Paula has sales that qualify to be reported on the installment basis. In year 2, installment sales were $40,000 with a cost of $30,000. In year 3, installment sales were $50,000 with a cost of $25,000. Collections in year 2 were in the amount of $30,000. Collections in year 3 were $10,000 on the year 2 sales and $30,000 on the year 3 sales. How much deferred gross profit exists as of the end of year 2

$2500

Explanation:

Gross profit is gotten when costs are subtracted from sales. Deferred gross profit is the cash that hasn't been gotten by a business.

The percentage on gross profit percentage will be calculated as:

= ($40000-$30000)/$40000 × 100

= $10,000/$40,000 × 100

= 0.25 × 100

= 25%

Deffered gross profit will now be calculated by multiplying the gross profit percentage by the cash to be cash to be collected. This will be:

=$10000 × 25%

= $2500

The deferred gross profit that exists as of the end of year 2 is $2500

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