Chapter 7

Problems
Problem I
1. Entries in 20x4:
Cash... 3,500
Mortgage Notes Receivable .. 20,500
Real Estate .
9,000
Gain on Sale of Real Estate ..
15,000
Cash 500
Mortgage Notes Receivable . 500

Entry in 20x5:
Real Estate . 16,500
Loss on Repossession of Real Estate .. 3,500
Mortgage Notes Receivable 20,000

2. Entries in 20x4
Cash 3, 500
Mortgage Notes Receivable .. 20,500
Real Estate ..
9,000
Deferred Gross Profit on Installment Sales ............
15,000
Cash . 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 II
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 III
1.
a. Installment Contracts Receivable 19X8 250,000
Installment Sales
250,000

b. Cash .. 120,000
Installment Contracts Receivable 19X8
120,000

c. Cost of Installment Sales .. 200,000

Merchandise Inventory ..
200,000

d. Merchandise Repossessions 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 16,000
Loss on repossession. 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 250,000
Cost of Installment Sales .
200,000
Deferred Gross Profit on Installment Sales-20x4..
50,000

c. Adjustment to Recognize Gross Profit on Installment Sales:

Deferred Gross Profit on Installment Sales 20x4... 24,000
Realized Gross Profit on Installment Sales 20x4 .
24,000
 Realized Gross Profit: 20% of P120,000 (collections),
or P24,000

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:
1,080,00
Accounts receivable 600,000 0
1,080,00
Sales 600,00 0

(2) To record installment sale:

Cash 60,000 144,000
Installment accounts receivable 300,000 336,000
Installment Sales 360,000 480,000

(3) To record cost of sales:

Periodic Method: No entry

Perpetual Method:
Regular Sales:
Cost of Sales 480,000 864,000
Merchandise inventory 480,000 864,000

Installment Sales:
Cost of installment sales 252,000 312,000
Merchandise inventory 252,000 312,000

(4) To record collections:

Regular Sales:
Cash 144,000 360,000
Accounts receivable 144,000 360,000

Installment Sales:
Cash 108,000 204,000
Installment Accounts
receivable
20x2 72,000 72,000
Installment Accounts
receivable
20x3 60,000
Interest income 36,000 72,000

(5) to record payment of operating expenses:

Operating expenses 90,000 102,000
 Cash 90,000 102,000
2.

Adjusting entries (end of the year):

(6) To recognize accrued interest receivable
Interest receivable 1,440 2,880
Interest income 1,440 2,880

(7) To set-up Cost of Sales:

Periodic Method:
Cost of sales 480,000 864,000
Merchandise inventory 480,000 864,000

Perpetual Method: No entry

(7) To set-up Cost of Installment Sales:

Periodic Method:
Cost of installment sales 252,000 312,000
Shipment s on installment
sales 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 252,000 312,000
Deferred gross profit 20x4 108,000
Deferred gross profit 20x5 168,000
Gross profit rate 20x4: P 108,000 / P360,000 = 30%.
Gross profit rate 20x5: P168,000 / P480,000 = 35%.

(9) To record realized gross profit on

installment
sales:
Deferred gross profit 20x4 39,600 *21,600
Deferred gross profit 20x5 71,400
Realized gross profit 39,600 93,000
*P72,000 x 30%
20x4: Realized gross profit on installment sales:
Collections applying as to principal..P132,000
Multiplied by: Gross profit rate. 30%
Realized gross profitP 39,600

20x5: Realized gross profit on installment sales;

20x4 20x5
Collections P *P204,00
principal 72,000 0
Multiplies by: Gross profit ____35
%.......... ____30% %
Realized gross P P P
profit 21,600 71,400 93,000
 *P144,000 + P60,000
Closing entries:
(10) To close realized gross profit account:
Realized gross profit 39,600 93,000
Income summary 39,600 93,000

(11) To close other nominal accounts

1,080,00
Sales 600,000 0
Interest income 37,440 74,880
Cost of sales 480,000 864,000
Operating expenses 90,000 102,000
Income summary 67,440 188,880

(12) To close results of operations:

Income summary 107,040 281,880
Retained earnings 107,040 281,880
Problem V
1.
Ratio to Total
Type of Sale Amount Sales Allocated Cost
Regular Sales:
Cash sales P 225,000 P *146,250
Credit sales ___450,000 **292,500
Total regular sales P 675,000 675/1,800 P 438,750
Installment Sales _ 1,125,000 1,125/1,800 __731,250
Total Sales P 1,800,000 P 1,170,000
*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.
Amount based on
Cash Sales Ratio to Total
Type of Sale Amount (100%) Sales Allocated Cost
Cash sales P 225,000 P 225,000 225/1,500 P 175,500
Credit sales 450,000 375,000* 375/1,500 292,500
1,125,00
Installment Sales 0 900,000** 900/1,500 __ 702,000
Total Sales P 1,500,000 P 1,250,000 P 1,170,000
*P450,000 / 120% = P375,000
**P1,125,000 / 125% = P900,000

3.
Type of Sale Amount Gross profit rate Cost ratio Allocated Cost*
Cash sales P 225,000 30% 70% P 157,500
Credit sales 450,000 25% 75% 337,500
1,125,00
Installment Sales 0 40% 60% _ _675,000
Total Sales P 1,800,000 P 1,170,000
* Amount of sale x cost ratio.

