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Chapter 7

Problem I
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of investment.
Following years: Each annual installment f P1,000 is profit.

2. 20x4: P4,000 is profit.


20x5: P1,000 is profit.
20x6: P750 is profit, and P250 is treated as return of investment.
Following years: Each annual installment is P1,000 is treated as a return of investment.

3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales


20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.
Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.
P425 per year is treated as return of investment.

Problem II
1. Entries in 20x4:
Cash...
Mortgage Notes Receivable ..

3, 500
20,500

Real Estate .
Gain on Sale of Real Estate ..
Cash

9,000
15,000
500

Mortgage Notes Receivable .

500

Entry in 20x5:
Real Estate .

16,500

Loss on Repossession of Real Estate ..

3,500

Mortgage Notes Receivable

2. Entries in 20x4
Cash
Mortgage Notes Receivable ..

20,000

3, 500
20,500

Real Estate ..

9,000

Deferred Gross Profit on Installment Sales ............


Cash .

15,000
500

Mortgage Notes Receivable ....

500

Receipt P500 cash in 20x4 applicable to principal of note

Deferred Gross Profit on Installment Sales ...

2,500

Realized Gross Profit on Installment Sales...

2,500

Gross Profit Percentages


15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
Or P2,500

Entry in 20x5
Real Estate... 16,500
Deferred Gross Profit on Installment Sales .. 12,500
Mortgage Notes Receivable ..

20,000

Gain in Repossession of Real Estate ..

9,000

Problem III
1.
a. Installment Contracts Receivable 19X8 250,000
Installment Sales

b. Cash ..

250,000

120,000

Installment Contracts Receivable 19X8

c.

Cost of Installment Sales ..

120,000

200,000

Merchandise Inventory ..

d. Merchandise Repossessions

200,000

14,500

Deferred Gross Profit on Installment Sales 19X8 ..

4,000

Loss on Repossession ...

1,500

Installment Contracts Receivable, 19X8 .

20,000

Gross Profit Percentages: 50,000/250,000, or 20%


Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000

Fair value of repossessed merchandise..

P 14,500

Less: Unrecovered cost:


Unpaid balanceP 20,000
Less: Deferred Gross Profit
20% x P20,000

4,000

Loss on repossession.

16,000
P 1,500

e. Expenses

16,000

Cash .

16,000

2. Adjustment to Recognize Gross Profit on Installments Sales:

a. To set-up Cost of Installment Sales:


No entry (since perpetual inventory method is used)

b. To set-up Deferred Gross Profit on Installment Sales:


Installment Sales

c.

250,000

Cost of Installment Sales .

200,000

Deferred Gross Profit on Installment Sales-20x4..

50,000

Adjustment to Recognize Gross Profit on Installment Sales:


Deferred Gross Profit on Installment Sales 20x4...
Realized Gross Profit on Installment Sales 20x4 .
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000

24,000
24,000

d. Closing of nominal accounts.


Realized Gross Profit on Installment Sales 20x4

24,000

Expenses .

16,000

Loss on Repossessions .

1,500

Income Summary .

6,500

To close the accounts for 20x4.

Problem IV
1.
January to December 31

20x4

20x5

(1) To record regular sales:


Accounts receivable
Sales
(2) To record installment sale:
Cash
Installment accounts receivable
Installment Sales

600,000

1,080,000
600,00

60,000
300,000

1,080,000
144,000
336,000

360,000

480,000

(3) To record cost of sales:


Periodic Method: No entry
Perpetual Method:
Regular Sales:
Cost of Sales
Merchandise inventory
Installment Sales:
Cost of installment sales
Merchandise inventory
(4) To record collections:
Regular Sales:
Cash
Accounts receivable
Installment Sales:
Cash
Installment Accounts receivable
20x2
Installment Accounts receivable
20x3
Interest income
(5) to record payment of operating expenses:
Operating expenses
Cash

2.

480,000

864,000
480,000

252,000

864,000

312,000
252,000

144,000

312,000

360,000
144,000

108,000

360,000
204,000

72,000

72,000

36,000

60,000
72,000

90,000

102,000
90,000

102,000

Adjusting entries (end of the year):


(6) To recognize accrued interest receivable
Interest receivable

1,440

Interest income

2,880
1,440

2,880

(7) To set-up Cost of Sales:


Periodic Method:
Cost of installment sales

480,000

Merchandise inventory

864,000
480,000

864,000

Perpetual Method: No entry


(7) To set-up Cost of Installment Sales:
Periodic Method:
Cost of installment sales

252,000

Shipment s on installment sales

312,000
252,000

312,000

Perpetual Method: No entry


(8) To set-up Deferred Gross Profit
Installment sales

360,000

480,000

Cost of installment sales

252,000

Deferred gross profit 20x4

108,000

312,000

Deferred gross profit 20x5


Gross profit rate 20x4: P 108,000 / P360,000 = 30%.
Gross profit rate 20x5: P168,000 / P480,000 = 35%.

