Carson Distributing,which began operating on January 1,appropriately uses the installment method of accounting.The following information pertains to Carson's operations for the first year: The balance in the deferred gross profit account at December 31 should be
A) $400,000.
B) $320,000.
C) $240,000.
D) $200,000.

Question

Carson Distributing,which began operating on January 1,appropriately uses the installment method of accounting.The following information pertains to Carson's operations for the first year:  The balance in the deferred gross profit account at December 31 should be
A) $400,000. 
B) $320,000. 
C) $240,000. 
D) $200,000.

Quizplus · Accepted Answer

The installment method of accounting recognizes revenue and cost of sales as payments are received from the customer. The gross profit is then deferred and recorded in a separate account called deferred gross profit.

Using the data provided in the table, the total amount of gross profit earned during the year is $960,000 ($3,200,000 - $2,240,000 - $960,000). This amount is then multiplied by the percentage of total payments received during the year, which is 75% (($3,200,000 - $240,000) / $4,000,000).

Therefore, the amount of gross profit recognized during the year is $720,000 ($960,000 x 75%) and the balance in the deferred gross profit account at December 31 is $240,000 ($960,000 - $720,000).

Therefore, the correct choice is B, $320,000.

Carson Distributing,which Began Operating on January 1,appropriately Uses the Installment