Part II: Problem Solving

1. The ABC Company recognizes profit on credit sales on installment basis. At the end of 2021,
before the accounts are adjusted, the ledger shows the following:
Installment Accounts receivable 2020 337,500
Installment Accounts receivable 2021 525,000
Deferred gross profit 2020 185,000
Deferred gross profit 2021 272,500
Regular Sales 1,500,000
Cost of Regular Sales 960,000
Each year the gross profit on installment sales was 8% lower than the regular sales. In 2021, the gross
profit on installment sales was 4% higher than 2020.
How much is the total realized gross profit in 2021?
a. 229,500
b. 769,500
c. 181,000
d. 721,000

2. Appliance Company reports gross profit on the installment basis. The following data are available:
2018 2019 2020
Installment sales 240,000 250,000 300,000
Cost of goods – installment sales 180,000 181,250 216,000
Gross profit 60,000 68,750 84,000
Collections
2018 installment contracts 45,000 75,000 72,500
2019 installment contracts 47,500 80,000
2020 installment contracts 62,500
Defaults
Unpaid balance of 2018 installment contracts 12,500 15,000
Value assigned to repossessed merchandise 6,500 6,000
Unpaid balance of 2019 installment contracts 16,000
Value assigned to repossessed merchandise 9,000
1. What is the realized gross profit before loss on repossession for 2020?
a. 49,775
b. 57,625
c. 48,975
d. 56,625
2. What is the loss on repossession for 2020?
a. 5,250
b. 2,600
c. 7,850
d. 9,000
3. Davao Company uses the installment method of income recognition. The entity provided the
following pertinent data:
2018 2019 2020
Installment sales 300,000 375,000 360,000
Cost of goods sold 225,000 285,000 252,000
Balance of Deferred Gross Profit at Year end
2018 52,500 15,000 -
2019 54,000 9,000
2020 72,000
What is the total balance of the Installment Accounts Receivable on December 31, 2020?
a. 270,000
b. 277,500
 c. 279,000
d. 300,000 ​8506
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4. Nikko Company, which began operations on January 5, 2018, appropriately uses the installment
method of revenue recognition. The following information pertains to the operations for 2018 and
2019:
2018 2019
Sales 300,000 450,000
Collections from :
2018 sales 100,000 50,000
2019 sales - 150,000
Accounts written off from
2018 sales 25,000 75,000
2019 sales - 150,000
Gross profit rates 30% 40%
What amount should be reported as deferred gross profit on December 31, 2019?
a. 75,000
b. 80,000
c. 112,000
d. 125,000

5. On November 1, 2020, Speed Motor which maintains a perpetual inventory records sold a new
automobile to Rapids for P6,800,000. The cost of the car to the seller was P5,205,000.
The buyer paid 30% down and received P640,000 allowance on an old car traded, the balance being
payable in equal monthly instalment payments commencing the month of sale.
The monthly amortization was P240,000 inclusive of 12% interest on the unpaid amount of the obligation.
The car traded-in has a wholesale value of P960,000 after expending reconditioning cost of P180,000.
After paying three instalments, the buyer defaulted and the car was subsequently repossessed. When
reacquired, the car was appraised to have a fair value of P2,400,000.
How much is the realized gross profit on instalment sales during 2020?
a. 820,596
b. 855,596
c. 885,000
d. 804,897

6. On January 1, 2018, an entity sold a car to a customer at a price of P400,000 with a production cost
of P300,000. It is the entity’s policy to employ installment method to recognize gross profit from
installment sales.
At the time of sale, the entity received cash amounting to 25% of the selling price and old car with
trade-in allowance of P50,000. The said old car has fair value of P150,000. The customer issued
a 5-year note for the balance to be payable in equal annual installments every December 31 starting
2018. The note payable is interest bearing with 10% rate due on the remaining balance of the note.
The customer was able to pay the first annual installment and corresponding interest due. However,
after the payment of the second interest due, the customer defaulted on the second annual
installment which resulted to the repossession of the car sold with appraised value of P110,000. On
December 31, 2019, the repossessed car was resold for P140,000 after reconditioning cost of
P10,000.
1. What is the entity’s realized gross profit for the year ended December 31, 2018?
a. 50,000
b. 120,000
c. 108,000
d. 128,000
2. What is the loss on repossession for the year ended December 31, 2019?
a. 30,000
b. 20,000
c. 10,000
 d. 40,000
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7. The chief accountant of Sony Appliances Inc. provided the following balances from its unadjusted
trial balance for the year ended December 31, 2023:

Account January 1, 2023 December 31, 2023

Instalment receivable – 2021 contract P2,000,000 P500,000
Instalment receivable – 2022 contract P3,000,000 P1,000,000
Instalment receivable – 2023 contract P5,000,000
Deferred gross profit – 2021 contract P800,000
Deferred gross profit – 2022 contract P1,800,000
New inventory P200,000 P300,000
Net purchases (excluding freight-in) P5,000,000
Freight in P100,000
Cash sales for year 2023 P2,000,000
Instalment sales for year 2023 P8,000,000

The following additional notes are provided for the year ended December 31, 2023:
The gross profit rate for 2023 instalment sales is the average of previous years’ gross profit rate
for instalment sales.
On July 1, 2023, Sony wrote off 2021 instalment receivable with account balance of P300,000
because of the bankruptcy of the customer. Sony records its impairment loss of instalment
receivable using direct write off method.
On October 1, 2023, a 2022 contract customer defaulted on the instalment due which resulted
to repossession of the inventory with fair value of P100,000. The defaulted account has a
balance of P600,000.
On November 1, 2023, the repossessed inventory was sold at a cash price of P150,000 after
reconditioning it at a cost of P20,000. The sale of repossessed inventory is not yet reflected on
the cash sales stated above.
The total operating expenses, exclusive of impairment loss and loss on repossession, of Sony
for the year ended December 31, 2023 amount to P400,000.

1. What is the net income to be reported by Sony Inc. for the year ended December 31, 2023?
a. 2,840,000
b. 3,130,000
c. 3,520,000
d. 2,980,000

2. What is the total adjusted deferred gross profit as of December 31, 2023, respectively?
a. 3,200,000
b. 3,300,000
c. 3,100,000
d. 3,400,000

END
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