168,000

(9) To record realized gross profit on installment


sales:
Deferred gross profit 20x4

25,200

25,200

Deferred gross profit 20x5

21,000

Realized gross profit

25,200

46,200

20x4: Realized gross profit on installment sales:


Collections applying as to principal..P 72,000
Multiplied by: Gross profit rate.
30%
Realized gross profitP 21,600
20x5: Realized gross profit on installment sales;
20x4

20x5

Collections principal

P 72,000

P 60,000

Multiplies by: Gross profit %..........

____30%

____35%

Realized gross profit

P 21,600

P 21,000

P 42,600

Closing entries:
(10) To close realized gross profit account:
Realized gross profit
Income summary
(11) To close other nominal accounts

21,600

42,600
21,600

42,600

Sales

600,000

Interest income

1,080,000

37,440

Cost of sales

74,880
480,000

864,000

Operating expenses

90,000

102,000

Income summary

67,440

188,880

(12) To close results of operations:


Income summary

89,040

Retained earnings

231,480
89,040

231,480

Problem V
1.
Type of Sale
Regular Sales:
Cash sales
Credit sales
Total regular sales
Installment Sales
Total Sales

Amount

Ratio to Total Sales

P 225,000
___450,000
P 675,000
_ 1,125,000
P 1,800,000

Allocated Cost
P *146,250
**292,500
P 438,750
__731,250
P 1,170,000

675/1,800
1,125/1,800

*P225,000/P1,800,000 x P1,170,000 = P146,250


**P450,000/P1,800,000 x P1,170,000 = P292,500

The allocation above was based on the assumptions that the markup for each type of sale is the
same. Normally, the selling prices of the merchandise are not the same for each type of sales.
2.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales

Amount
P 225,000
450,000
1,125,000
P 1,500,000

Amount based on
Cash Sales (100%)
P 225,000
375,000*
900,000**
P 1,250,000

Ratio to Total
Sales
225/1,500
375/1,500
900/1,500

Gross profit rate


30%
36%
40%

Cost ratio
70%
64%
60%

Allocated Cost
P 175,500
292,500
__ 702,000
P 1,170,000

*P450,000 / 120% = P375,000


**P1,125,000 / 125% = P900,000

3.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales

Amount
225,000
450,000
1,125,000
P 1,800,000
P

Allocated Cost*
P 157,500
288,000
_ _675,000
P 1,170,000

* Amount of sale x cost ratio.

Problem VI
The entries are required under the periodic method:
Repossessed merchandise......
Deferred gross profit 20x4............
Loss on repossession...
Installment accounts receivable 20x4.

68,400
48,000
3,600
120,000

To record repossessed merchandise.

Repossessed merchandise......
Cash, etc (or various credits)................

12,000
12,000

To record reconditioning costs

The loss on repossession is computed as follows:


Estimated selling price after reconditioning costs..............
Less: Reconditioning costs
Costs to sell and dispose.
Normal profit (20% x 108,000).

P 108,000
P 12,000
6,000
__21,600

__39,600

Market value before reconditioning costs..


Less: Unrecovered cost
Installment accounts receivable 20x4,
unpaid balance...
Less: Deferred gross profit 20x4 (P120,000 x 40%).....
Loss on repossession.

P 68,400
P120,000
__48,000

__72,000
P( 3,600)

Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise...............
Over-allowance on trade-in merchandise.
Cash..
Installment accounts receivable 20x4............
Installment sales.......

840,000
360,000
2,400,000
3,360,000
6,960,000

To record installment sales with trade-in.

Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales,
the entry would be as follows:
Trade-in Merchandise...............
Cash..
Installment accounts receivable 20x4............
Installment sales (net of over-allowance)..............

840,000
2,400,000
3,360,000
6,600,000

To record installment sales with trade-in.

The over-allowance is computed as follows:


Trade-in allowance..................
Less: Market value before reconditioning costs:
Estimated resale price after reconditioning costs.
Less: Reconditioning costs..
Costs to sell (5% x P1,680,000)
Normal profit (20% x P1,680,000).......
Over-allowance

P1,200,000
P1,680,00
0
420,000
84,000
__336,000

__840,000
P 360,000

The gross profit rate on installment sales is computed as follows:


Installment sales......
Less: Over-allowance
Adjusted Installment Sales
Less: Cost of installment sales.
Gross profit.
Gross profit rate (P2,680,000/P6,600,000)..

P6,960,000
___360,000
P6,600,000
__3,920,000
P2,680,000
40.60%

Further, the entry to record the reconditioning costs is as follows:


Trade-in Merchandise...............
Cash, etc (or various credits)..............

420,000
420,000

To record reconditioning costs.

Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4
is computed as follows:
Trade-in merchandise (market value before reconditioning costs)
Down payment
Installment collection (March 31 December 31: P80,000 x 10 months)
Total collections..
Multiplied by: Gross profit rate in 20x4..
Realized gross profit on installment sales of new merchandise

840,000
2,000,000
___800,000
P3,640,000
___40.60%
P1,477,840

Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance:
Oct. 31 Cash 20,000
Mortgage Notes Receivable . 55,000
Real Estate .

60,000

Deferred Gross Profit on Installment Sales .

Nov. 30 Cash .

15,000

1,150

Mortgage Notes Receivable

600

Interest Income .

550

Interest Received: P55,00 at 12% for 1 month, or P550

Dec. 31 Cash 1,144


Mortgage Notes Receivable ..

600

Interest Income

544

Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544

31 Deferred Gross Profit on Installment Sales .. 4,240


Realized Gross Profit on Installment Sales

4,240

Gross Profit Percentage: 15,000/75,000, or 20%


Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240

2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the
contract:
Dec. 31 Cash 20,000.00
Mortgage Notes Receivable 55,000.00
Real Estate
Deferred Gross Profit on Installment Sales ..

Nov. 30 Cash
Mortgage Notes Receivable ..

60,000.00
15,000.00

600
50.00

Interest Income

550.00

Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50,
is reduction in principal)

Dec. 31 Cash .

600.00

Mortgage Notes Receivable

50.50

Interest Received

549.50

Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in


principal.

31 Deferred Gross Profit on Installment Sales

4,020.10

Realized Gross Profit on Installment Sales

4,020.10

Gross Profit Percentage: 15,000/75,000, or 20%


Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or
P4,020.10
Problem IX
1. 6/30x4: Cash. 25,000
Notes Receivable 125,000
Accumulated Depreciation (3.1/2[2% of P90,000])
Depreciation Expense (1/2[2% of P90,000])

6,300
900

Land

10,000

Building ..

90,000

Deferred Gross Profit on Sale of Property

Deferred Gross Profit on Sale of Property

57,200

9,553

Realized Gross Profit on Sale of Property ...

9,553

Amount realized: (P25,000/150,000) x 57,200


2. 6/30x5: Cash 30,000
Notes Receivable ..
30,000
Deferred Gross Profit on Sale of Property . 11,440
Realized Gross Profit on Sale of Property

11,440

Amount realized (P30,000/P150,000) x 57,200


6/30/x6 Cash .
Notes Receivable

50,000
50,000

Deferred Gross Profit on Sale of Property 19,067


Realized Gross Profit on Sale of Property
Amount Realized: (P50,000/P150,000) X 57,200
6/30/x7 Cash ..
Notes Receivable
Deferred Gross Profit on Sale of Property .
Realized Gross Profit on Sale of Property
Amount Realized: (P15,000/P150,000) X 57,200

19,067

15,000
15,000
5,720
5,720

Problem X
Installment Contracts Receivable . 200,000
Installment Sales

Cost of Installment Sales ..

200,000

120,000

Merchandise Inventory

120,000

Cost of Sales: 60% of P200,000


Installment Sales ..

200,000

Cost of Installment Sales

120,000

Deferred Gross Profit on Installment Sales

60,000

Cash . 124,000
Installment on Contracts Receivable 20x4...

30,000

Installment on Contracts Receivable 20x5...

34,000

Installment on Contracts Receivable 20x6...

60,000

Deferred Gross Profit on Installment Sales -20x4 13,800


Deferred Gross Profit on Installment Sales-20x5 ...

14,280

Deferred Gross Profit on Installment Sales -20x6 ...

24,000

Realized Gross Profit on Installment Sales ...

52,080

Realized Gross Profit


20x4: 46% of P30,000 or P13,800
20x5: 42% of P34,000 or P14,280
20x6: 40% of P60,000 or P24,000
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment
sales 20x6 . 27.5%
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts
receivable 20x5 ..

30%

20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts


receivable 20x4 ..

32%

2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash ....................

P27,500

Installment Accounts Receivable 20x6 .. P 55,000


20x5 ..

12,000

20x4 ..

3,000

70,000

Accounts receivable .

17,000

Inventory ....

60,000

Other Assets ...

40,000

Total Assets P 214,500

Liabilities
Accounts payable
Deferred Gross Profit

20x6 P 15,125

P 40,000

20x5

3,600

20x4

960

19,685

Total Liabilities
59,685

Stockholders Equity
Capital Stock ..

P 100,000

Retained Earnings .. P 68,400


Balance, Jan. 1, 20x6 .

13,585

Balance, Dec. 31, 20x6 .

54,185

Total Stockholders Equity


P154,815
Total Liabilities and Stockholders Equity .

P 214,500

WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6

Sales ............
Cost of goods sold:
Merchandise Inventory, Jan. 1 P 52,000
Purchases .................. 350,000
Merchandise Available for sale .................
402,000
Less: Merchandise Inv. Dec. 31
60,000
Gross Profit ..
Less: Deferred Gross Profit on 19X34
Realized Gross Profit on current years sales .
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule) .
Total Realized Gross Profit .
Operating Expenses ...
Net Loss ..

