Installment sales; alternative recognition methods
Response to the following problem:
On July 1, 2016, the Foster Company sold inventory to the Slate Corporation for $300,000. Terms of the sale called for a down payment of $75,000 and three annual installments of $75,000 due on each July 1, beginning July 1, 2017. Each installment also will include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster $120,000. The company uses the perpetual inventory system.
Required:
1. Compute the amount of gross profit to be recognized from the installment sale in 2016, 2017, 2018, and 2019 if revenue was recognized upon delivery. Ignore interest charges.
2. Repeat requirement 1 applying the installment sales method.
3. Repeat requirement 1 applying the cost recovery method.