USA Installment Sales Method

[Student9090]

Hi everybody,

I have an exam next week and I just don´t get familiar with the Installment method.

I dont understand why the solutions are $100,000 in the first, $400,000 in the second and C in the third exercise.

Exercise: On December 15,2013, HTC Co. sold a tract of land that cost $3,600,000 for $4,500,000. HTC appropriately uses the installment sale method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15,2014 and December 15,2015. Ignore interest charges. HTC has a December 31 year-end.

1.) In 2013, HTC would recognize realized gross profit of:
a) $ 500,0000
b) $ 0
c) $ 900,000
d) $ 100,000

2.) In 2014, HTC would recognize realized gross profit of:
a) $ 0
b) $ 450,000
c) $ 300,000
d) $ 400,000

3.) HTC´s December 31, 2013 balance sheet should report
a) Deferred gross profit of $ 900,000
b) Deferred gross profit of $ 100,000
c) Installment receivables (net of deferred gross profit) of $ 3,200,000
d) Installment receivables (net of deferred gross profit) of $ 4,000,000

 

[kirby]

The gain on sale was $900,000. If you take gain over sale you get 20% gain on every dollar you get paid. So when you get paid $500K you figure 20% of that is gain = $100,000 gross profit and so on...