Installment
Sales
P320,000

Regular
Sales
P125,000

232,000
P88,000
15,125
P78,875

110,000
P15,000

WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
For Year Ended December 31, 20x6
Deferred Gross profit on installment sales, 20x6

P15,000

Total
P445,000

342,000
P103,000
15,125
P87,875
50,040
P137,915
151,500
P 13,585

Installment contracts receivable, P320,000 less collections P265,000


Or P55,000; P55,000 x 27.5% P 15,125

Realized Gross Profit:


20x6
Collections on Installment Contracts Receivable ... P265,000
Installment sales gross profit percentage ..

27.5%

20x4

P138,000

P27,000

30%

Realized Gross Profit .. P 72,875

Installment Sales

20x5

32%

P 41,400

P 8,640

320,000

Cost of Installment Sales . 232,000


Deferred Gross profit 88,000

Deferred Gross Profit, 20x6 ............... 72,875


Deferred Gross Profit, 20x5 ............... 41,400
Deferred Gross Profit, 20x4 ...............

8,640

Realized Gross Profit on Installment sales 122,915

Income Summary

170,000

Shipment on Installment of Sales

232,000

Merchandise Inventory, Jan. 1, 20x6 .

52,000

Purchases

350,000

Merchandise Inventory, Dec. 31, 20x6 ..

60,000

Income Summary

Sales .

60,000

125,000

Income Summary .
Realized Gross Profit on Installment Sales.....

125,000
122,915

Income Summary .

Income Summary

122,915

151,500

Operating Expenses ...

151,500

Retained Earnings ..

13,585

Income Summary ...

13,585

Problem XII
1. Calculation of gross profit percentage on installment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6 38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 . 40%
20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment
accounts receivable 20x4 . 45%

2.
Deferred Gross Profit, 20x6

1,900

Deferred Gross profit, 20x5

4,000

Deferred Gross Profit, 20x4

3,600

Loss on Repossessions..

9,500

Cancellation of deferred gross profit,


balances upon repossessions:
20x6: 38% of P5,000, or P1,900
20x5: 40% of P10,000, or P4,000
20x4: 45% of P8,000, or P3,600

GG SALES CORPORATION
Income Statement
For Year Ended December 31, 20x6

Sales ............

Installment
Sales
P500,000

Regular
Sales
P192,000

Total
P692,000

Cost of goods sold:


Merchandise Inventory, Jan. 1 P 30,000
Purchases .................. 445,000
Repossessed Merchandise ..
10,000
Merchandise Available for sale .................
495,000
Less: Merchandise Inv. Dec. 31
35,000
Gross Profit ..
Less: Deferred Gross Profit on 20x6 sales (see schedule)
Realized Gross Profit on current years sales .
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule) .

310,000
P190,000
32,300
P157,700

150,000
P42,000

460,000
P103,000
32,300
P199,700

P42,000

100,650
P300,350
3,500
P296,850
300,000
P 3,150

Deduct loss on repossession .


Total Realized Gross Profit .
Operating Expenses
Net Loss ..

Analysis of Gross Profit on Installment Sales


Schedule to Accompany Income Statement
For Year Ended December 31, 20x6

Deferred gross profit on Installment sales before defaults, 19X8:


Installment contracts receivable, P500,00, less collections, P415,000, or
P85,000; P85,000 x 38% .

P 32,300

Realized Gross Profit:


20x6
Collections of Installment contracts receivable.. P415,000
Installment sales gross profit percentage ..

20x5

P210,000 P 37,000

38%

Realized gross profit ..P157,700

20x4

40%

45%

P 84,000 P 16,650

GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash ...
Installment Accounts Receivable 20x6 P 80,000
20x5 20,000

P 25,000

20x4

5,000

105,000

Accounts receivable ..

40,000

Inventory .

35,000

Other Assets

52,000

Total Assets .P
257,000

Liabilities
Accounts payable .

P 75,000

Deferred Gross Profit 20x6 . P 30,400


20x5 .

8,000

20x4 .

2,250

40,650

Total Liabilities

115,650

Stockholders Equity
Capital Stock .

P100,000

Retained Earnings . P 44,500


Balance, Jan. 1, 20x6

3,150

Balance, Dec. 31, 20x6

41,350

Total Stockholders Equity .

141,350

Total Liabilities and Stockholders Equity ..


4. Installment Sales ..

P 257,000
500,000

Cost of Installment Sales ..

310,000

Deferred Gross Profit, 20x6 ..

190,000

Deferred Gross Profit, 20x6

157,500

Deferred Gross Profit, 20x5

84,000

Deferred Gross Profit, 20x4

16,650

Realized Gross Profit on Installment Sales

258,350

Income Summary

185,000

Shipment on Installment Sales

310,000

Merchandise Inv, January 1, 20x6 .

