Chapter 7

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 balance…………………………P 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 installment 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 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 profit…………………………………………………P 21,600

20x5: Realized gross profit on installment sales;

20x4 20x5
Collections – P P
principal…………… 72,000 60,000
Multiplies by: Gross profit
%.......... ____30% ____35%
Realized gross P P P
profit……………… 21,600 21,000 42,600
 Closing entries:
(10) To close realized gross profit account:
Realized gross profit 21,600 42,600
Income summary 21,600 42,600

(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 89,040 231,480
Retained earnings 89,040 231,480

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 36% 64% 288,000
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 Stockholder’s Equity ………………………………………………………
P154,815
Total Liabilities and Stockholder’s 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 year’s 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 year’s 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 Stockholder’s Equity ………………………………………….
141,350
Total Liabilities and Stockholder’s 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 company’s 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

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. c
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. d
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 revenue—4 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 – P5,880 = P2,520
(P3,000 – P300) – P2,520 = P180 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
 P174,662.9

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

Quiz - VII
1. P920,000

20x4: P1,200,000 x 30% = P 360,000

20x5: P1,400,000 x 40% = 560,000 P920,000

2. P190,000
(P300,000 ÷ P750,000) x P250,000 = P100,000
[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000
3. P1,600– 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.

4. Zero/Nil
When the cost recovery method is used, gross profit is recognized only after all
costs have been recovered.
20x5
P45,000 x 63% = P28,350 Cost of sale
P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5.
Costs still to be recovered.
5. P19,250
20x6
Relating to 20x5 sales:
P19,000 - P4,350 = P14,650 Gross profit recognized
Relating to 20x6 sales:
P60,000 x 59% = P35,400 Cost of sale
P40,000 - P35,400 = 4,600 Gross profit recognized
P19,250 Recognized in 20x6
6. P21,000
20x7
Relating to 20x5 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... P 2,000
Relating to 20x6 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... 17,000
Relating to 20x7 sales:
P85,000 x 60% = P51,000 Cost of sale
P53,000 - P51,000 = .......... 2,000 Gross profit
recognized
P21,000 Recognized in 20x7
7. P320,000
[(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000

8. P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (P825,000 x 40%) = P390,000.
9. P 128,000
Installment Accounts Receivable, end of 20x4 P 320,000
x: Gross profit rate (66 2/3 / 166 2/3)
_____40%
Deferred Gross Profit, end of 20x4 P 128,000

10. P25,168, determined as follows:

Gross profit percentages:

20x3: P136,000/P160,000 = 85%; 100% x 85% = 15%
20x4: P158,240/P184,000 = 86%; 100% x 86% = 14%

To deferred gross profit:

20x3: P160,000 x P136,000 = P24,000
20x4: P184,000 x P158,240 = 25,760
 P49,760

Gross profit realized:

0.15 x P40,000 = P 6,000
0.15 x P89,600 = 13,440
0.14 x P36,800 = 5,152
P24,592
Balance of Gross Profit Deferred:
P49,760 - P24,592 = P25,168

11. P 0 – all profit recognized in 20x5

12. P240 – (P1,200/P2,000) x P400
13. P100 - (100% of costs were fully recovered prior to 20x7
14. P10 million, the amount of sale
15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450
16. P50 gain
Repossessed merchandise……………………………………… 500
Deferred gross profit……………………………………………… 300
Installment Accounts receivable…………………….. 750
Gain on repossession…………………………………… 50

