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Installment Sales Method
Installment Sales Method
2. Solutions:
Requirement (a):
Requirement (b):
Requirement (c):
1
20x3 0, ending A/R x 30% = 0
3. D
4. B
6. D 1M sale price – 750K cost of sale = 250K total gross profit – 200K
deferred = 50K realized
7. D 1M sale price – 750K cost of sale = 250K total gross profit – 220K
realized = 30K deferred
8. A 1M sale price – 750K cost of sale = 250K total gross profit – 180K
realized = 70K deferred ÷ 25% = 280,000
9. B 1M sale price – 750K cost of sale = 250K total gross profit – 160K
realized = 90K deferred ÷ 25% = 360,000 ending A/R;
10. Solution:
Requirement (a):
The fair value of the repossessed inventory is computed as follows:
Estimated selling price
12,000
Reconditioning costs
(2,000)
Normal profit margin (year of repossession) (12K x
30%) (3,600)
Fair value of repossessed property 6,400
2
Installment
Installment receivable -
receivable - 20x1 20x2
Collectio
n
(squeez Sal 240,00 60,00 Collection
47,000 e) e 0 0 (squeeze)
180,0
30,000 End. 00 End.
11. D
12. Solutions:
Scenario 1
Requirement (a):
The journal entry to record the sale is as follows:
Requirement (b):
3
The gross profit rate is computed as follows:
Scenario 2
Requirement (a):
The journal entry to record the sale is as follows:
Dat Inventory – traded-in (at fair value) 3,000
e Over allowance on trade-in 1,000
Installment account receivable 12,000
(squeeze) 16,000
Installment sale
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price 16,000
4
Over allowance (1,000)
Adjusted installment sale price 15,000
(10,000
Cost of sale
)
Gross profit 5,000
Scenario 3
Requirement (a):
The journal entry to record the sale is as follows:
Dat Inventory – traded-in (at fair value) 6,000
e Installment account receivable 12,000
(squeeze) 16,000
Installment sale 2,000
Under allowance on trade-in
Requirement (b):
The gross profit rate is computed as follows:
5
The realized gross profit is computed as follows:
Trade-in value granted to customer 4,000
(Over) under allowance 2,000
Subsequent collections 6,000
Total collections on installment sale 12,000
Multiply by: Gross profit rate 55.56%
Realized gross profit - 20x1 6,667
13. C
14. Solution:
10,00
Total collections from 20x1 sales
0
(8,00
Cost of 20x1 sales
0)
2,00
Gross profit - 20x1 sales
0
12,00
Total collections from 20x2 sales
0
(9,00
Cost of 20x2 sales
0)
3,00
Gross profit - 20x2 sales
0
Gross profit recognized in 20x2
5,000
15. A
Requirement (b):
Installment sales 1,000,000
Requirement (c):
Installment sales 1,000,000
6
Cost of sales (800,000)
Deferred gross profit - unadjusted balance 200,000
Gross profit rate based on sales (200K / 1M) 20%
Requirement (d):
Requirement (e):
Deferred gross profit - unadjusted balance 200,000
OR
2. Solutions:
Requirement (a):
Requirement (b):
Installment sales 1,000,000
Requirement (c):
Requirement (d):
Deferred gross profit (before year-end adjustment) 200,000
Reconciliations:
3. Solution:
Installment sales
900,000
500,00
Installment accounts receivable, Dec. 31, 20x1
0
Collections in 20x1
400,000
Multiply by: (100% - 60%) 40%
Realized gross profit - 20x1
160,000
4. Solutions:
Requirement (a):
Deferred gross profit, before year-end adjustment
560,000
8
Divide by: Gross profit on sales 40%
Total sales 1,400,000
Installment accounts receivable, Dec. 31, 20x1
(800,000)
Collections - 20x1 600,000
Requirement (b):
Collections - 20x1
600,000
Multiply by: Gross profit on sales 40%
Realized gross profit - 20x1
240,000
5. Solution:
6. Solutions:
Requirement (a):
The gross profit rates are computed as follows:
20x1 20x2 20x3
Installment sales 300,000 375,000 360,000
Cost of sales 225,000 285,000 252,000
Gross profit 75,000 90,000 108,000
Gross profit rate based on sales 25% 24% 30%
9
20x1 Installment accounts receivable, Dec. 31, 20x3 -
Requirement (b):
15,00
20x1 Deferred gross profit, Dec. 31, 20x2 0
Divide by: Gross profit rate 25%
60,00
20x1 Installment accounts receivable, Dec. 31, 20x2 0
20x1 Installment accounts receivable, Dec. 31, 20x3 -
Collection during 20x3 from 20x1 sales 60,000
54,00
20x2 Deferred gross profit, Dec. 31, 20x2 0
Divide by: Gross profit rate 24%
20x2 Installment accounts receivable, Dec. 31, 20x2 225,000
37,50
20x2 Installment accounts receivable, Dec. 31, 20x3 0
Collection during 20x3 from 20x2 sales 187,500
Requirement (c):
Collection during 20x3 from 20x1 sales
10
60,000
Multiply by: Gross profit rate - 20x1 sales 25%
7. Solutions:
Requirement (a):
11
* (135,000 less 22,500 unpaid balance in repossessed merchandise) =
112,500
Requirement (b):
20x Inventory (at fair value) 15,000
3 Deferred gross profit (22.5K x 30%) 6,750
Loss on repossession (squeeze) 750
Installment account receivable 22,500
8. Solution:
Cash down payment
600,000
1,440,00
Collection from installment payment (900K + 540K)
0
Total collections 2,040,000
(4,000,000
Cost of sale
)
Excess of collection over cost
-
Since total collections do not exceed the cost of sale, no income shall be
recognized by Sound Co.
