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REVIEW HANDOUTS AND MATERIALS

SEMESTER 2ND SEMESTER SCHOOL YEAR 2018-2019
SUBJECT ADVANCED FINANCIAL ACCOUNTING AND REPORTING (INTEGA)
HANDOUT # IMI - 001
TOPIC Installment Sales

Installment Method of Revenue Recognition

Installment method is a method of revenue recognition in which gross profit is deferred until cash from
the sale is received. Unlike the cost recovery method, which defers the profit till the cash collections
exceeds the costs; installment method recognizes proportionate profit at receipt of each installment.

Installment method is a conservative method of revenue recognition. It is only applied in situations, for
example in real estate, when the risks and rewards are not completely transferred at the time of sale. It
differs from cost recovery method because in installment method there is less doubt about collectability
of the installments.

 What are the four steps on calculating installment sale?

Step 1) Find gross profit amount.

Step 2) Find Gross profit percentage
Step 3) Find earned gross profit amount
Step 4) Find deferred gross profit amount

 Accounting for installment sales include the following steps:

 At the time of sale, recognize the revenue and related cost of goods sold.
 Defer the gross profit on the sale.
 At the end of each period, make a journal entry to recognize profit equal to the product of the
gross profit rate on the installment sale and the actual cash collection.

Discussion:

The installment sales method is a special case of revenue recognition which deviates from the revenue
recognition principles of PFRS 15.

The installment method may be used when:

a. The entity uses the “income tax basis” of accounting (The income tax basis of accounting
maybe used for external reporting entity is a micro entity)
b. The entity makes a departure from the provisions of the PFRS under circumstances described in
PAS 1 Presentation of Financial Statements.

PAS 1.19 states that “ in the extremely rare circumstances in which management concludes that
compliance with a requirement in a PFRS would be so misleading that it would conflict with the
objective of financial statements set out in the FRAMEWORK, the entity shall depart from that
requirement if the relevant regulatory framework requires, or otherwise does not prohibit such
departure”

Brief History

The “installment sales method” has originated from the traditional U.S GAAP and is usually applied by
entities providing financing through long-term installment sales of real properties and personal
properties having relatively high values when there is uncertainty in the collection of the consideration.

Page 1 of 17
Exercise 1.

At the end of 2018, John the beloved Sells for P1, 000,000 property costing P425, 000. Terms of the
sale are P400, 000 down with the balance to be paid in annual instalment of P100, 000.

Accounting for Installment sales:

At the same of sale.
Installment Receivable 1,000,000
Installment Sales 1,000,000

COGS 425,000
Merchandise inventory 425,000

Defer the gross profit on the sale.

Installment Sales 1,000,000
COGS 425,000
Unrealized/ Deferred Gross profit 575,000
Upon collection

Cash 400,000
Installment Receivable 400,000

Unrealized Gross profit 230,000

Realized Gross profit 230,000

Step 1) Find the gross profit amount.

Installment sales: 1,000,000

Cost : 425,000
Gross Profit : 575,000

Step 2) Find the Gross Profit Percentage

Gross profit/ Installment sales = GPP 575,000 / 1,000,000 = 57.5%

Step 3) Find earned gross profit amount

Collection x Gross profit rate = 400,000 * 57.5% = 230,000

Step 4) Find deferred gross profit amount

Uncollected Amount x Gross profit rate = 345,000

Notes:

Under PFRS 15 revenue from contracts with customers is recognized when the entity satisfies a
performance obligation.