Problem VI
The entries are required under the periodic method:
 Repossessed merchandise...... 68,400
Deferred gross profit 20x4............ 48,000
Loss on repossession... 3,600
Installment accounts receivable 20x4. 120,000
To record repossessed merchandise.

Repossessed merchandise...... 12,000

Cash, etc (or various credits)................ 12,000
To record reconditioning costs

The loss on repossession is computed as follows:

Estimated selling price after reconditioning P 108,000
costs..............
Less: Reconditioning costs P 12,000
Costs to sell and dispose. 6,000
Normal profit (20% x 108,000) __21,600 __39,600
.
Market value before reconditioning costs.. P 68,400
Less: Unrecovered cost
Installment accounts receivable 20x4,
unpaid balance... P120,000
Less: Deferred gross profit 20x4 (P120,000 x __48,000 __72,000
40%).....
Loss on repossession. P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise............... 840,000
Over-allowance on trade-in merchandise. 360,000
Cash.. 2,400,00
0
Installment accounts receivable 20x4............ 3,360,00
0
Installment sales....... 6,960,00
0
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............... 840,000
Cash.. 2,400,00
0
Installment accounts receivable 20x4............ 3,360,00
0
Installment sales (net of over-allowance).............. 6,600,00
0
To record installment sales with trade-in.

The over-allowance is computed as follows:

Trade-in allowance.................. P1,200,00
0
Less: Market value before reconditioning costs:
Estimated resale price after reconditioning costs. P1,680,0
00
Less: Reconditioning costs.. 420,000
Costs to sell (5% x P1,680,000) 84,000
Normal profit (20% x P1,680,000)....... __336,00 __840,00
0 0
 Over-allowance P
360,000

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

Installment sales...... P6,960,000
Less: Over-allowance ___360,000
Adjusted Installment Sales P6,600,000
Less: Cost of installment sales. __3,920,00
0
Gross profit. P2,680,000
Gross profit rate (P2,680,000/P6,600,000).. 40.60%

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

Trade-in Merchandise............... 420,000
Cash, etc (or various credits).............. 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) P 840,000
Down payment 2,000,000
Installment collection (March 31 December 31: P80,000 x 10 months) ___800,000
Total collections.. P3,640,000
Multiplied by: Gross profit rate in 20x4.. ___40.60%
Realized gross profit on installment sales of new merchandise 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 .
15,000
Nov. 30 Cash . 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
60,000.00
Deferred Gross Profit on Installment Sales ..
15,000.00

Nov. 30 Cash 600

Mortgage Notes Receivable ..
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]) 6,300
Depreciation Expense (1/2[2% of P90,000]) 900
Land 10,000
Building .. 90,000
Deferred Gross Profit on Sale of Property 57,200
Deferred Gross Profit on Sale of Property 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 . 50,000
Notes Receivable 50,000

Deferred Gross Profit on Sale of Property 19,067

Realized Gross Profit on Sale of Property
19,067
 Amount Realized: (P50,000/P150,000) X 57,200

6/30/x7 Cash .. 15,000

Notes Receivable 15,000

Deferred Gross Profit on Sale of Property . 5,720

Realized Gross Profit on Sale of Property
5,720
Amount Realized: (P15,000/P150,000) X 57,200
Problem X
Installment Contracts Receivable 200,000
Installment Sales
200,000

Cost of Installment Sales .. 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 P 40,000
Deferred Gross Profit 20x6 P 15,125
20x5 3,600
20x4 960 19,685
Total Liabilities P
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

Installment Regular Total

Sales Sales
Sales ............ P320,000 P125,000 P445,00
0
Cost of goods sold:
Merchandise Inventory, Jan. 1 P
52,000
Purchases ..................
350,000
Merchandise Available for sale .................
402,000
Less: Merchandise Inv. Dec. 31 232,000 110,000 342,000
60,000
Gross Profit .. P88,000 P15,000 P103,00
0
Less: Deferred Gross Profit on 19X34 15,125 15,125

Realized Gross Profit on current years sales P78,875 P15,000 P87,875
.
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule) 50,040
.
Total Realized Gross Profit . P137,91
5
Operating Expenses ... 151,50
0
Net Loss .. P
13,585

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
Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% P
15,125

Realized Gross Profit:

20x6 20x5 20x4
Collections on Installment Contracts Receivable ... P265,000 P138,000
P27,000
Installment sales gross profit percentage .. 27.5% 30%
32%
Realized Gross Profit .. P 72,875 P 41,400
P 8,640

Installment Sales 320,000

Cost of Installment Sales . 232,000
Deferred Gross profit -20x6 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 60,000

Sales . 125,000
Income Summary . 125,000
Realized Gross Profit on Installment Sales..... 122,915
Income Summary . 122,915

Income Summary 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

Installment Regular Total

Sales Sales
Sales ............ P500,000 P192,000 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. 31 310,000 150,000 460,000
35,000
Gross Profit .. P190,000 P42,000 P103,000
Less: Deferred Gross Profit on 20x6 sales (see 32,300 32,300
schedule)
Realized Gross Profit on current years sales P157,700 P42,000 P199,700
.
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule) 100,650
. P300,350
3,500
Deduct loss on repossession .
Total Realized Gross Profit . P296,850
Operating Expenses 300,000
Net Loss .. P 3,150
 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 20x5 20x4
Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000
Installment sales gross profit percentage .. 38% 40% 45%
Realized gross profit ..P157,700 P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash ... P
25,000
Installment Accounts Receivable 20x6 P 80,000
20x5 20,000
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 P
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 .. P
257,000