30,000

Purchases .

455,000

Repossessed Merchandise ..

10,000

Merchandise Inv, December 31, 20x6...

35,000

Income Summary ..

Sales ....

35,000

192,000

Income Summary

Realized Gross Profit on Installment Sales..

192,000

258,350

Income Summary ..

Income Summary

258,350

3,500

Loss on Repossession .

Income Summary

3,500

300,000

Operating Expenses ..

Retained Earnings

300,000

3,150

Income Summary .

3,150

Problem XIII
1.
Deferred gross profit 20x4..
8,407.00
Deferred gross profit 20x5.. 93,438.80
Deferred gross profit 20x6.. 71,006.70
Realized Gross Profit on Installment Sales (20x4 20x6)..
172,852.50
Computation of GP rates:
20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35%

20x5: P285,120/P432,000 = 66%, cost rate; GP rate = 100% - 66% = 34%


20x6: P379,260/P602,000 = 63%, cost rate; GP rate = 100% - 63% = 37%

Calculation of collections in 20x6:


20x4: Beginning balance

P 24,020

20x5: P344,460 (beginning balance) P67,440 (ending balance)


P2,200 (write-offs on default)

274,820

20x6: P602,000 (sales) P410,090 (ending balance)

191,910

Calculation of realized gross profit:


20x4: 35% x P24,020

8,407.00

20x5: 34% x P274,820

93,438.80

20x6; 37% x P191,910

71,006.70

Total

2. Deferred gross profit 20x5

P172,852.50

748.00

Inventory of Repossessed Merchandise.

748.00

To reduce by 20x5 deferred gross profit related to defaulted contract and requiring
cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date);
inventory now reported at P2,200 (balance of installment contract), less P748 or
P1,452.

Loss on repossession..
Inventory of repossessed merchandise..

381.00
381.00

To reduce inventory to market as follows: to realize a gross profit of 37% on a


resale estimated at P1,700, the repossessed merchandise should be reported at a
value of 63% of P1,700, or P1,071; the inventory then requires a further write-down
of P381 (P1,452 P1,071)

Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on
sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit
margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248
(P1,700 P1,452), the later period would actually have to absorb a loss as a result of such valuation.
Recording the goods at resale value reduced by the companys usual profit margin on sales is
recommended, for such practice will charge the next period with no more than the utility of the goods
carried forward.

Problem XIV HH Instruments


1.
Installment Contracts Receivable .
Merchandise Inventory (Piano)
Deferred Gross Profit on Installment Sales

2.

3.

4.

1,600.00
1,000.00
600.00

Cash ..........................
Installment Contracts Receivable

160.00

Cash ........................
Interest Income
Installment Contracts Receivable .

160.00

Cash ......................
Interest Income .
Installment Contracts Receivable

160.00

Deferred Gross Profit on Installment of Sales ..


Realized Gross Profit on Installment of Sales
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)

160.00
14.40
145.60
11.47
148.53
225.45
225.45

Merchandise Inventory (piano) ... 560.00


Deferred Gross Profit on Installment of Sales ........... 374.55
Loss on Repossessions .
64.36
Installment Contracts Receivable
998.81
Deferred Gross profit cancelled upon repossession:
37.5% of P998.81 (balance in installment contracts
receivable account) or P 374.55

Problem XIV Big Bear


20x4:
Installment receivables
Inventory
Deferred gross profit
Cash

250,000
150,000
100,000
80,000

Installment receivables
20x5:
Cash

80,000
120,000

Installment receivables
Deferred gross profit
Realized gross profit
20x6:
Cash

120,000
50,000
50,000
50,000

Installment receivables
Installment receivables
Inventory
Deferred gross profit

50,000
300,000
210,000
90,000

Cash

135,000
Installment receivables

135,000

Deferred gross profit


Realized gross profit

40,500
40,500

Gross profit deferred at sale = 30% x P300,000 = P90,000.


Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500
(Or cash collected x GP% =P135,000 x 30% = P40,500)
Problem XV Tappan Industrial
(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale.
Determination of selling price:
PVn = R(PVAFn/i) Table IV
PVn = P187,500 x 4.3553 n = 6, i = 10%
PVn = P816,619 (rounded)
Gross profit on sale:
Sales
Cost of sales
Gross profit
Interest revenue--4 months: P816,619 x 10% x 4/12 =
Total income for 20x5 = P179,119 + P27,221 =

P816,619
637,500
P179,119
_ 27,221
P206,340

(2) No reasonable assurance assume the use of installment sales method


Installment sale: Gross profit (P179,119/P816,619) =
Gross profit earned in 20x5 (P0 x 22%)

Interest revenue

0
27,221

Total income for 20x5


Multiple Choice Problems
1. c
20x4: P1,200,000 x 30% = P 360,000
20x5: P1,400,000 x 40% = 560,000

22% rounded

P 27,221

P920,000

2. d [P225,000 + (P120,000/40%)]
3. b (P36,000 24%) + (P198,000 30%) = P810,000.
4. d
Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%
20x4 Sales: P120,000/ 30%
P 400,000
20x5 Sales: P440,000/ 40%
1,100,000
P 1,500,000
5. b [(P1,000,000 P200,000) x (P1,000,000 P600,000)/P1,000,000 = P320,000
6. b

[(P1,400,000 P980,000) P1,400,000] x P840,000 = P252,000.

7. c

P1,200,000 P720,000 = P480,000 gross profit (40% gross profit rate)


P480,000 (P288,000 .4) = P364,800.

8. c

P300,000 + P50,000 = P350,000


P350,000 P245,000 = P105,000 gross profit (30% gross profit rate)
(P300,000 P100,000) x 30% = P60,000.

9. c

P1,800,000 P1,080,000 = P720,000 (40% gross profit rate)


P720,000 (P825,000 x 40%) = P390,000.

10. a assume the use of installment sales method. It should be noted that if the collectability is highly
uncertain or extremely uncertain, the use of cost recovery method is preferable.
P8,000 x (P30,000 P24,000)/P30,000 = P1,600
11. b
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000

P390,000

12. d same with No. 4


13. b
Installment Accounts Receivable, end of 20x4
x: Gross profit rate (66 2/3 / 166 2/3)
Deferred Gross Profit, end of 20x4
14. b
20x4: P150,000 (P568,620 x 10%) = P93,138.
20x5: (P568,620 P93,138) x 10% = P47,548.

P 320,000
_____40%
P 128,000

15. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
20x5 sales: P50,000 x 25%
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)
Realized Gross Profit on Sales in 20x5
Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
Realized Gross Profit in 20x5 for 20x4 sales
Divided by: Collections in 20x5 for 20x4 sales
Gross Profit % for 20x4 sales

2,200
12,500
10,575
P 25,275
P 10,500
5,000
P 5,500
P 25,000
22%

16. a
Installment Sales Method:
20x3 Sales: P240,000 x 25/125P 48,000
20x4 Sales: P180,000 x 28/128
39,375
Realized Gross Profit on Installment SalesP 87,375
Cost Recovery Method:
20x3 Cost: P480,000 / 1.25
Less: Collections in 20x3
Collections in 20x4
Unrecovered Cost, 12/31/20x4

P384,000
140,000
240,000
P 4,000

Under the cost recovery method, no income is recognized on a sale until the cost of the item sold
is recovered through cash receipts. All cash receipts, both interest and principal portions, are applied
first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all
costs have been recovered, the recognized revenue after the cost recovery represents income
(interest and realized gross profit). This method is used only when the circumstances surrounding a
sale are so uncertain that earlier recognition is impossible.
17. a

(1) Gain or Loss on repossession:


Estimated selling price
Less: Normal profit (37% x P1,700)
Market value of repossessed merchandise
Less: Unrecovered Cost:
Unpaid balance 20x3
Less: DGP x3 (P2,200 x34%)
Loss on repossession

P 1,700
629
P 1,071
P 2,200
748

(2) Realized gross profit on installment sales:


20x2 Sales: (P24,020 P 0) x 35%
20x3 Sales: (P344,460 P67,440 P2,200) x 34%
20x4 Sales: (P602,000 P410,090) x 37%
Realized gross profit on installment sales

1,452
P( 381)

8,407.0
93,438.8
71,006.7
P 172,852.5

18. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%.
20x4 Sales: (P410,090 x 37%)
19. a refer to No. 16 for discussion.
Cost, January 1, 20x4
Less: Collections including interest 20x4
Unrecovered Cost, December 31, 20x4

22,929.6
151,733.3
P174,662.9
P
P

20. b

(P300,000 P750,000) x P250,000 = P100,000


[(P270,000 P900,000) x P300,000] + P100,000 = P190,000.

21. d

[P5,600 x (1 .40)] (P2,100 P140) = P1,400.

22. d

P8,400 P5,880 = P2,520


(P3,000 P300) P2,520 = P180 gain.

23. b

P24,000 P7,200 = P16,800


P16,800 P13,500 = P3,300 loss.

24. d

(P2,000,000 P1,500,000) P2,000,000 = 25%

25. a

(P800,000 x .25) P90,000 = P110,000,

26. d

P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.

27. a

(P3,000,000 P2,100,000) P3,000,000 = 30%.

28. d

(P1,200,000 .30) P120,000 = P240,000.

29. a

P1,050,000 .30 = P315,000


P900,000 [(P1,200,000 + P1,050,000) .30] = P225,000.

30. c

(P3,600,000 P2,400,000) P3,600,000 = 33 1/3%


(P3,600,000 .20) + [(3,600,000 .80) 4/12)] = P1,680,000
P1,680,000 33 1/3% = P560,000.

31. b

[(P3,600,000 .20) + (P3,600,000 .80 x 8/12] P2,400,000 = P240,000.

27,830

60,000
32,170

32. a P0.
33. c
Sale: Installment receivables
Inventory
Deferred gross profit
Payment: Cash
Installment receivables
Deferred gross profit
Realized gross profit
Balance Sheet:
Installment receivables (4,500,000 500,000)
Deferred gross profit (900,000 100,000)
Installment receivables (net)

4,500,000
3,600,000
900,000
500,000
500,000
100,000
100,000
P 4,000,000
800,000
P 3,200,000

34. b
12/15/x5 Cash [(P4,500,000 P500,000)/2 = P2,000,000]
2,000,000
Installment receivables
2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)]
400,000
Realized gross profit
400,000
Balance sheet:
Deferred gross profit: P800,000 400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
35. b refer to No. 16 discussion.
Cost, January 1, 20x4.P 500,000
Less: Collections including interest 20x4.P241,269
Collections including interest 20x5 241,269
482,538
Unrecovered Cost, December 31, 20x5.P 17,462
36. c
Trade-in allowance
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs
Less: Reconditioning costs
Normal profit (15% x P36,000)
Over-allowance
Installment sales
Less: Over-allowance
Adjusted Installment Sales
Less: Cost of Installment Sales
Gross profit
Gross profit rate: P21,600/P108,000

P43,200
P36,000
1,800
5,400 28,800
P 14,400
P122,400
14,400
P108,000
86,400
P 21,600
20%

Realized gross profit:


Down payment
P 7,200
Trade-in (at market value)
28,800
Installment collections:
(P108,000 P28,800 P7,200) / 10 mos. X 3 mos.
21,600
Total collections in 2008
P 57,600
x: Gross profit rate
20%
Realized gross profit
P 11,520

37. a - Costs not yet recovered.


38. c
Cost, 20x4
20x4 cost recovery
Remaining cost, 12/31/x4
20x5 collection
Gross profit 20x5

P 30,000
(20,000)
P 10,000
15,000
P 5,000

39. d
Cost
20x4 cost recovery
20x5 cost recovery
Remaining cost

P 30,000
( 20,000)
( 10,000)
0

The entire P20,000 payment received in 20x6 is recognized as gross profit.


40. d
Sale:

Installment receivables
Inventory
Deferred gross profit

55,000
30,000
25,000

Payment: Cash

20,000
Installment receivables

20,000

Balance Sheet:
Installment receivables P55,000 20,000
Deferred gross profit
Installment receivables (net)

P 35,000
( 25,000)
P 10,000

41. a
Sale:

2008:

Installment receivables
Inventory
Deferred gross profit

55,000
30,000
25,000

Cash

20,000
20,000
15,000
15,000
5,000

Installment receivables
Cash
2009:

Installment receivables
Deferred gross profit
Realized gross profit

5,000

Balance Sheet:
Installment receivables
Deferred gross profit
Installment receivables (net)

P 20,000
( 20,000)
P
0

42. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000


43. a Gross profit % = (P900,000 P450,000)/P900,000 = 50%
20x4: 50% x P300,000 = P150,000
44. c
20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50%
50% x P300,000 received in 2010 = P150,000
20x5 sales: Gross profit % = (P1,500,000

P900,000)/P1,500,000 = 40%

40% x P400,000 received in 2010 = P160,000


Total: P150,000 + P160,000 = P310,000
45. c
20x4 Sales: Installment receivables = P900,000 P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 P150,000 (x4 collections)
- P150,000 (x5 collections) =
Net installment receivable for 20x4 sales
=

P 300,000
150,000
P 150,000

20x5 Sales: Installment receivables = P1,500,000 P500,000 (x5 collections)=


Deferred gross profit
= P600,000 P200,000 (x5 collections) =
Net installment receivable for 20x5
=
Total
=

P1,000,000
400,000
P 600,000
P 750,000

46. a
Installment receivable = P200,000
Deferred gross profit = P80,000 (P200,000 x 40%)
Fair value
= P75,000
Repossessed inventory P 75,000
Deferred gross profit
P 80,000
Loss on repossession (plug)
P 45,000
Installment receivable

P 200,000

47. b - P450,000 cost P300,000 collections = P150,000 unrecovered costs


48. b
20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost
recovered in 20x4, the other P150,000 of cost recovered in 20x5, so P150,000 of
gross profit recognized in 20x5, leaving P300,000 recognized in 20x6.
20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000 of
cost recovered in 20x5, the other P400,000 of cost recovered in 20x5, so P0 of
gross profit recognized in 20x6.
Total: P300,000 + P0 = P300,000
49. d
20x4 Sales: Installment receivables = P900,000 P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) =
Net installment receivable for 20x4 sales
=

P 300,000
300,000
P

20x5 Sales: Installment receivables = P1,500,000 P500,000 (x5 collections)= P1,000,000