17. 0
Unrecovered costs,1/1/20x4 100
Less: Collections 70
Unrecovered costs,1/1/20x5 30
Less: Collections 40
Profit – 20x5 10
Profit – 20x5 30
18. P10 – refer to No. 17
19. P30 –refer to No. 17
20. Zero
Unrecovered costs – 20x4 120,000
Less: Collections – 20x4 ______0
Unrecovered costs, 12/31/20x4 120,000
Additional costs – 20x5 _20,000
Total costs 140,000
Less: Collections – 20x5 80,000
Unrecovered costs, 12/31/20x5 60,000
Additional costs – 20x6 20,000
Total costs 80,000
Less: Collections – 20x6 40,000
Unrecovered costs, 12/31/20x6 40,000
Additional costs – 20x7 10,000
Total costs 50,000
Less: Collections – 20x7 100,000
Profit – 20x7 50,000
21. P50,000 profit – refer to No. 20
22. P105,000 = P68,250 / (100% - 35%)
23. P31,000 = P50,000 x (100% - 38%)
24. P43,700
Unrecovered costs – Cost of installment sales for 20x5 installment sales 56,050
Less: Collections in 20x5 for 20x5 installment sales _22,800
Unrecovered costs, 12/31/20x5 33,250
Less: Collections in 20x6 for 20x5 installment sales (balancing figure) _43,700
Realized GP on I/S in 20x6 for 20x5 sales *10,450
*
Realized GP on I/S in 20x6 16,050
 Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23)
is
already recovered in 20x5 equivalent to collection __5,600
Realized GP on I/S in 20x6 for 20x5 installment sales *10,450
25. Zero – costs is not yet fully recovered, the profit should be recognized
Unrecovered costs – Cost of installment sales for 20x4 (No. 23) 31,000
Less: Collections in 20x4 for 20x4 installment sales _22,800
Unrecovered costs, 12/31/20x4 8,200

26. P41,000
Unrecovered costs – Cost of installment sales for 20x4 installment
sales 31,000
Less: Collections in 20x4 for 20x4 installment sales _25,600
Unrecovered costs, 12/31/20x4 5,400
Less: Collections in 20x5 for 20x4 installment sales 46,400
Realized GP on I/S in 20x5 for 20x4 installment sales 41,000
Realized GP on I/S in 20x5 for 20x5 installment sales:
Unrecovered costs – Cost of installment sales for 20x5
installment
Sales 56,050
Less: Collections in 20x5 for 20x5 installment sales 22,800
Unrecovered costs, 12/31/20x4 33,250 ____-0-
Realized GP on I/S in 20x5 41,000

27. P 45,000
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

28. Zero
P450,000 cost P300,000 collections = P150,000 unrecovered costs

29. P300,000
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
30. d
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P
300,000
Deferred gross profit = P450,000 – P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) = 300,000
Net installment receivable for 20x4 sales = P
0

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

31. 24%.
Determined from the repossession entry:
Deferred gross profit P2,400
———— = 24%
Installment accounts receivable P10,000

32. 35%
Installment sales P120,000
Cost of sales 78,000
Gross profit P 42,000

Gross profit P42,000

————- = 35% gross profit rate
Installment sales P120,000

33.
a. 20x4 Deferred gross profit balance P 12,000
Gross profit rate ÷ 25%
Beginning accounts receivable P 48,000
Beginning accounts receivable P 48,000
Ending accounts receivable (20,000)
Cash collected P 28,000

b. 20x5 Deferred gross profit balance P 26,400

Gross profit rate ÷ 24%
Beginning accounts receivable* P110,000
Beginning accounts receivable* P110,000
Ending accounts receivable* (50,000)
Cash collected P 60,000

c. 20x6 Installment sales—20x6 P120,000

Accounts receivable—20x6 (90,000)
Cash collected P 30,000
34. P31,900
Total realized gross profit in 20x6
From 20x4 P28,000 × 25% = P 7,000
20x5 P60,000 × 24% = 14,400
20x6 P30,000 × 35% = 10,500
P31,900
*Excluding accounts receivable for repossessed merchandise.

35. 20x4 (2010), P33,750; 20x5 (2011), P95,250

Gross profit realized in 20x4 (2010):

Installment sales = [(P300,000  P165,000)/P300,000] x P33,750

P75,000 =

Gross profit realized in 20x5 (2011):

From 20x4 sales = [(P300,000  P165,000)/P300,000] x P47,250
P105,000 =

From 20x5 sales = [(P450,000  P270,000)/P450,000] x 48,000

P120,000 =
P95,250
36. 20x4 (2010), P148,750; 20x5 (2011), P275,250

20x4 20x5
(2010) (2011
Sales P450,000 P450,000
Cost of sales 335,000 270,000
Gross profit P115,000 P180,000
Gross profit realized on installment 33,750 95,250
sales
Total gross profit P148,750 P275,250

37. 20x4 (2010), P148,750; 20x5 (2011), P275,250

. 20x4 20x5
(2010) (2011
Installment accounts receivable P225,000 P450,000
Less: Deferred gross profit 101,250 186,000
Net of deferred gross profit P123,750 P264,000

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
61 B 66 b
. .
62 b 67 d
. .
63 c 68 d
. .
64 d 69 c
. .