4. Installment Sales .. 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 .. 35,000

Sales .... 192,000

Income Summary 192,000

Realized Gross Profit on Installment Sales..258,350

Income Summary .. 258,350

Income Summary 3,500

Loss on Repossession . 3,500

Income Summary 300,000

Operating Expenses .. 300,000

Retained Earnings 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 P 8,407.00
20x5: 34% x P274,820
93,438.80
20x6; 37% x P191,910
71,006.70
Total P172,852.50

2. Deferred gross profit 20x5 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.. 381.00

Inventory of repossessed merchandise.. 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 . 1,600.00
Merchandise Inventory (Piano) 1,000.00
Deferred Gross Profit on Installment Sales
600.00

Cash .......................... 160.00

Installment Contracts Receivable 160.00

2. Cash ........................ 160.00

Interest Income 14.40
Installment Contracts Receivable . 145.60
Cash ...................... 160.00
Interest Income . 11.47
Installment Contracts Receivable 148.53
3. Deferred Gross Profit on Installment of Sales .. 225.45
Realized Gross Profit on Installment of Sales
225.45
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)

4. 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 XV Big Bear

20x4:
Installment receivables 250,000
Inventory 150,000
 Deferred gross profit 100,000

Cash 80,000
Installment receivables 80,000

20x5:
Cash 120,000
Installment receivables 120,000

Deferred gross profit 50,000

Realized gross profit 50,000

20x6:
Cash 50,000
Installment receivables 50,000

Installment receivables 300,000

Inventory 210,000
Deferred gross profit 90,000

Cash 135,000
Installment receivables 135,000

Deferred gross profit 40,500

Realized gross profit 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 XVI 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 P816,61
9
Cost of sales 637,500
Gross profit P179,119
Interest revenue--4 months: P816,619 x 10% x 4/12 = _ 27,221
Total income for 20x5 = P179,119 + P27,221 = P206,340

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

Installment sale: Gross profit (P179,119/P816,619) = 22% rounded

Gross profit earned in 20x5 (P0 x 22%) P 0

 Interest revenue 27,221

Total income for 20x5 P 27,221

IFRS 15 Based Problems

Problem XVII 5-Step Process
Recognize revenue in the accounting period when the performance obligation is satisfied.
Step 1: Identify the contract with customers.
A contract is an agreement between two parties that creates enforceable rights or obligations. In
this case, Maritime Ship Manufacturers contract to deliver cargo ships to Kim and Dreicy Shipping
Lines.
Step 2: Identify the separate performance obligations in the contract.
Maritime Ship Manufacturers has only one performance obligationto deliver cargo ships to Kim
and Dreicy Shipping Lines. If Maritime Ship Manufacturers also agreed to maintain the cargo ships,
a separate performance obligation is recorded for this promise.
Step 3: Determine the transaction price.
Transaction price is the amount of consideration that a company expects to receive from a
customer in exchange for transferring a good or service. In this case, the transaction price is
straight forwardit is P720,000,000.
Step 4: Allocate the transaction price to the separate performance obligations.
In this case, Maritime Ship Manufacturers has only one performance obligationto deliver cargo
ships to Kim and Dreicy Shipping Lines.
Step 5: Recognize revenue when each performance obligation is satisfied.
Maritime Ship Manufacturers recognizes revenue of P800 million for the sale of the cargo ships to
Kim and Dreicy Shipping Lines when it satisfies its performance obligationthe delivery of the
cargo ships to Kim and Dreicy Shipping Lines.
Problem XVIII Contracts and Recognition
The entry on July 31, 20x7, to record the sale and related cost of goods sold is as
follows:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,00 .
. 0
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
...
Cost of34,20
sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200
...
The entry to record the receipt of cash on August 31, 20x7 is a follows:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57,00
..... 0
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000
......
A key attribute of the revenue arrangement is that the signing of the contract by the two parties is not
recorded until one or both of the parties perform under the contract. Until performance occurs, no
net asset or net liability occurs.
Problem XIX Contracts and Recognition
The above new contract, AB recognizes additional total revenue of P63,720,000, computed as follows
Original contract [(120,000 units 72,000 units) x P900]P 43,200,000
New product (24,000 units x P855).. 20,520,000
Total revenue after the modification.P 63,720,000

In this situation, the contract modification for the additional 24,000 products is, as a result, a new and
separate contract, which does not affect the accounting for the original contract.
Problem XX Prospective Modification
For AB, the amount recognized as revenue for each of the remaining products would be a blended
price of P885, computed as shown:
Products not delivered under original contract (P900 x 48,000)P43,200,000
Products to be delivered under contract modification (24,000 x P855). 20,520,000
Total remaining revenueP 63,720,000
Revenue per remaining unit (P63,720,000 72,000)= P885, blended price
Note: Under the prospective approach, this computation differs from that in the separate
performance obligation approach is that revenue on the remaining units (i.e., 72,000
units) is recognized at the blended price.

