2010 = 130,000+240,000
= 370,000
Therefore profit to be recognized in 2011 = 370,000 - 360,000
= 10,000
(As cash collected, in relation to goods sold in the year 2011, is less than the cost of goods sold, therefore no revenue shall be recognized for that sale under cost - recovery method).
In the year 2010, no profit shall be recognized because the cash collected is less than the cost of goods sold.
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