Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is unable to reliably predict bad debts. During 2014, Coaster sold equipment costing $4,800,000 for $7,200,000. The terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments for 2014 were made on schedule. Round answers to two places. Assuming that Coaster uses the installment-sales method of accounting for its installment sales, what amount of realized gross profit will Coaster report in its income statement for the year ended December 31, 2014

As per the installment-sales method of accounting, we first calculate the gross profit % and then apply this % to the total amount collected in sales by the end of the period. The calculations are as follows.

Sales $7,200,000

Less: Cost of sales ($4,800,000)

Gross profit $2,400,000

Gross profit % ($2,400,000 / $7,200,000) 33.33%

Down payment (20% x $7,200,000) $1,440,000

Installments during 2014 $1,920,000

(80% x $7,200,000 x 4/12)

Total amount collected $3,360,000

Gross profit recognized (33.33% x $3,360,000) $1,120,000