 If the performance obligation in the contract is satisfied over time revenue is recognized over time
AS the entity progresses towards the complete satisfaction of the obligation. The entity recognizes
revenue over time by measuring its progress towards the complete satisfaction of that
performance obligation. If the outcome of a performance obligation cannot be reasonably
measured the entity recognizes revenue only up to the extent of costs incurred that the entity
expects to recover until such time that the outcome of performance obligation can be
reasonably measured.
 If the performance obligation is satisfied at a point in time, revenue is recognized WHEN control
over the promised good or service is transferred to the customer.
 In both cases , the timing of revenue recognition is not affected by the timing of receipt of the
consideration. i.e. whether the consideration is to be received in lump sum or installment.
However, if the timing of the receipt of the consideration provides the entity or the customer with
a significant benefit of financing, the revenue recognized shall be an amount adjusted for the
effects of the time value of money, but still , the adjusted amount is recognized as revenue when
or as the performance obligation is satisfied.
 If, at contract inception, the collectability of the consideration is not probable, the entity does not
recognize any revenue from the contract. Any consideration received is recognized as liability.
 In subsequent periods , if the collectability of the consideration (a) becomes uncertain, the entity
assesses its receivable for impairment or (b) becomes significantly uncertain, the entity ceases
from recognizing further revenue from the contract and assesses its receivable for impairment.

Page 2 of 17
Exercise 2

Discussion:

Under the “cost recovery method” the initial collections on the sale are treated as recovery of the costs
of the inventory sold. Thus, no gross profit or interest income is recognized until total collections from the
sale exceed the cost inventory sold.

This method is different from the “cost-recovery approach” under PFRS 15 Revenue from Contracts with
customers. Under the said approach of PFRS 15, when the outcome of a performance obligation that is
satisfied over time cannot be reasonably measured. Revenue is recognized only to the extent of costs
incurred that the entity expects to recover.

PFRS 15 does not state that revenue recognition should be based on actual collection. Rather, revenue
is recognized only up to extent of costs that are expected to be collected . Costs incurred that are not
expected to be recovered are recognized immediately as expense.
It is also a deviation from PFRS 15

On January 2018, Matthew sells his car for P 2,000,000 costing P1,250,000 to James. Terms of sale
are P800,000 Down payment with the balance of P400,000 for the next 3 years.

Required: Compute the profit recognized by Matthew in 2018 and in each of the 3 years that follow,
assume the use of the following method.

Solution guide: Gross Profit Recognized

Installment sales: 2,000,000

Cost : 1,250,000
Gross Profit : 750,000

37.5%

Method 2018 2019 2020 2021

1. Cost recovery 0 0 350,000 400,000
method
2. Installment Method 300,000 150,000 150,000 150,000

Deferred Gross Profit

Method 2018 2019 2020 2021
1. Cost recovery 750,000 750,000 400,000 0
method
2. Installment Method 400,000 300,000 150,000 0

Exercise 3

Ember Appliance Company uses the instalment method of recognizing revenues. Pertinent data are as
follows:
2018 2019 2020
Installment Sales P750,000 P937,500 P900,000
Cost of installment sales 525,000 750,000 675,000

Collections during the

year
2018 270,000
2019 260,000 597,500
2020 65,000 160,000 210,000

Required:
1. Compute the following:
2018 2019 2020
Realized gross profit 81,000.00 197,500 104,000.00
Deferred/ unrealized 144,000 106,500 255,000
gross profit

Solution:
GPR 30.00% 20.00% 25.00%
2018 2019 2020 Total

Page 3 of 17
 Installment
Beg IAR 750,000.00 937,500.00 900,000.00
sales
2018 Collection: 270,000.00
Default:
Repo:
RGP 81,000.00 81,000.00
2019 Collection: 260,000.00 597,500.00
Default:
Repo:

RGP 78,000.00 119,500.00 197,500.00

-
2020 Collection: 65,000.00 160,000.00 210,000.00
Default:
Repo:
RGP 19,500.00 32,000.00 52,500.00 104,000.00
Ending IAR 155,000.00 202,500.00 690,000.00

Exercise 4 (regular and Installment Sales)

Luke Corp. reported the following accounts for the year just ended:
Collection from installment sales of 2018 P210,000
Collection from installment sales of 2017 560,000
Collection on regular sale 1,000,000
Deferred gross profit,2017 350,000
Deferred gross profit,2018 840,000
Regular Sales 1,400,000
Cost of Regular Sales 1,050,000

The gross profit rate on instalment sales was 10% higher than regular sales. For 2018, the gross profit on
profit on instalment sales was 3% lower than in 2017.