Prospective Modification. Under the prospective approach, a blended price (P885) is used
for sales in the periods after the modification.
Revenue Recognized Revenue Recognized Total Revenue
Prior to Modification After Modification Recognized
Separate performance obligation P64,800,000* P 63,720,000 P128,520,000
No separate performance
obligation - prospectively P64,800,000* P 63,720,000 P128,520,000
* 72,000 x P900
Note: As pointed out, whether a modification is treated as a separate performance obligation
or prospectively, the same amount of revenue is recognized before and after the
modification. However, under the prospective approach, a blended price (P885) is used for
sales after the modification.

Problem XXI Identifying Separate Performance Obligations

The license and the consulting services are distinct but interdependent, and therefore should
be accounted for as one performance obligation.

Problem XXII Identifying Separate Performance Obligations

1. The sale of the computer and related assurance warranty are one performance
obligation as they are interdependent and interrelated with each other.
2. The extended warranty is separately sold and is not interdependent.
Problem XXII Estimating Variable Consideration
The probability-weighted method is the most predictive approach for the management to
determine the transaction price:
60% chance of P160,000,000P 96,000,000
30% chance of P154,000,000[P160,000,000 (10% x P60,000,000)].. 46,200,000
10% chance of P148,000,000[P160,000,000 (10% x P60,000,000) x 2] 14,800,000
P157,000,000
Problem XXIII Revenue Recognition Constraint
The following items should be taken into consideration by Ging and Associates:
1. Recognized the management fee each quarter based on the performance of its services
during the year.
2. The incentive fee should not be recorded until the end of the year. Therefore, this fee is
constrained (not recognized) until the incentive is determinable at the end of the year.

Problem XXIV Extended Payment Terms

July 1, 20x7: Record the Sale
Notes 894,697.
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540,000.0
... 0
Unearned Interest income (discount on notes receivable). . . . . . 354,697.8
0
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,000.
.
... 00
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,000.0
.... 0
December 31, 20x7: Record interest revenue:
Unearned interest income (Discount on notes receivable). . . . . . . . . . 32,400.0 .
... 0
Interest income (12% x x P540,000). . . . . . . . . . . . . . . . . . . . . . . 32,400.00
.....
The revenue that James Company should record on July 1, 20x7 should amount to P540,000. While the
amount of revenue (i.e., interest income) that should be report related to this transaction on December
31, 20x7 also amounted to P32,400.
For practical considerations, companies are not required to reflect the time value of money if
the time period for payment is less than a year.
Problem XXV Volume Discount
The entries that Samsung recognize as revenue for the first three months of 20x7 (March 31, 20x7) are
as follows:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400
....
Sales [P420,000 - (P420,000 x 407,400
3%)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Samsung should reduce its revenue by P12,600 (P420,00 x 3%) because it is probable that it will
provide this rebate.

Assuming Samsungs customer meets the discount threshold, Samsung makes the following entry:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400
. . . . ..
Accounts 407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
If Samsungs customer fails to meet the discount threshold, Samsung makes the following entry upon
payment.
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .420,000
. . . . ..
Accounts 407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales discount 12,600
lost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,400
. . . . ..
Accounts 407,400
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Problem XXVI One or Multiple Performance Obligations

The following items should be taken into consideration by Ube Company:
1. The performance obligations relate to building construction, maintenance of the building and
operate the condominium (buildings).
2. As pointed out, Ube Company can determine standalone values for the building, and the
maintenance building.
3. The company then can make a best estimate of the price for operating the condominium
(buildings), using the adjusted market assessment approach or expected cost plus a margin
approach.
4. Ube Company next applies the relative fair value method at the inception of the transaction
to determine the proper allocation to each performance obligation.
5. Once the allocation is been properly determined, Ube Company recognizes revenue
independently for each performance obligation using regular revenue recognition criteria.
6. If, alternatively, the standalone selling price for operating the condominium (building) is highly
variable or uncertain, Ube Company may use a residual approach. In this case, Ube
Company uses the fair values of the high rise building and the maintenance agreements and
subtracts their fair value from the total transaction price to arrive at a residual value for
operating the condominium (buildings):
 Total transaction price P xxx
Less: Fair value of the high rise building P xxx
Building maintenance.. _xxx _xxx
Residual value Amount allocated for operating the
condominium (buildings).. P xxx

Problem XXVII Multiple Performance Obligations

The following items should be taken into consideration by AA Maritime Industries, Inc.
The first condition for separation into a standalone unit for the bridge simulator is met. That is,
the bridge simulator, installation, and training are distinct and not interdependent - they are
three separate products or services, and each of these items has a standalone selling price.
The total revenue of P42,000,000 should be allocated to the three components based on their
relative fair values.

