PROBLEM 1:

The Abbott Corporation sells merchandise on the installment basis, and the
uncertainties of cash collection make the use of the installment sales method of
accounting acceptable. The following data relate to two years of operations.

2018 2019
Installment sales P480,000 P560,000
Cost of installment 300,000 364,000
sales
Gross profit 180,000

Gross profit 35%

percentage
Cash collections:

2018 Sales P190,000 P210,000

2019 Sales -- 235,000

Record the transactions related to installment sales for 2018 and 2019.

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ANSWERS:

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2018:
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Installment accounts receivable,2018 480,000
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Cost of installment sales 300,000

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Installment sales,2018 480,000

Merchandise inventory 300,000
To record 2018 installment sales
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● Cash 190,000
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Installment accounts receivable,2018 190,000

To record 2018 collections

● Installment sales, 2018 480,000

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Cost of installment sales 300,000

ar stu

Deferred gross profit,2018 180,000

To close “Installment sales,2018” & “Cost of installment sales”
accounts and to record deferral of gross profit
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● Deferred gross profit, 2018(37.5% x 190,000) 71,250

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Realized gross profit 71,250

To record realization of gross profit

● Realized gross profit 71,250

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Retained earnings 71,250

To close “Realized gross profit” account

2019:
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 ● Installment accounts receivable,2019 560,000
Cost of installment sales 364,000
Installment sales,2019 560,000
Merchandise inventory 364,000
To record 2019 installment sales

● Cash 445,000
Installment accounts receivable,2018 210,000
Installment accounts receivable,2019 235,000
To record 2019 collections

● Installment sales, 2019 560,000

Cost of installment sales 364,000
Deferred gross profit,2018 196,000
To close “Installment sales,2019” & “Cost of installment sales”
accounts and to record deferral of gross profit

● Deferred gross profit, 2018(37.5% x 210,000) 78,759

Deferred gross profit, 2019(35% x 235,000) 82,250
Realized gross profit 161,009
To record realization of gross profit

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● Realized gross profit
er as 161,009

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Retained earnings 161,009
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To close “Realized gross profit” account
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PROBLEM 2:

These
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 • Down payment, 20%

• Installment sales: P545,000 in year 1; P785,000 in year 2; and P968,000 in

year 3.

• Mark-up on cost, 35%

• Collections after down payment: 40% in the year of sale, 35%

in the year after sale, and 25% in the third year.

a. What is the realized gross profit in year 1?

b. What is the unrealized gross profit for installment sales made during
year 2, as of the end of year 2?
c. What is the total installment accounts receivable at the end of year 3?
d. What is the unrealized gross profit at the end of year 3?

ANSWERS:

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a.
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Realized gross profit in year 1 = P73,474

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Downpayment(20% x 545,000) P109,000
Collections (40% x (545,000 x 80%)) o. 174,400
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P283,400
ou urc

Gross margin .35/1.35

Realized gross profit P73,474
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b. Unrealized gross profit = P105,830

aC s
vi y re

Downpayment(20% x 785,000) P157,000

Collections (40% x (785,000 x 80%)) 251,200
P408,200
ed d

Gross margin .35/1.35

Realized gross profit 105,830
ar stu

Gross Profit, year 2 P274,750

Less: Realized gross profit. 105,830
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Unrealized gross profit. P 71,231

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c. Total installment accounts receivable = P621,640

Year 1 Year 2 Year 3 Total

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 Installment accounts P545,000 P785,000 P968,000 2,298,000
receivable

Less:
Year 1 collections 283,400 - - 283,400

Year 2 collections 152,600 408,200 - 560,800

Year 3 collections 109,000 219,800 503,360 832,160

Remaining installment
accounts receivable -0- 157,000 464,640 621,640

d. Unrealized gross profit = P161,165

Total installment accounts receivable P621,640

Gross profit rate .35/1.35
Unrealized gross profit. P161,165

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PROBLEM 3:
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1. RUBEN SUN EQUIPMENT accounts for ALL sales of its merchandise

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on the installment basis. Following is the UNADJUSTED trial balance at

12/31/17.

Cash P 45,000
Installment accounts receivable——2015 20,000
Installment accounts receivable——2016 50,000
Installment accounts receivable——2017 90,000
Inventory 27,400
Repossessed merchandise 4,600 P 37,600
Accounts payable
Deferred gross profit——2015 12,000
Deferred gross profit——2016 26,400
Ordinary Share 125,000
Retained earnings 10,000
Installment sales 120,000
Cost
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 Loss on repossessions 3,000
Operating expenses 13,000 ———
———— ———
———— ——
P331,000 P331,000

Additional information:

Collection for 2015 installment sales during 2017 – P28,000.

Total cash receipts during 2017: P118,000

Merchandise sold in 2016 was repossessed in 2017 and the following entry
was prepared:

Deferred Gross Profit——2016 ............... 2,400

Repossessed Merchandise ................... 4,600
Loss on Repossessions ..................... 3,000
Installment Accounts Receivable——2016 ... 10,000

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INSTRUCTIONS

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(a) What is the gross profit rate for 2016? Show supporting
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computations.
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rs e
ou urc

(b) What is the gross profit rate for 2017? Show supporting
computations.
o

(c) Of the total cash receipts in 2017, how much represents

aC s

collections from installment sales of: (Show supporting

vi y re

computations.)
(1) 2015
(2) 2016
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(3) 2017
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(d) What is the total realized gross profit in 2017?

Answers:
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 a. Gross profit rate - 2016 = 24%

Deffered gross profit (from repossession of merchandise) P 2,400

Installment accounts receivable (from repossession of merchandise) ÷ 10,000
24%
b. Gross profit rate - 2017 = 35%

Installment sales 100%

Less:
Cost of installment sales (78,000/120,000) 65%
Gross profit. 35%

c. Total collections:
(1) Installment sales collection - 2015 = P28,000 (given in the problem)
(2) Installment sales collection - 2016 = P60,000

Deferred gross profit P26,400

Gross profit rate ÷ 24%
Installment accounts receivable, beg P110,000

Installment accounts receivable, beg P110,000

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Installment accounts receivable, end 50,000
Installment sales collection - 2016
er as P 60,000

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(3) Installment sales collection - 2017 = P30,000
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rs e

Total cash receipts - 2017 P118,000

ou urc

Less:
Installment sales - 2015, collection 28,000
Installment sales - 2016, collection 60,000
o

Installment sales - 2017, collection. P 30,000

aC s
vi y re

d. Realized gross profit = P31,900

Realized gross profit - 2015(28,000 x 25%) P 7,000

Realized gross profit - 2015(60,000 x 24%) 14,400
ed d

Realized gross profit - 2015(30,000 x 35%) 10,500

ar stu

Total realized gain P 31,900

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 ACC 60: Advanced Financial Accounting

ASSIGNMENT: INSTALLMENT SALES

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