Use the following information for questions 99 - 101.
During 2014, Martin Corporation sold merchandise costing $3,500,000 on an installment basis for $5,000,000. The cash receipts related to these sales were collected as follows: 2014, $2,000,000; 2015, $1,750,000; 2016, $1,250,000.
-If expenses, other than the cost of the merchandise sold, related to the 2014 installment sales amounted to $200,000, by what amount would Martin's net income for 2014 increase as a result of installment sales?
A) $1,800,000
B) $ 600,000
C) $ 450,000
D) $ 400,000

Question

Quizplus · Accepted Answer

To determine the increase in net income for 2014 resulting from installment sales, we need to calculate the gross profit on the installment sales and then subtract the related expenses.

The gross profit on the installment sales can be calculated as follows: 
Total installment sales price - Total cost of merchandise sold = Gross profit on installment sales 
$5,000,000 - $3,500,000 = $1,500,000

Of this $1,500,000 gross profit, only a portion was recognized as income in 2014 since installment sales were made in multiple years. The portion of gross profit recognized in 2014 can be calculated as follows: 
$1,500,000 x ($2,000,000 ÷ $5,000,000) = $600,000

Therefore, the increase in net income for 2014 resulting from installment sales is the gross profit recognized in 2014 minus the related expenses: 
$600,000 - $200,000 = $400,000.

Use the Following Information for Questions 99 - 101