1. The fair value of the bridge simulator should be considered P42,000,000, the installation fee is
P840,000, and the training is P420,000. The total fair value to consider amounted to:
Bridge simulator (P40,740,000/P42,000,000) x P40,740,000...
P39,517,800
Installation (P840,000/P42,000,000) x 814,800
P40,740,000..
Training (P420,000/P42,000,000) x___407,400
P40,740,000.........................................
Total.. P40,740,000

2. AA Maritime Industries, Inc makes the following entry on November 1, 20x7, to record
both sales revenue and service revenue on the installation, as well as unearned service
revenue:
Cash. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .40,740,0
.... 00
Service revenue (installation). . . . . . . . . . . . . . . . . . . . . . . 814,800
....
Unearned service 407,400
revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales 39,517,80
revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

(Not required)
Assuming the cost of the bridge simulator is P28,518,000 the entry on November 1, 20x7 to
record cost of goods sold is as follows:
Cost of goods sold. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .28,518,0
..... 00
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,518,00
. ... 0

As indicated by the above entries, AA Maritime Industries, Inc recognizes revenue from the
sale of the bridge simulator once the installation is completed on November 1, 20x7. In
addition, it recognizes revenue for the installation fee because these services have been
performed.

3. AA Maritime Industries, Inc recognized the training revenues on a straight-line basis

starting on November 1, 20x7, or P101,000 (P407,400/4 months) per month for four (4) months.
The journal entry on December 31 20x7 to recognize the training revenue of two (2)
months in 20x7 is as follows:
Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000
..
Service revenue (P101,000 x 2 months). . . . . . . . . . . . . . . 202,000
...
 Therefore, AA Maritime Industries, Inc recognizes revenue on December 31, 20x7, in the
amount of P40,534,600 (P39,517,800 + P814,800 + P202,000). AA Maritime Industries, Inc
makes the following journal entry on December 31, 20x7 to recognize the training revenue in
20x8, assuming adjusting entries are made at year-end:
Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,400
..
Service revenue (P407,400 P202,000). . . . . . . . . . . . . . . 205,400
...

Problem XXVIII Discounted Transaction Price

The following items should be taken into consideration by Tobys Store:
As indicated, the standalone price for product 1, 2, 3, and 4 is P21,240, but the bundled price
for all four products is P18,600.
The discount applies to the performance obligations related to products 1, 3, and 5.
Accordingly, Tobys Store: allocates the discount to product 1, 3, and 4, and not to products
2, as follows:
Allocated Amounts
Product 1, 3, and 4 P 16,200
Product 2.. 6,000
Total P 17,200

Problem XXIX Timing of Revenue Recognition - Point in time when revenue should be
recognized
The following items should be taken into consideration by Cerise Outsourcing Company:
Cerise Outsourcing Company does not create an asset with an alternative use because it is
prohibited from redirecting the software to another customer.
Cerise Outsourcing Company is entitled to payments for performance to date and expects
to complete the project.
Consequently, Cerise Outsourcing Company concludes that the contract meets the criteria
for recognizing revenue over time.
Problem XXX Right of Return
The following entries in relation to the sale are as follows:
1. NN records the sale as follows with the expectation that three products will be returned:
Cash. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
...
Sales (P100 x (240 13,400
6)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refund Liability (P100 x 6 600
units). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales (P14,400 14,040
P360). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated inventory returns (P60 x 6). . . . . . . . . . . . . . . . . . . . . . . . . . 360
..
Inventory (P60 x 240 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400
...

2. When a return occurs, assuming 4 units were returned: NN records the following entries :
Refund Liability (4 units x P100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
...
Accounts 400
Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Returned Inventory (4 x P60) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
..
Estimated inventory returns . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 240
. ..
Companies record the returned asset in a separate account from inventory to provide transparency.
Problem XXXI Repurchase Agreement
MM Inc., an equipment dealer, sells equipment on January 1, 20x7, to RR Company for P200,000. It
agrees to repurchase this equipment on December 31, 20x8, for a price of P242,000.
1. Assuming an interest rate of 10 percent is imputed from the agreement, MM makes the following
entry to record the financing on January 1, 20x7:
Cash. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
...
Liability to RR Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000

2. MM Inc. records interest on December 31, 20x8, as follows :

Interest 24,000
Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability to RR Company (P240,000 x 24,000
10%). . . . . . . . . . . . . . . . . . . . . .

3. MM Inc. records interest and retirement of its liability to RR Company on December 31, 20 x9, as
follows:
Interest 26,400
Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability to RR Company [P240,000 + P24,000) x 26,400
10%]. . . . . . . . . . . . . . . .
Liability to RR290,400
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .
Cash [P240,000 + P24,000 + P26,400] . . . . . . . . . . . . . . . . . . . . . . 290,400
. . . . ..

Problem XXXII Bill and Hold

GG Company determines when it has satisfied its performance obligation to transfer a product by
evaluating when CC obtains control of that product. For CC to have obtained control of a product in a
bill-and-hold arrangement, all of the following criteria should be met:
- The reason for the bill-and-hold arrangement must be substantive.
- The product must be identified separately as belonging to CC.
- The product currently must be ready for physical transfer to CC
- Gianne cannot have the ability to use the product or to direct it to another customer.

In this case, it appears that the above criteria were met, and therefore revenue recognition
should be permitted at the time the contract is signed.

GG makes the following entry to record the sale:

Accounts 1,080,00
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,000
......

GG makes an entry to record the related cost of goods sold as follows.

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .672,000
...
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672,000
....
Problem XXXIII - Warranties
JJ Company sold 2,400 units during 20x7 at a total price of P14,400,000, with a warranty guarantee
that the product was free of any defects. The cost of each unit sold is P9,600,000. The term of the
assurance warranty is two years, with an estimated cost of P72,000. In addition, Jack sold extended
warranties related to 800 units for three years beyond the two-year period for P28,800.

