The Collection of Credit Sales Is Usually Predictable and Reasonably

question 66

Essay

The collection of credit sales is usually predictable and reasonably assured as a result of credit approval,collections procedures,and historical evidence.In such cases,revenue is appropriately recognized at the point of sale.If a company makes credit sales to customers of relatively poor credit risk,however,recognition of revenue at the point of sale may be inappropriate.Although revenue may have been earned and is measurable,ultimate collection of the proceeds on the sale are highly uncertain.The creditor in such circumstances may defer the recognition of revenue until the amount due is collected.The installment sales method thus may be used.Under the installment sales method,both sales and cost of sales are recognized in the period of sale,but the related gross margin is deferred to those periods in which cash is collected.The gross margin rate for the installment sales is computed and multiplied times the cash collection to determine the portion of deferred gross margin to be recognized.
Required:
Evaluate the conceptual soundness of the installment sales method.

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Definitions:

Compounded Semi-annually

A method of calculating interest where the interest amount is added to the principal amount twice a year, leading to compound growth.

Amortization Period

The length of time it takes to fully pay off a debt with regular payments that cover both principal and interest.

Cash-back Mortgage

A type of mortgage where the borrower receives a cash rebate upfront, often used for home improvements or debt consolidation.

Compounded Semi-annually

A method of calculating interest where the interest is added to the principal amount twice a year and then interest is subsequently earned on the new principal.