PROBLEM IV

Transactions and entries for the Omega Corporation relating to regular and installment sales for 20x4 and 20x5 follow:
REQUIREMENT NO.1

January to December 31 20x4 20x5

1)To record the regular sales:
Cash 360,000 480,000
Accounts Receivable 240,000 600,000
Sales 600,000 1,080,000

2) To record the 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 20x4 72,000 72,000
Installment Accounts Receivable 20x5 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
for 20x4 and 20x5 follow:
REQUIREMENT NO. 2
Adjusting entries (end of the year)
6) To recognize accrued interest receivable
Interest receivable
Interest Income

7) To set up Cost of Installment Sales

Periodic Method:
Cost of Installment Sales
Merchandise Inventory

Perpetual Method: No entry

8) To set-up Deferred Gross Profit

Installment Sales
Cost of Installment Sales (144,000 + 108,000)
Deferred Gross Profit - 20x4 (360,000 - 252,000)
Deferred Gross Profit - 20x5 (480,000 - 312,000)

Gross Profit Rate - 20x4: 108,000 / 360,000 = 30%

Gross Profit Rate - 20x5: 168,000 / 480,000 =35%

9) To record realized gross profit on installment sales:

Deffered gross profit - 20x4
Deffered gross profit - 20x5
Realized gross profit on installment sales

*20X4 Realized gross profit on installment sales:

Collections applying as to principal (72,000 + 60,000)
Multiplied by: Gross Profit Rate
Realized Gross Profit

** 20x5: Realized gross profit on installment sales: 20x4

Collections - principal 72,000
- 28,800 + 43,200 Multiplied by: Gross Profit rate 30%
Realized Gross Profit 21,600

Closing entries:
10) To close realized gross profit account:
Realized gross profit
Income Summary

11) To close other nominal accounts

Sales
Interest Income 20x4: (36,000 + 1,440) 20x5: (28,800+43,200+1,080+ 1800)
Cost of Sales
Operating Expenses
Income Summary

12) To close operations:

Income Summary
Retained Earnings
 20x4 20x5

1,440 2,880
1,440 2,880 1,080 + 1,800

480,000 864,000
480,000 864,000

360,000 480,000
252,000 312,000
108,000
168,000

39,600 21,600
71,400
39600* 93,000**

132,000
30%
39,600

20x5
204,000
35%
71,400 93,000

39,600 93,000
39,600 93,000

600,000 1,080,000
 37,440 74,880
480,000 864,000
90,000 102,000
67,440 188,880

107,040 263,760
107,040 263,760