Saunders Hardware sells on the instalment plan.Sales-related figures for Saunders Hardware for 2017 were as follows: sales,$600 000;down payments on the sales,$60 000;collections on instalments,$250 000;beginning inventory,$90 000;ending inventory $60 000;and purchases,$400 000.What is Saunders Hardware's gross profit using the sales method of income recognition?
A)$200 000
B)$170 000
C)$260 000
D)$190 000

Question

Quizplus · Accepted Answer

To calculate the gross profit using the sales method of income recognition, we only consider the sales made during the year and the cost of goods sold related to those sales. We ignore the collections on instalments and down payments on sales.

The cost of goods sold can be calculated as:

Beginning inventory + Purchases - Ending inventory 
= $90,000 + $400,000 - $60,000 
= $430,000

Therefore, gross profit = Sales - Cost of goods sold 
= $600,000 - $430,000 
= $170,000

Hence, the correct answer is B.

Saunders Hardware Sells on the Instalment Plan