1. To record the revenue and liabilities related to the warranties:

Cash (P14,400,000 +14,428,8
P28,800). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00
Warranty expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
 ....
Warranty liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
....
Unearned Warranty Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,800
.....
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000,00
... .. 0

2. To reduce inventory and recognize cost of goods sold:

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,00
.
... 0
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,000
....
Problem XXXIV Non-refundable Upfront Fee Considerations
The following items should be taken into consideration by Physical Gym:
1. In this case, the membership fee arrangement may be viewed as a single performance
obligation (similar services are provided in all periods). That is, Physical Gym is providing a
discounted price in the second and third years for the same services, and this should be
reflected in the revenue recognized in those periods.
2. Physical Gym determines the total transaction price to be P144,000 - the upfront fee of
P14,400 and the 3 years of monthly fees of P129,600 (P3,600 x 36 months) - and allocates it
over the 3 years.
3. In relation to No. 2, the Physical Gym would report revenue of P4,000 [(P144,000 / 36
months) each month for 3 years.

Problem XXXV - Contract Assets

On February 1, 20x7, Janine records the following entry:
Contract Asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
....
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
......

On February 1, JJ does not record an accounts receivable because it does not have an unconditional
right to receive the P240,000 unless it also transfers Product Y to DD.

When JJ transfers Product Y on March 1, 20x7, it makes the following entry:

Accounts 240,000
receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract 72,000
Asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,000
.....
Problem XXXVI - Contract Liabilities
There is no entry is required on March 1, 20x7 for the following reasons:
Neither party has performed on the contract.
Neither party has an unconditional right as of March 1, 20x7.

On receiving the cash on April 15, 20x7, Asser records the following entry:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 24,000
....
Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
.....

On satisfying the performance obligation on July 31, 20x7, Janine records the
following entry to record the sale:
Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
...
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
.....
In addition, Asser records cost of goods sold as follows:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
...
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
....
Costs to Fulfill a Contract

Companies divide fulfillment costs (contract acquisition costs) into two categories:
Those that give rise to an asset.
Those that are expensed as incurred.
Companies recognize an asset for the incremental costs if these costs are incurred to obtain a
contract with a customer. In other words, incremental costs are those that a company would not incur
if the contract had not been obtained, such as:
a. Sales commissions;
b. Direct labor, direct materials, and allocation of costs that relate directly to the contract (e.g.,
costs of contract management and supervision, insurance, and depreciation of tools and
equipment); and;
c. Costs that generate or enhance resources of the company that will be used in satisfying
performance obligations in the future. Such costs include intangible design or engineering
costs that will continue to give rise to benefits in the future.
Other costs that are expensed as incurred include general and administrative expenses (unless those
costs are explicitly chargeable to the customer under the contract) as well as costs of waste, labor, or
other resources to fulfill the contract that were not reflected in the price of the contract.

In summary, companies only capitalize costs that are direct, incremental, and recoverable
(assuming that the contract period is more than one year).

Problem XXXVII - Contract Costs

The following items should be taken into consideration by Espi Outsoucing Company:
The P48,000 selling commission costs related to obtaining the contract are recognized as an
asset.
The design services cost of P72,000 and the hardware for the platform of P240,000 are also
capitalized.
As the technology platform is independent of the contract, the pattern of amortization of this
platform may not be related to the terms of the contract.
The migration and testing costs of P156,000 are expensed as incurred; in general, these costs
are not recoverable.

Multiple Choice Problems

1. b
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000 P390,000

2. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
2,200
20x5 sales: P50,000 x 25%
12,500
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)
10,575
P 25,275

Realized Gross Profit on Sales in 20x5 P

10,500
 Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
5,000
Realized Gross Profit in 20x5 for 20x4 sales P
5,500
Divided by: Collections in 20x5 for 20x4 sales P
25,000
Gross Profit % for 20x4 sales 22%

3. 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 P384,000
Less: Collections in 20x3 140,000
Collections in 20x4 240,000
Unrecovered Cost, 12/31/20x4 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.

4. a P0.
5. c
6. e, 20x6 0; 20x7 - 0
Unrecovered costs,1/1/20x4 110,000
Less: Collections
1/1//20x4 0
Add: Sales on account 15,000
Total 15,000
Less: 1/1/20x5 10,500
Collections in 20x4 __4,500
Unrecovered costs,1/1/20x5 105,500
1/1//20x5 10,500
Add: Sales on account 30,000
Total 40,500
Less: 1/1/20x6 25,500
Collections in 20x5 15,000
Unrecovered costs,1/1/20x6 90,500
1/1//20x6 25,500
Add: Sales on account 60,000
Total 85,500
Less: 1/1/20x7 40,500
Collections in 20x6 45,000
Unrecovered costs,1/1/20x7 45,500
1/1//20x7 40,500
Add: Sales on account 24,000
Total 64,500
Less: 1/1/20x8 70,000
Collections in 20x7 ____-0-
Unrecovered costs,1/1/20x8 45,500

7. b
20x4: P150,000 (P568,620 x 10%) = P93,138.
 20x5: (P568,620 P93,138) x 10% = P47,548.

8. a refer to No. 3 for discussion.

