The Jones Company Makes Sales on an Installment Basis

question 30

Multiple Choice

The Jones Company makes sales on an installment basis. In 2016, it sells items with a cost of $20 million. The total sales price is $25 million. Ignoring interest payments, customers pay in five equal installments, of $5 million each, with one payment in each of 2016, 2017, 2018, 2019, and 2020. If the company uses the installment method of accounting for this sale, the gross profit it will recognize in 2016 is

• A) Zero
• B) $1 million
• C) $5 million
• D) $25 million

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Definitions:

Standard Costs

Pre-determined or estimated costs used as a benchmark to compare with the actual costs incurred.

Actual Costs

The real, total expenses incurred during the production or acquisition of goods and services.

Fixed Overhead

Fixed costs that do not vary with the level of production or sales over a short term, including rental expenses, salaries, and insurance.

Direct Materials Price Variance

This refers to the difference between the actual cost of direct materials and the standard cost that was expected or budgeted for those materials.