Question

1.

On December 15, 2018, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $5,000,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $440,000 with the balance in two equal annual installments payable on December 15, 2019, and December 15, 2020. Ignore interest charges. Rigsby has a December 31 year-end.

In 2018, Rigsby would recognize realized gross profit of:

Multiple Choice

• $ 0.

• $440,000.

• $123,200.

• $1,400,000.

2.

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2017, Lake began operations and sold jet skis with a total price of $750,000 that cost Lake $375,000. Lake collected $250,000 in 2017, $250,000 in 2018, and $250,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,860,000 that cost Lake $1,116,000. Lake collected $620,000 in 2018, $500,000 in 2019, and $500,000 in 2020 associated with those sales. In 2020, Lake also repossessed $240,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $90,000 at the time they were repossessed.

Total cash collections on installment sales during 2018 would be:

Multiple Choice

• $0.

• $770,000.

• $250,000.

• $870,000.

3.

During the current year, Stern Company had pretax accounting income of $40 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $18 million. Stern's taxable income for the year would be:

Multiple Choice

• $40 million.

• $58 million.

• $22 million.

• $45 million.

Answer 1

1)  

Gross profit

$123,200

Explanation:-

Gross profit % = sale price- cost / sale price

Gross profit % = ($5,000,000 - $3,600,000)/ $5,000,000

Gross profit % = $1,400,000/ $5,000,000

Gross profit % = 28%

Gross profit for 2018 = $440,000 ×28%

Gross profit for 2018= $123,200

2)

Cash collection on installment sales during 2018

$870,000

Explanation:-

$250,000 (2017 sales - 1/3 installment received in 2018) + $620,000 (2018 sales) = $870,000

3)

Taxable income

$58 million

Explanation:-

Pretax accounting income	$40 million
Add: Rent received	$18 million
Taxable income	$58 million