Cost, January 1, 20x4 P 60,000
Less: Collections including interest 20x4 32,170
Unrecovered Cost, December 31, 20x4 P 27,830

9. 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.

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

11. b refer to No. 3 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
12. b [(P1,400,000 P980,000) P1,400,000] x P840,000 = P252,000.
13. 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.

14. c P1,200,000 P720,000 = P480,000 gross profit (40% gross profit rate)
P480,000 (P288,000 .4) = P364,800.

15. d [P225,000 + (P120,000/40%)]

16. b (P36,000 24%) + (P198,000 30%) = P810,000.

17. 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
18. c
Sale: Installment receivables 4,500,000
Inventory
3,600,000
Deferred gross profit
900,000
Payment: Cash 500,000
Installment receivables
500,000
Deferred gross profit 100,000
Realized gross profit
100,000
Balance Sheet:
Installment receivables (4,500,000 500,000) P
4,000,000
Deferred gross profit (900,000 100,000)
800,000
Installment receivables (net) P 3,200,000
19. 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.

20. No requirement
21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000

22. a Gross profit % = (P900,000 P450,000)/P900,000 = 50%

20x4: 50% x P300,000 = P150,000

23. 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

24. c
20x4 Sales: Installment receivables = P900,000 P300,000 (x4 collections)
- P300,000 (x5 collections) = P
300,000
Deferred gross profit = P450,000 P150,000 (x4 collections)
- P150,000 (x5 collections) =
150,000
Net installment receivable for 20x4 sales = P
150,000

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

P1,000,000
Deferred gross profit = P600,000 P200,000 (x5 collections) =
400,000
Net installment receivable for 20x5 = P 600,000
Total = P 750,000

25. a - Costs not yet recovered.

26. b
Cost, 20x4 P 30,000
20x4 cost recovery (20,000)
Remaining cost, 12/31/x4 P 10,000
20x5 collection 15,000
Gross profit 20x5 P 5,000

27. d
Cost P 30,000
20x4 cost recovery ( 20,000)
20x5 cost recovery ( 10,000)
Remaining cost 0
 The entire P20,000 payment received in 20x6 is recognized as gross profit.

28. a
Sale: Installment receivables 55,000
Inventory 30,000
Deferred gross profit 25,000

Payment: Cash 20,000

Installment receivables 20,000

Balance Sheet:
Installment receivables P55,000 20,000 P 35,000
Deferred gross profit ( 25,000)
Installment receivables (net) P 10,000

29. a
Sale: Installment receivables 55,000
Inventory 30,000
Deferred gross profit 25,000
2008: Cash 20,000
Installment receivables 20,000
Cash 15,000
Installment receivables 15,000
2009: Deferred gross profit 5,000
Realized gross profit 5,000
Balance Sheet:
Installment receivables P 20,000
Deferred gross profit ( 20,000)
Installment receivables (net) P 0

30. 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

31. c
Total Income for 20x4:
Gross profit (realized) No. 51 P179,119
Interest revenue4 months: P816,619 x 10% x 4/12.. _ 27,221
Total income for 20x4 P206,340

32. b
Total Income for 20x5:
Gross profit (realized) already recognized in 20x4 P
0
Interest revenue 8 months in Year 1 (P81,662* x 8/12) P 54,441
4 months in Year 2 (P71,078* x 4/12) 23,693
78,134
Total Income for 20x5 P
78,134

*Schedule of Discount Amortization/Interest Income computation:

 (1) (2) (3) (4)
Face Net Discount
Amount Unamortized Amount Amortization
Year of Note1 Discount (1) (2) 10% (3)
1 P1,125,000 P308,3813 P 816,6192 81,6625
2 937,500 226,7194 710,781 71,078
1
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.

33. 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%) P 0

* no collections in 20x4.

34. a
Total Income for 20x4:
Gross profit earned in 20x4 (P0* x 22%) P
0
Interest revenue (refer to No. 52 27,221
Total income for 20x4. P 27,221

35. d
Collections in 20x5 (August 31, 20x5) P 187,500
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
81,662
Collection as to principal P 105,838
x: Gross Profit % (refer to No. 54)
22%
Gross profit realized in 20x5 P 23,284
Add: Interest revenue/income for 20x5 (refer to No. 53)
78,134
Total Income for 20x5 P 101,418

36. d (P2,000,000 P1,500,000) P2,000,000 = 25%

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

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

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

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

41. a P1,050,000 .30 = P315,000

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

42. b P24,000 P7,200 = P16,800

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

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

44. d- P8,400 (70% x P8,400) = P2,520

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

Note: The selling price to be used in determining gain or loss should be more profitable
to the company which is P3,000 instead of P2,400 as repossessed. Theoretically, the gain
is not recognized but since the requirement is gain or loss on repossession, therefore,
P180 is the indicated gain.

