Installment Sales

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MT327

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Total sale price $3000
Total Cost $2000
Year 1 - Cost = 500 Cash Rec’d = 700
Year 2 - Cost = 800 Cash = 1000
Year 3 - Cost = 300 Cash = 1300
What is the amount of revenue and expense recoginized each year under installment method?
 
so ur profit margin is 33% and this will be based on cash received/collected. So we receive $700 in year 1. That is our revenue, and expenses will be $466.67. Continue doing this for yrs 2 and 3 and there you have it. Remember we do installment sales when collectibility is uncertain (if highly uncertain use cost recovery method) and it is most often tied to transactions involving the sale of real estate or other firm assets.
 
compute your profit margin.
1000/3000
multiply that by cash recieved.
 
so wouldnt expense be 233 and profit for the period = 466
 
if your profit margin is 33%, and you received cash of 700, that means (700-X)/700 = 33%. Do the math and solve for X (expenses) and you will get 466
 
Year 1 - Rev = 700, cost =700/3000 * 2000
Year 2 - Rev = 1000, cost = 1000/3000 * 2000
Year 3 - Rev = 1300, cost = 1300/3000 * 2000
 
How would you do it using cost recovery?
This one is used when the cost cannot be estimated, so assume no cost was given, and then when you receive teh first revenue $700, you record a matching cost to it (cost=$700), because you want to make sure you account for your cost quickly.
If you use the “accrual” method, then from year 1, you just book the full expected revenue of $3k, abd the full cost of $2k, and nothing for years 2 and 3.
 
is final answer this
expenses =
Y1 466
Y2 666
Y3 866
?
thanks
 
formula then is
cash/sales * (total cost)
or margin * total cost
 
it does not matter which way you do it. dreary and i both did the same thing, we just chose different ways to get to the answer.
 
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