Requirement (a):
Requirement (b):
Requirement (c):
12
20x2 500,000, ending A/R x 25% = 12,500
20x3 0, ending A/R x 25% = 0
2. Solutions:
Case 1: 112,000 ÷ 35% = 320,000
Case 3: 900K – 585K = 315K total gross profit – 200K deferred = 115,000
realized
Case 5: 900K – 585K = 315K total gross profit – 220K realized = 95,000
deferred
Case 6: 900K – 585K = 315K total gross profit – 180K realized = 135,000
deferred ÷ 35% = 385,714 A/R, end.
Case 7:
If the realized gross profit is ₱147,000, how much is the total collections
during the year?
3. Solution:
Requirement (a):
The fair value of the repossessed inventory is computed as follows:
Estimated selling price 24,000
Reconditioning costs
(4,000)
Normal profit margin (year of repossession) (24K x
30%) (7,200)
13
Installment account receivable 26,000
Installment
Installment receivable -
receivable - 20x1 20x2
Collectio
n
94,00 (squeez Sal 480,00 120,00 Collection
0 e) e 0 0 (squeeze)
60,00 360,00
0 End. 0 End.
4. Solution:
Scenario 1
14
Requirement (a):
The journal entry to record the sale is as follows:
Requirement (b):
Scenario 2
Solution:
The amount of over (under) allowance is determined as follows:
Trade-in value granted to customer 8,000
Fair value of merchandise traded-in (6,000)
Over allowance 2,000
Requirement (a):
The journal entry to record the sale is as follows:
Dat Inventory – traded-in (at fair value) 6,000
e Over allowance on trade-in 2,000
15
Installment account receivable 24,000
(squeeze) 32,000
Installment sale
Requirement (b):
The gross profit rate is computed as follows:
Installment sale price 32,000
Over allowance (2,000)
Adjusted installment sale price 30,000
(20,000
Cost of sale
)
Gross profit 10,000
Scenario 3
Solution:
Requirement (a):
The journal entry to record the sale is as follows:
Dat Inventory – traded-in (at fair value) 12,000
e Installment account receivable 24,000
(squeeze) 32,000
Installment sale 4,000
Under allowance on trade-in
Requirement (b):
The gross profit rate is computed as follows:
16
Installment sale price 32,000
Under allowance 4,000
Adjusted installment sale price 36,000
(20,000
Cost of sale
)
Gross profit 16,000
Gross profit rate 55.56%
5. Solution:
17
4
9. C
. A B 14.
5 10
D
. B . B 15.
Solutions:
2. C
Amortizatio
Date Collection Interest n Principal
9/30/x1 48,000
9/30/x1 4,800 - 4,800 43,200
10/31/x1 4,800 432 4,368 38,832
11/30/x1 4,800 388 4,412 34,420
12/31/x1 4,800 344 4,456 29,965
Totals 19,200 1,165 18,035
3. A
Inventory 16,800
Deferred gross profit (29,965 x 37.5%) 11,237
Loss on repossession 1,928
Receivable 29,965
4. C
18
Amortizatio
n t n al
Date of (squeeze
sale 158,000 )
20x1 71,000 7,000 64,000 94,000(a)
(squeeze) (given) (given) (start)
(a)
108,000 N/R – 14,000 discount on N/R = 94,000 carrying amount 12/31/x1
Inventory
beg. -
COGS
Purchases 100,850 90,850 (squeeze)
10,000 end.
Sales 158,000
COGS (90,850)
Gross profit 67,150
Gross profit rate 42.50%
5. B
Amortizatio
Date Collection Interest n Principal
Date of sale 158,000
20x1 71,000 7,000 64,000 94,000
20x2 34,000 60,000 (b)
19
(squeeze) (start)
(b)
72,000 N/R – 12,000 discount on N/R = 60,000 carrying amount 12/31/x2
Inventory
beg. -
COGS
Purchases 105,250 89,250 (squeeze)
16,000 end.
Sales 170,000
COGS (89,250)
Gross profit 80,750
Gross profit rate 47.50%
20
Gross profit rate – 20x2 47.50%
Realized gross profit in 20x2 from 20x2 sale 31,350
6. D
Solution:
Inventory
beg. 174,180
COGS
Purchases 627,891 693,441 (squeeze)
108,630 end.
7. A
Solution:
Amortizatio
Date Collection Interest n Principal
Date of sale 3,000(a)
Down
payment 825(b) - 825.00 2,175
1st installment 165(c) 21.75(d) 143.25 2,032
2nd
installment 165 20.32 144.68 1,887
3rd
installment 165 18.87 146.13 1,741
Total interest 60.94
(a)
3,300 installment price ÷ 100% = 3,000 cash price equivalent
(b)
3,300 x 25% = 825 down payment
(c)
(3,300 – 825 down payment) ÷ 15 = 165 monthly installment
(d)
2,175 unpaid cash price equivalent x 1% monthly interest = 21.75
21
8. D
Solution:
22