45. d
20x4: P24,000 P0 = P24,000 collections x 39%P
9,360
20x5: P300,000 P60,000 P10,000 defaults = P230,000 x 42%
96,600
20x6: P480,000 P320,000 P5,000 defaults = P155,000 x 40%
62,000
Realized gross profit on installment sales in 20x6
P167,960

46. b
20x5 Sales 20x6 Sales
Net
Market Values P 4,500 P 3,500
Less: Unrecovered Cost:
IAR, unpaid balances P10,000 P 5,000
x: Cost Ratio 50% 5,800 60% 3,000
Gain (loss) P (1,300) P 500 P( 800)

47. a
(1) Gain or Loss on repossession:
Estimated selling price P
1,700
Less: Normal profit (37% x P1,700) 629
Market value of repossessed merchandise P 1,071
Less: Unrecovered Cost:
Unpaid balance 20x3 P 2,200
Less: DGP x3 (P2,200 x34%) 748
1,452
Loss on repossession P( 381)

(2) Realized gross profit on installment sales:

20x2 Sales: (P24,020 P 0) x 35% P 8,407.0
20x3 Sales: (P344,460 P67,440 P2,200) x 34%
93,438.8
20x4 Sales: (P602,000 P410,090) x 37% 71,006.7
Realized gross profit on installment sales P 172,852.5
48. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
 20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%.
22,929.6
20x4 Sales: (P410,090 x 37%)
151,733.3
P
174,662.9

49. d*
Resale Value P 8,500
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 P1,896,300)/P3,010,000] x 8,500 3,145
Market Value of Repossessed Merchandise P 5,355
Less: Unrecovered Costs 20x5
Defaulted balance* (P27,000 P16,000) P 11,000
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000]
x
P11,000 ___3,740 __7,260
Loss on repossession P( 1,905)

Entry made:
Inventory of RM* 11,000
IAR-20x5 11,000

Correct Entry (Should be):

Inventory of RM (at MV) 5,355
DGP-20x5 3,740
Loss on repossession 1,905
IAR-20x5 11,000

Correcting Entry:
DGP-20x5 3,740
Loss on repossession 1,905
Inventory of RM 5,645**

50. c
Installment Sales P 3,600,000
Less: Over-allowance:
Trade-in allowance P1,500,000
Less: MV of Trade-in Merchandise:
Estimated Resale Price P 1,400,000
Less: Normal profit (25% x P1,400,000) 350,000
Reconditioning costs 150,000 900,000
600,000
Adjusted Installment Sales P
3,000,000
Less: Cost of I/S
2,500,000
Gross Profit P 500,000
Gross profit rate: P500,000/ P3,000,000 16 2/3%
x: Collections Trade-in merchandise (at MV) P
900,000
RGP on I/S in 20x4 P
150,000
51. c
Trade-in allowance P43,200
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs P36,000
Less: Reconditioning costs 1,800
Normal profit (15% x P36,000) 5,400 28,800
Over-allowance P 14,400

Installment sales P122,400

Less: Over-allowance 14,400
Adjusted Installment Sales P108,000
Less: Cost of Installment Sales 86,400
Gross profit P 21,600
Gross profit rate: P21,600/P108,000 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

52. d
(Note: For financial accounting purposes, the installment-sales method is not used, and the
full gross profit is recognized in the year of sale, because collection of the receivable is
reasonably assured.)
Finley Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 20x3
Sales P4,584,000
Cost of Sales 3,825,000
Gross Profit 759,000
Interest Revenue (Schedule I) 328,320
Income before Income Taxes P1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales) P4,584,000
Payment made on January 1, 20x3 936,000
Balance outstanding at 12/31/x3 3,648,000
Interest rate 9%
Interest Revenue P 328,320

53. c
54. d
55. d
56. a
57. d
58. a (P900,000 .65) + (P890,000 .25) + (P880,000 .05) + (P870,000 .05) =
P895,000.
59. d (P55,000 P50,000) 7/12 = P2,917.
60. c P37,000 (P37,000 .03) = P35,890.
61. b P6,750,000 .85 = P5,737,500.
62. d P75,000 + P50,000 + P25,000 = P150,000
P75,000/ P150,000 P120,000 = P60,000
P50,000/ P150,000 P120,000 = P40,000
P25,000/ P150,000 P120,000 = P20,000.
63. c P75,000 + P50,000 + P25,000 = P150,000
(P25,000/ P150,000) P120,000 = P20,000.
64. a P160,000 + P25,000 = P185,000.
P160,000/ P185,000 P180,000 = P155,676
P25,000/ P185,000 P180,000 = P24,324
65. b P3,000 .2 = P600; P3,000 P600 = P2,400
66. c P1,500/ P3,000 = 5; P200 .5 = P100.
67. c
68. a
69. b - P10,000 + P275,000 + P85,000 + P15,000 + P25,000 = P410,000.

Theories
1. False 6. True 11. True 16. True 21 True 26. True
.
2. True 7. False 12 False 17 True 22 True 27. True
. . .
3. False 8. True 13 False 18 False 23 True 28. False
. . .
4. True 9. False 14 True 19 False 24 True 29. True
. . .
5. True 10 True 15 True 20 True 25 True
. . . .

30 c 35 b 40. a 45. b 50 d 55. d

. . .
31 b 36 d 41. e 46. c 51 c 56. b
. . .
32 b 37 d 42. b 47. c 52 b 57. d
. . .
33 b 38 e 43. b 48. c 53 a 58. c
. . .
34 c 39 c 44. d 49. d 54 b 59. c
. . .

60. c 65. b 70. d 75. c 80. b

61. b 66. b 71. c 76. b 81. c
62. b 67. d 72. b 77. b 82. a
63. c 68. d 73. d 78. d
64. d 69. c 74. a 79. a