Regular sales is 25% , 2018 GPR is 35% , 2017 is 38%

1. In computing the realized gross profit from collections of 2017 installment sales, the applicable
gross profit rate was? 38%

2. The total realized gross profit in 2018 is?

2017 2018 regular Total

Collections 560,000 210,000
38% 35%

212,800.00 73,500.00 350,000.00 636,300.00

Exercise 5 (with notes receivable)

Jacob Corp. Sold a piece of real estate on January 2, 2017 for P5,000,000. It had purchased the
property in 2010 for P4,500,000 in cash. At that time the lad was worth P450,000 and the remainder was
attributed to the building. at the time of sale, the carrying value of the building was P3,600,000. The
terms of the sale were as follows:

Down payment P250,000

Note Receivable P4,750,000
Interest rate 10%
Length of mortgage 20 years
Annual Payment P557,933 due at the end of each year
The sale has been consummated, the seller’s receivable is not subject to future subordination, and the
seller has no continuing involvement with the property. However, because the initial investment is
inadequate, the seller must use instalment method to account for this sale.

Page 4 of 17
 Installment
Sales 5,000,000

COS 4,500,000.00

GP 500,000.00
GPR 10.00%

Annual Interest
Date Payment Income ammortization C.A

4,750,000.00

1.00 12/31/2017 557,933.00 475,000.00 82,933.00 4,667,067.00

2.00 12/31/2018 557,933.00 466,706.70 91,226.30 4,575,840.70

3.00 12/31/2019 557,933.00 457,584.07 100,348.93 4,475,491.77

4.00 12/31/2020 557,933.00 447,549.18 110,383.82 4,365,107.95

5.00 12/31/2021 557,933.00 436,510.79 121,422.21 4,243,685.74

Required:
1. Compute the following:
A. Deferred gross profit on January 2,2017: 500,000
B. Realized profit for the year 2017: 8,293.3
C. Interest income for the year 2018: 466,706.70
D. Realized gross profit for the year 2018: 9,122.6
E. Deferred gross profit on Dec. 31, 2018: 482,584.1

Exercise 6 (with Trade-in)

Genesis Corp. sells new cars. On January 2, 2017 a new car costing P2, 500,000 was sold for P3, 600,000.
An old car was accepted as down payment and an allowance of P1, 500,000 was allowed on the
trade in. The company anticipates reconditioning costs on the old car of P150, 000 and a resale price of
P1, 400,000.It’s used car sales are expected to produce a 25% gross profit. The balance is payable in five
annual payments starting December 31, 2017.

Installment Sales 3,600,000 Allowance 1,500,000

Adjustment for T.I -530,000 FV of T.I
True Installment
SALes 3,070,000 Resale price 1,400,000
Reconditioning
cost 150,000
COS 2,500,000 GP 280,000 1120000
GP 570,000 FV of T.I 970,000
GPR 18.57% UA/OA 530,000

Required:
1. Compute for the deferred gross profit for 2017: 311,921.82
2. Compute for the realized gross profit for 2017: 356,482.08
3. Compute for the deferred gross profit for 2018: 233,941.37
4. Compute for the realized gross profit for 2018: 77,980.46

Discussion:

Trade-ins:
Sellers often accept merchandise traded-in by buyers as part of downpayment of sales of new
merchandise.

The merchandise traded-in is accounted as follows:

1. The merchandise received is debited to an inventory account at “fair value”

For purpose of applying the installment method. “fair value” is either:

1. The appraised value of the traded-in merchandise; or
Page 5 of 17
 2. The estimated selling price of the traded-in merchandise less reconditioning cost and normal
profit margin, at date of traded-in

2017 2018
Beg IAR 3,600,000 Beg IAR 1,680,000
Collection 420,000 Collection 420,000
T.I 1,500,000 T.I 0
ending
ending IAR 1,680,000 RGP 1,920,000 IAR 1,260,000 RGP 420,000
18.57% 18.57% 18.57% 18.57%

DGP 311,921.82 356,482.08 DGP 233,941.37 77,980.46

Exercise 7

On October 1, 2018, Instagram Company sold Article One costing P270,000 for P400,000. Article Two, a used article
was accepted as down payment and the balance on monthly installments for two years that include both
principal and interest at 15% per year, starting October 31, 2018, as evidenced by a note. P120,000 was allowed
on the article traded-in. The company estimates reconditioning cost of P8,000 on this article and a sales price of
P110,000 after reconditioning. The company normally expects 20% gross profit on sale of used article.

