Problem I

1) Regular Sales - full profit 2) Installment Sales Meth

20x4 20x4
Cash 3,500 Cash
Mortgage Receivable (24,000 - 3,500) 20,500 Mortgage Notes Receivab
Real Estate (at cost) 9,000
Gain on Sale of Real Estate 15,000

Cash 500 Cash

Mortgage Notes Receivable 500

20x5
Real Estate 16,500 Deferred Gross Profit 15
Loss on Repossession of Real Estate 3,500 Gross Profit Percentage =
Mortgage Notes Receivable 20,000 Total Collection(3,500 + 5
Multiplied by: GPP - 62.5
Deferred Gross Profit on

Deferred Gross Profit on

20x5
Real Estate
Deferred Gross Profit
2) Installment Sales Method

3,500
Mortgage Notes Receivable 20,500
Real Estate 9,000
Deferred Gross Profit on Installment Sales 15,000

500
Mortgage Notes Receivable 500

Deferred Gross Profit 15,000/ 24,000= .625

Gross Profit Percentage = 62.5%
Total Collection(3,500 + 500) = 4,000
Multiplied by: GPP - 62.5%
Deferred Gross Profit on Installment Sales = 2,500

Deferred Gross Profit on Installment Sales 2,500

Realized Gross Profit on Installment Sales 2,500

Real Estate 16,500

Deferred Gross Profit 12,500
Mortgage Notes Receivable 20,000
Gain on Repossession on RE 9,000
PROBLEM II
1) 20x4: 4,000 is treated as a return of investment. No profit is recognized.
20x5: 250 is treated as a return of investment. 750 is treated as profit
20x6: 1,000 Is treated as profit
20x7: 1,000 Is treated as profit
20x8: 1,000 Is treated as profit
20x9: 1,000 Is treated as profit
2010; 1,000 Is treated as profit

2) 20x4: 4,000 is treated as profit

20x5: 1,000 is treated as profit
20x6: 250 is treated as a return of investment. 750 is treated as a profit
20x7: 1,000 is treated as a return of investment
20x7: 1,000 is treated as a return of investment
20x8: 1,000 is treated as a return of investment
20x9: 1,000 is treated as a return of investment
2010; 1,000 is treated as a return of investment
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

107,040 281,880
107,040 281,880
PROBLEM VI- page 274 reference in the book

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

The loss on repossession is computed as follows:

Estimated selling price after reconditioning costs
Less: Reconditioning costs 12,000
Costs to sell and dispose 6,000
Normal profit (20% x 108,000) 21,600
Market Value before reconditioning costs
Less: Uncovered cost
Installment accounts receivable - 20x4, unpaid balance 120,000
Deferred gross profit -20x4 (120,000 x 40%) 48,000
Loss on repossession

Repossesd merchandise 12,000

Cash, etc (or various credits) 12,000
108,000

39,600
68,400

72,000
3,600
PROBLEM VII- page 276 reference in the book
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 2,400,000
Installment Accounts Receivable - 20x4 (80,000 x 42) 3,360,000
Installment Sales 6,960,000

Overallowance is computed as follows:

Trade-in Allowance 1,200,000
Less: MV before reconditioning costs:
Estimated Resale price after reconditioning costs 1,680,000
Less: Reconditioning costs 420,000
Costs to sell (5% x 1,680,000) 84,000
Normal Profit (20% x 1,680,000) 336,000 840,000
Over-allowance 360,000

The gross profit on installment sales is computed as follows:

Installment Sales 6,960,000
Less: Over-allowance 360,000
Adjusted Installment Sales 6,600,000
Less: Cost of Installment Sales 3,920,000
Gross Profit 2,680,000
Gross Profit Rate (2,680,000/6,600,000) 40.60%

Further, the entry to record the reconditioning cost is as follows:

Trade in Merchandise 420,000
Cash, etc (or various credits) 420,000

Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4 is computed as follows:
Trade in merchandise (mv before reconditioning costs) 840,000
Down Payment 2,000,000
Installment collection (March 31 - December 31: 80k x 10 mos) 800,000
TOTAL COLLECTIONS 3,640,000
Multiplied by: Gross profit rate in 20x4 40.60%
Realized Gross Profit on installment sales of new merchandise 1,477,840
 Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales, the entry would be
Trade-in Merchandise 840,000
Cash 2,400,000
Installment Accounts Receivable- 20x4 3,360,000
Installment Sales ( net-over allowance) - (6,960,000 - 360,000) 6,600,000

0x4 is computed as follows:

ment sales, the entry would be as follows: