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Instructor: Ms. July Joy S. Lumantas, CPA Midterm Quiz # 1

Theory. True or false.

1. Generally, expenses incurred to generate revenues should be matched to the revenues


recognized in a given period.
2. Companies should recognize revenue when it is probable that the economic benefits will
flow to the company and when cash is received.
3. Delayed recognition of revenue is appropriate if the sale does not represent substantial
completion of the earnings process.
4. The cost recovery method delays recognition of profit until cash collections have at least
equalled costs incurred.
5. When there is doubt about eventual collectibility, the income recognition method least likely
to overstate income is cost recovery method.

Problem solving.

1. Anna Corporation, a capital goods manufacturing business that started on January 4, 2016 and
operates on a calendar year basis. The following data were taken form the records of 2016 and
2017:
2016 2017
Installment sales P 580,000 P 640,000
Gross profit as a percent of costs 25% 28%
Cash collection on sales of 2016 160,000 250,000
Cash collection on sales of 2017 - 180,000
Compute the realized gross profit to be reported in the 2017 income statement:
a) using the installment method: ___________
b) using the cost recovery method: ___________

2. On August 1, 2017, Belle Co. sold a piece of land costing P337,500 at a gross margin of 66
2/3% above cost. The buyer paid a 20% down payment and made four installments of P22,500
each during the same year. Using the installment method of accounting:
a) the total collections in 2017: __________
b) the realized gross profit in 2017: __________

3. C, Inc. began operations on January 1, 2016 and approximately uses the installment method of
accounting. The following data are available for 2016:
Installment accounts receivable, 12/31/2016 P 600,000
Installments sales for 2016 1,050,000
Gross profit on sales 40%
Under the installment method, Cs deferred gross profit at December 31, 2016 is: ___________

4. Francis Enterprise uses the installment method of accounting and it has the following data at the
year-end:
Gross profit on cost 66 2/3%
Deferred gross profit P 192,000
Cash collections including down payment 360,000
What was the total amount of sales on installment basis? ___________

5. The Mitch Subdivision sells residential subdivision lots on installment basis. The following
information was taken from the companys records as at December 31, 2016:
Installment accounts receivable, Jan. 1 P 755,000
Installment accounts receivable, Dec. 31 840,000
Deferred gross profit, Jan. 1 339,750
Installment sales 950,000
What is the balance of the deferred gross profit at Dec. 31? ___________