Questions:
1. How much is the realized gross profit in 2018? (Round of PV factors to 4 decimal places)
2. Assume that there is a very high degree of uncertainty about the collectability of the note, thus, Instagram
opted to use the cost recovery method. How much is the increase in profit or loss related to interest income
in 2019? (Round of PV factors to 4 decimal places)

Installment
Sales 400,000
Adjustment for
T.I 36,333
363,667
cost 270,000
Gp 93,667
GPR 0.257562

allowance 120,000
FV
110,000
recon cost 8,000
GP 18,333 91666.67
FV 83,667

OA 36,333

400,000
120,000
Remaining
Balance 280,000.00
monthly
payment 11,666.67
interest 15%
12
Monthly interest 0.0125

3,500.00

PV factor CA

Page 6 of 17
Principal 11,666.67 20.6242 240615.735
Interest
payment 3,500.00 20.6242 72184.7
312800.435

Interest Carrying
Payment Income Ammortization amount

312,800.44

Oct-18 1 15,166.67 3,910.01 11,256.66 301,543.77

Nov-18 2 15,166.67 3,769.30 11,397.37 290,146.40

Dec-18 3 15,166.67 3,626.83 11,539.84 278,606.56

Jan-19 4 15,166.67 3,482.58 11,684.09 266,922.47

Feb-19 5 15,166.67 3,336.53 11,830.14 255,092.33

Mar-19 6 15,166.67 3,188.65 11,978.02 243,114.31

Apr-19 7 15,166.67 3,038.93 12,127.74 230,986.57

May-19 8 15,166.67 2,887.33 12,279.34 218,707.24

Jun-19 9 15,166.67 2,733.84 12,432.83 206,274.41

Jul-19 10 15,166.67 2,578.43 12,588.24 193,686.17

Aug-19 11 15,166.67 2,421.08 12,745.59 180,940.57

Sep-19 12 15,166.67 2,261.76 12,904.91 168,035.66

Oct-19 13 15,166.67 2,100.45 13,066.22 154,969.44

Nov-19 14 15,166.67 1,937.12 13,229.55 141,739.88

Dec-19 15 15,166.67 1,771.75 13,394.92 128,344.96

Jan-20 16 15,166.67 1,604.31 13,562.36 114,782.61

Feb-20 17 15,166.67 1,434.78 13,731.89 101,050.72

Mar-20 18 15,166.67 1,263.13 13,903.54 87,147.18

Apr-20 19 15,166.67 1,089.34 14,077.33 73,069.85

May-20 20 15,166.67 913.37 14,253.30 58,816.55

Jun-20 21 15,166.67 735.21 14,431.46 44,385.09

Jul-20 22 15,166.67 554.81 14,611.86 29,773.24

Aug-20 23 15,166.67 372.17 14,794.50 14,978.73

-
Sep-20 24 15,166.67 187.23 14,979.44 0.71

2018
Realized Gross
profit
T.I 83,667

collection 34,193.88
Total 117,861
GPR 25.76%

Page 7 of 17
 RGP 30,356.38

2019

Principal 184,455.47

Interest income 43,044.58

Total 227,500.05
Cost 270,000
-
42,499.95

Exercise 8 (With Repossession)

On January 1, 2016, Exodus Company had an instalment account receivable from Leviticus with a
balance of P1, 200,000. During March 2, 2016, P220, 000 was collected from Leviticus. No further
collections could be made and the merchandise was repossessed. When reacquired, the merchandise
was appraised as being worth P460, 000. To improve its salability, the company expended P60, 000 for
reconditioning.

