Table 17-1
In 2016, a developer sells land for $ \$ 800,000 $. The cost of the land was $ \$ 500,000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300,000 $, $ \$ 200000 $ and $ \$ 100,000 $ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.
-Refer to Table 17-1.What amount of profit will be recorded when the 2019 payment is received?
A)$0
B)$26 091
C)$100 000
D)$9 091

Question

Table 17-1
 In 2016, a developer sells land for $ \$ 800,000 $. The cost of the land was $ \$ 500,000 $. He receives a $ \$ 200000 $ down payment plus three instalments of $ \$ 300,000 $, $ \$ 200000 $ and $ \$ 100,000 $ which will be paid in 2017, 2018 and 2019 . He uses the instalment method to record revenue. It is decided that $ 10 \% $ is the appropriate rate of interest.
-Refer to Table 17-1.What amount of profit will be recorded when the 2019 payment is received?
A)$0
B)$26 091
C)$100 000
D)$9 091

Quizplus · Accepted Answer

The profit is recognized proportionally as payments are received. By 2019, the developer has received all payments. The total profit is $300,000 ($800,000 - $500,000). The 2019 payment is $100,000, which is 1/8 of the total payments ($800,000). Thus, 1/8 of the profit is recognized in 2019, which is $37,500. However, the interest component must be deducted. The interest for 2019 is $28,409 ($100,000 - $71,591 present value of $100,000 at 10% for 3 years). Therefore, the profit recorded in 2019 is $37,500 - $28,409 = $9,091.

Table 17-1 in 2016, a Developer Sells Land For $800,000 \$ 800,000 $800,000

Table 17-1
in 2016, a Developer Sells Land For $\$ 800,000$