As the existing contracts were more than half paid up, the question then arose as to what profit should be carried to Profit and Loss, and the following plan was adopted as a compromise, recourse being had to the third method of calculation described in Section 173. In this case the unearned profit was represented by the following fraction: $37,467 / $88,090 X $23,022 (balance of Gains account) = $9,790

This would yield an unearned profit of $9,790 and an earned profit of $13,229. From this amount there was deducted 25% as a reserve, i.e., $3,307.25; and $9,922 was carried to Profit and Loss. The selection of 25% as the margin of safety was, of course, arbitrary, but the examples given in Section 145 will show that it is a safe margin. Technical objections may be raised as to the accuracy of this method, and it may be claimed that the Gains account should have been increased to bring it up to $32,218, the difference being charged against Profit and Loss. However, inasmuch as the contracts have been more than half paid, it was, in this instance, considered more equitable to follow the plan outlined above.