The merchandise was originally cost P924, 000 and was originally sold for P1,650,000 in 2015.
Required:
1. How much is the repossession gain or loss:
2. Compute for the realized gross profit for 2016:
Installment Remaining
Sales 1,650,000 balance 980,000
COS 924,000 GP 431200
adjusted
GP 726,000 Balance 548,800
FV of
GPR 44.00% repossessed 460,000
difference -88,800
collection 220,000

GP 96,800.00

Exercise 9

Expedition Motors sells automobiles on installment basis. On May 30, 2018, Mr. Montenegro bought a car
for P1,125,000, terms: 25% down payment and the balance is payable in 48 months starting June 30, 2018.
The cost of the car is P800,625. In lieu of the down payment, Expedition Motors accepted the buyers
slightly used pick up which has a resale value of P300,000 after reconditioning at a cost of P127,500. After
paying the October 2018 installment, Mr. Montenegro met an accident which incapacitates him to meet
his liabilities. After 3 notices, Expedition Motors repossessed the car. The repossessed car has a resale value
of P496,875 after incurring reconditioning costs of P180,000. What is the cancelled profit due to
repossession?

a. P 160,393 b. P 193,143 c. P 200,958 d. P 226,758

Trade in
selling price 1,125,000.00 allowance 281,250.00
-
allowance 108,750.00
true selling
price 1,016,250.00 FV 300,000.00

cost 800,625.00 RCC 127,500.00

GP 215,625.00 FV 172,500.00

GPR 0.21
-
allowance 108,750.00

Balance 843,750.00
Page 8 of 17
 monthly 17,578.13

Paid 87,890.63

Remaining 755,859.38

GPR 0.21

GPR 160,376.07

net of GPR 595,483.31

FV of repo 496,875.00

rcc 180,000.00

Fv 316,875.00
-
278,608.31

Exercise 10 ( With interest and selling the repossessed Item)

Numbers Company sold computer equipment by giving a trade discount of 10% to all its customers. On
May 1, 2017, Five units of computer with a total list price of P100,000 and total cost of P59,800 were sold
to Deuteronomy, Numbers Company accepted computer as trade in and granted an allowance of
P10,000, the current market value of the computers is P12,000.
The balance was payable as follows: 20% of the balance paid at the time of sale; the rest is payable in
10 months starting on June 1, 2017. After 6 months of paying Deuteronomy defaulted in the payment if
December 1, 2017. The five units of computer equipment were repossessed and it would require P2, 000
reconditioning cost for each computer before it could be resold for P6,000 each. A 15% gross profit rate
was normal from the sale of used equipment. Operating expenses amounted for P5, 380.

Required:
1. Compute for the realized gross profit for 2017:
2. Compute for the net income for 2017:

Sales price 100,000

trade discount 10000
Trade in
adjustment 2,000
True Sales price 92,000
Cost 59800
GP 32,200
GPR 0.35

allowance 10,000
Fv 12,000
2,000

Trade in 12,000
DP 16000
Collection 38400
Total 66,400

Remaining
balance 41,600
GPR 0.35
GP 14560
adjusted
balance 27,040

Page 9 of 17
 FV of repo
SP 30,000
RC 10,000
GP 3,913 26086.96
FV of repo 16,087

Difference -10,953

RGP 23240
loss on
repo -10,953
opex -5380
net
income 6906.957

Exercise 11 (Consignment Sales)

Joshua Company consigned to Judges Company twelve Sony color TV sets which cost P9, 000 each.
Judges sold eight sets, and rendered an account sale, and remitted the amount of P82, 600 after
deducting the following from the selling price:

Commission on selling price 12%

Selling Expenses P1,200
Cost of antennae tapes given free P1,400
Delivery and Installation P2,800

Questions:
a. The total selling price of the eight sales sold by: Joshua
b. The net profit of Joshua on the eight sales sold by Judges
SP 100000
commission on selling
price 12,000
88,000 88%
Selling expense 1,200
cost of antennae given
free 1,400
Delivery and installation 2,800
Remitted 82,600

