Nevada Real Estate Sales Company sells lots in its development in Dry Creek Canyon under terms calling for small cash down payments with monthly installment payments spread over a few years. Following are data on the company”s operations for its first three years:
|
2008 |
2009 |
2010 |
|
|
Gross margin rate |
45% |
48% |
50% |
|
Cash collected in 2010 from sales of lots made in |
$640,000 |
$800,000 |
$900,000 |
The total selling price of the lots sold in 2010 was USD 3,000,000, while general and administrative expenses (which are not included in the costs used to determine gross margin) were USD 800,000.
a. Compute net income for 2010 assuming revenue is recognized on the sale of a lot.
b. Compute net income for 2010 assuming use of the installment basis of accounting for sales and gross margin.