On December 15, 2021, Lima Lighting Co. sold a tract of land that cost $3,600,000 for $4,500,000. Lima appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2022, and December 15, 2023. Ignore interest charges. Lima has a December 31 year-end. In 2021, Lima would recognize realized gross profit of:

D.$100,000.

Explanation:

Gross profit is the net of sale amount and cost associated with the sold item.

Selling Price =  $4,500,000

Cost of Tranct of land = $3,600,000

Gross Profit = $4,500,000 - $3,600,000

Gross Profit = $900,000

Gross profit percentage = $900,000 / $4,500,000 = 20%

In 2016 only doewn payment is received so, proportionated groos profit based on the down payment will be recognized.

Gross Profit = Gross profit in percentage x Payment received in 2016 = 20% × $500,000 = $100,000

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