SP 100000
9,000 * 8
Cost 72,000.00
commission on selling
price 12,000.00
Selling expense 1,200.00
cost of antennae given
free 1,400.00
Delivery and installation 2,800.00
Total expense 89,400.00
Net income 10,600.00

Exercise 10

On January 1, 2018, Liberty Realty Corporation sold property carried in inventory at a cost of P840,000
for P1,400,000. A 10% down payment was made and the balance is payable in 4 equal installments of
P363,625, inclusive of 12% interest, payable every June 30 and December 31.

Questions:
1. How much is the realized gross profit in 2018 assuming the installment method is used?
a. P 237,332.60 b. P 293,332.60 c. P 308,000 d. P 346,900

2. How much is the total collection in 2018 applied to interest?

a. P0 b. P 133,918.50 c. P 151,200 d. P 168,000

Page 10 of 17
 Sales 1,400,000
Cost 840,000
DGP 560,000 0.4

Annual Interest
Payment Income ammortization Cv
1,260,000

18-Jun 363,625 75,600.00 288,025.00 971,975.00

18-Dec 363,625 58,318.50 305,306.50 666,668.50

19-Jun 363,625 40,000.11 323,624.89 343,043.61

19-Dec 363,625 20,582.62 343,042.38 1.23

593,331.50
140,000
Total
Payment 733,331.50

GPR 293,332.60

Exercise 11

Genesis Corp. sells new cars. On January 2, 2019 a new car costing P2, 500,000 was sold for P3, 600,000.
An old car was accepted as down payment and an allowance of P1, 500,000 was allowed on the
trade in. The company anticipates reconditioning costs on the old car of P150, 000 and a resale price of
P1, 400,000.It’s used car sales are expected to produce a 25% gross profit. The balance is payable in five
annual payments starting December 31, 2019. How much is the Net Income for December 31, 2019?

Selling Trade in
Price 3,600,000.00 value
-
OA 600,000.00 Allowance 1,500,000.00

TSP 3,000,000.00
Fair Value
Selling
Cost 2,500,000.00 Price 1,400,000.00
Recon
Gain 500,000.00 0.166667 cost 150,000.00

GP 350,000.00

FV 900,000.00

FV of TI 900,000.00
1st
payment 420,000.00 OA/UA 600,000.00

Total 1,320,000.00

RGP 220,000.00 3600000

1500000
2100000
420000

Exercise 12

Page 11 of 17
On January 1, 2019, Exodus Company had an instalment account receivable from Leviticus with a
balance of P1, 200,000. During March 2, 2019, P220, 000 was collected from Leviticus. No further
collections could be made and the merchandise was repossessed. When reacquired, the merchandise
was appraised as being worth P460, 000. To improve its salability, the company expended P60, 000 for
reconditioning.

The merchandise was originally cost P924, 000 and was originally sold for P1,650,000 in 2018.

Required:
1. How much is the repossession gain or loss: P88,800
2. Compute for the realized gross profit for 2019: P96,800
3. How much is the net income ? P8,000

SP 1,650,000.00

Cost 924,000.00

GP 726,000.00 0.44

Remaining IAR 980,000.00

GP 431,200.00

IAR 548,800.00

FV of
Repossessed

Appraised Value 460,000.00

Loss on recon 88,800.00

Collection 220,000.00 96,800.00

Net Income 8,000.00

Exercise 13

Expedition Motors sells automobiles on installment basis. On May 30, 2018, Mr. Montenegro bought a car
for P1,125,000, terms: 25% down payment and the balance is payable in 48 months starting June 30, 2018.
The cost of the car is P800,625. In lieu of the down payment, Expedition Motors accepted the buyers
slightly used pick up which has a resale value of P300,000 after reconditioning at a cost of P127,500. After
paying the October 2018 installment, Mr. Montenegro met an accident which incapacitates him to meet
his liabilities. After 3 notices, Expedition Motors repossessed the car. The repossessed car has a resale value
of P496,875 after incurring reconditioning costs of P180,000. What is the cancelled profit due to
repossession?

