Installment sales usually are accounted for by one of the following methods:
(1) The profit may be recognized as earned in the period of sale;
(2) The profit may be recognized on a proportionate basis in the periods of collection (commonly called the “installment method”).
Required
1. Discuss the propriety of the two methods, including in your discussion a list of the circumstances under which recognition of profit in the period of sale would be preferable to recognition of profit on the installment method.
2. The collection period of an installment sale contract is frequently 24 months or longer. Discuss, in terms of both methods, the presentation of the installment contracts receivable on the balance sheet.
3. Deferred gross profit arising from installment sales has been reported on the balance sheet variously as a contra or valuation account to installments receivable, an estimated liability, a part of stockholders’ equity, or a deferred credit. Discuss the nature and, hence, the appropriate balance sheet classification(s) of “deferred gross profit” for an accrual-basis business that uses the installment sales method for financial reporting and income tax purposes.