Deferred gross profit
= P600,000 P0 (all x5 collections to
cost recovery) =
P 600,000
Net installment receivable for 20x5
=
P 400,000
Total
=
P 400,000
50. b same with No. 59.
51. c
Note: Since the collectibility of the note is reasonably assured, the accrual basis should be applied.
Therefore, full gross profit is recognized in the year of sale.
Gross profit on sale:
Sales (P187,500 x 4.3553)
P816,619
Cost of sales
637,500

Gross profit (realized)

P179,119

52. c
Total Income for 20x4:
Gross profit (realized) No. 51
Interest revenue4 months: P816,619 x 10% x 4/12..
Total income for 20x4

P179,119
_ 27,221
P206,340

53. b
Total Income for 20x5:
Gross profit (realized) already recognized in 20x4
Interest revenue 8 months in Year 1 (P81,662* x 8/12)
4 months in Year 2 (P71,078* x 4/12)
Total Income for 20x5

P
P 54,441
23,693

78,134
P 78,134

*Schedule of Discount Amortization/Interest Income computation:

Year
1
2

(1)
Face
Amount
of Note1
P1,125,000
937,500

(2)
Unamortized
Discount
P308,3813
226,7194

(3)
Net
Amount
(1) (2)
P 816,6192
710,781

(4)
Discount
Amortization
10% (3)
81,6625
71,078

P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the previous
balance.
2
The present value of sales/receivables: P187,500 x 4.3553 = P816,619
3
P1,125,000 P816,619
4
(2) (4)
5
Discount amortization give rise to recognition of interest revenue/income.
54. a
Note: Since the collectibility of the note cannot be reasonably assured, the installment sales method
should be applied. Also, if the there is high degree of uncertainty as to collectibility, the cost recovery
method may be used.
Installment sale: Gross profit (P179,119/P816,619)
22% (rounded)
Gross profit earned in 20x4 (P0* x 22%)
* no collections in 20x4.

55. a
Total Income for 20x4:
Gross profit earned in 20x4 (P0* x 22%)
Interest revenue (refer to No. 52
Total income for 20x4.
56. d
Collections in 20x5 (August 31, 20x5)
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
Collection as to principal
x: Gross Profit % (refer to No. 54)
Gross profit realized in 20x5
Add: Interest revenue/income for 20x5 (refer to No. 53)
Total Income for 20x5

0
27,221
P 27,221
P 187,500

81,662
P 105,838
22%
23,284
78,134
P 101,418

57. d*
Resale Value
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 P1,896,300)/P3,010,000] x 8,500
Market Value of Repossessed Merchandise
Less: Unrecovered Costs 20x5
Defaulted balance* (P27,000 P16,000)
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x
P11,000
Loss on repossession

P 8,500
3,145
P 5,355
P 11,000
___3,740

Entry made:
Inventory of RM*
IAR-20x5

__7,260
P( 1,905)

11,000
11,000

Correct Entry (Should be):


Inventory of RM (at MV)
DGP-20x5
Loss on repossession
IAR-20x5

5,355
3,740
1,905
11,000

Correcting Entry:
DGP-20x5
Loss on repossession
Inventory of RM

3,740
1,905
5,645**

58. d
20x4: P24,000 P0 = P24,000 collections x 39%P
20x5: P300,000 P60,000 P10,000 defaults = P230,000 x 42%
20x6: P480,000 P320,000 P5,000 defaults = P155,000 x 40%
Realized gross profit on installment sales in 20x6

9,360
96,600
62,000
P167,960

59. b
Market Values
Less: Unrecovered Cost:
IAR, unpaid balances
x: Cost Ratio
Gain (loss)

20x5 Sales
P 4,500
P10,000
50%

5,800
P (1,300)

60. c
Installment Sales
Less: Over-allowance:
Trade-in allowance
Less: MV of Trade-in Merchandise:
Estimated Resale Price
Less: Normal profit (25% x P1,400,000)
Reconditioning costs
Adjusted Installment Sales
Less: Cost of I/S
Gross Profit
Gross profit rate: P500,000/ P3,000,000
x: Collections Trade-in merchandise (at MV)
RGP on I/S in 20x4
Theories

20x6 Sales
P 3,500

P 5,000
60%
P

3,000
500

Net

P( 800)
P 3,600,000

P1,500,000
P 1,400,000
350,000
150,000

900,000

600,000
P 3,000,000
2,500,000
P 500,000
16 2/3%
P 900,000
P 150,000

1.

2
.
3
.
4
.
5
.

True
True

7. True

6.

True

12. True

17. True

22. d

27. b

32. c

False

8. True

13. True

18. b

23. d

28. d

33. c

False

9. True

14. True

19. c

24. c

29. b

34. b

True

10 False
,

15, True

20. c

25. b

30. d

35. b

36.

41.

37.
38.
39.
40.

d
b
b
d

42. c
43. c
44. c
45.

11.

False

16.

True

21.

26.

31.