a. P 160,393 b. P 193,143 c. P 200,958 d. P 226,758

Selling Price 1,125,000.00 Trade in

-
OA 108,750.00

TSP 1,016,250.00 allowance 281,250.00

Cost 800,625.00

GP 215,625.00 SP 300,000.00

0.21 Rc 127,500.00

172,500.00
Page 12 of 17
 Installment per
month

1,125,000.00 OA 108,750.00

25% 281,250.00

843,750.00

17,578.13

paid 87,890.63

remaining 755,859.38

160,376.07

Exercise 14

Abensons Company sells home theater set both on installment and cash basis. Mr. Aquino purchased a
set from Abensons Company on March 30, 2018 for P367,500 which has a cost of P289,800. A used set is
accepted as down payment, P89,600 being allowed on the trade in and the balance is payable 10
months starting May 1, 2018. The used set can be resold for P112,140 after reconditioning cost of P5,362.
The company expects to make 20% gross profit on the sale of used sets. Mr. Aquino defaulted payment
starting Nov. 1, 2018 and the set was repossessed. Abensons Company had to incur additional cost of
repairs amounting to P6,475 before the car was subsequently sold for P90,125 on December 1, 2018. What
is the net income to be recognized for the year 2018 in relation to the above transactions?

a. P 44,940 b. P 51,415 c. P 68,243 d. P 69,293

SP 367,500.00 Ti

OA 5,250.00 allowance 89,600.00

TSP 362,250.00

cost 289,800.00 FVTI

GP 72,450.00 SP 112,140.00

0.20 RC 5,362.00

GP 22,428.00

FVTI 84,350.00

DP 84,350.00

Collection 166,740.00 OA 5,250.00

Total
Collection 251,090.00

RGP 50,218.00 Installment 367500 89600

277900
27790
Repo

FVRepo 90,125.00

Rc 6,475.00

FVRepo 83,650.00

IAR 111,160.00

Page 13 of 17
 GP 22,232.00

IAR 88,928.00

Loss on repo 5,278.00

Net income 44,940.00

Exercise 15

Confidence Corporation sells goods on the installment basis. For the year just ended, the following were
reported: Cost of installment sales – P8,400,000; Loss on repossession – P202,500; Wholesale value of the
repossessed merchandise – P1,687,500; Repossessed account – P2,700,000; Deferred gross profit after
adjustment – P1,620,000. How much was the collections for the year?
FV of TI IAR

1,687,500.00 2,700,000.00

810,000.00 0.30

1,890,000.00

202,500.00

12,000,000.00

Cost 8,400,000.00

3,600,000.00 0.3

IAR Beg 12,000,000.00

Default 2,700,000.00

Ending 5,400,000.00 1620000

Collection 3,900,000.00

Exercise 16

THE IMMORTALS Store accounts for its sales on the installment basis. At the beginning of 2020, ledger
accounts include the following balances: Installment contracts receivable, 2018 - P 30,000; Installment
contracts receivable, 2019 - P 96,000; Deferred gross profit, 2018 - P 12,600; Deferred gross profit, 2019 - P
36,000. At the end of 2020, account balances before adjustment for realized gross profit on installment
sales are:

Installment contracts receivable, 2018 - P 0; Installment contracts receivable, 2019 - P 24,000; Installment
contracts receivable, 2020 - P 130,000; Deferred gross profit, 2018 - P 12,600; Deferred gross profit, 2019 - P
34,350; Deferred gross profit, 2020 - P 60,000.

Installment sales in 2020 are made at 25% above cost of merchandise sold. During 2020 upon default in
payment by the customer, the company repossessed the merchandise with an estimated market value
of P 2,000. The sales was in 2019 for P 10,800, and P 6,400 had been collected prior to repossession.

Questions:
1. Compute the gain or (loss) on repossession assuming that Profit is recognized when sale is made:
a. (P 2,400) b. P -0- c. (P 750) d. (P 750)

2. Compute the gain or (loss) on repossession assuming that Profit is in proportion to periodic
collection (IS method):
a. (P 2,400) b. P -0- c. (P 750) d. (P 750)

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3. The net realized gross profit on December 31, 2020 is:
a. P 73,600 b. P 71,950 c. P 71,200 d. P 34,000

2,018.00 2019

IAR 30,000.00 96000

DGP 12,600.00 36000

0.42 0.38

IAR 2,018.00 2019 2020

Ending IAR - 24000 130000

DGP 34350 60000 0.25 300,000.00

1.25

0.20
72000
4400

67600 170,000.00

12,600.00 25,350.00 34000 71,950.00

71,200.00

SP 2,000.00

10,800.00

6,400.00

4,400.00

1,650.00

2,750.00

-
750.00

Exercise 17

Numbers Company sold computer equipment by giving a trade discount of 10% to all its customers. On
May 1, 2019, Five units of computer with a total list price of P100,000 and total cost of P59,800 were sold
to Deuteronomy, Numbers Company accepted computer as trade in and granted an allowance of
P10,000, the current market value of the computers is P12,000. The balance was payable as follows: 20%
of the balance paid at the time of sale; the rest is payable in 10 months starting on June 1, 2019. After 6
months of paying Deuteronomy defaulted in the payment if December 1, 2019. The five units of computer
equipment were repossessed and it would require P2, 000 reconditioning cost for each computer before
it could be resold for P6,000 each. A 15% gross profit rate was normal from the sale of used equipment.
Operating expenses amounted for P5, 380.

Required:
1. Compute for the realized gross profit for 2019: P19,040

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2. Compute for the net income for 2019: P17,620

List price 100,000.00

TD 10,000.00 90,000.00

Invoice price 90,000.00 10,000.00

OA 2,000.00 80,000.00

TSP 92,000.00 16,000.00 DP

Cost price 59,800.00 64,000.00

GP 32,200.00 6,400.00 per month

0.35 38,400.00

Total 54,400.00

RGP 19,040.00
FV of TI

6 x 6000 36,000.00

RCC 10,000.00

GP 5,400.00 Sale 80000

20,600.00 Dp 16000

collection 38,400.00

Balance 25,600.00 Remaining 25,600.00

GP 8,960.00

16,640.00 RGP 19040

gain on repo 3960

3,960.00 opex -5380

Net income 17620

Theories
1. The installment method of recognizing revenue

a . should be used only in cases in which no reasonable basis exists for estimating the
collectability of receivables.
b. is not a generally accepted accounting principle under any circumstances.
c. should be used for book purposes only if it is used for tax purposes.
d. is an acceptable alternative accounting principle for a firm that makes installment sales.

2. Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because
its customers typically cannot qualify for a bank loan. Default rates tend to be high or
unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars
without loss. The revenue method Slick would use is the:

A. Installment sales method.

B. Point of sales method.
C. Cost recovery method.
D. Completed contract method.

3. The installment method of recognizing profit for accounting purposes is acceptable if

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 a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.
c. collection of the sales price is not reasonably assured.
d. the method is consistently used for all sales of similar merchandise.

4. An acceptable method for recognizing profit when the collection of cash is in doubt is the
a. Percentage-of-completion method.
b. Completed-contract method.
c. Installment method.
d. Consignment method.

5. When using the installment sales method,

a. gross profit is deferred until all cash is received, but revenues and costs are recognized in
proportion to the cash collected from the sale.
b. gross profit is recognized only after the amount of cash collected exceeds the cost of the item
sold.
c. revenue, costs, and gross profit are recognized proportionally as the cash is received from the
sale of product.
d. total revenues and costs are recognized at the point of sale, but gross profit is deferred in
proportion to the cash that is uncollected from the sale.

“yun pala kulang pa ang kaalaman kong labis, ngayon alam ko na kung ba’t may pambura ang lapis”
-Loonie

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