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a. At time of sale
Installment Accounts Receivable xxxx
Installment Sales xxxx
a. At time of sale
Installment Accounts Receivable xxxx
Installment Sales xxxx
The difference between the total debits and the credits is recognized as loss on
repossession (if debit) and if credit, the amount must be deducted from the value
of the repossessed merchandise. No gain is reported at the time of repossession.
COMPUTATION OF TRUE WORTH OF REPOSSESSED MERCHANDISE
Estimated selling price after reconditioning xxxx
Less: Reconditioning costs xxxx
Desired profit xxxx
Selling expenses xxxx xxxx
True worth of merchandise xxxx
OVER-ALLOWANCE ON TRADE-IN
Represents the difference between the actual trade-in allowance granted on the
merchandise traded-in and the true work of such merchandise.
COMPUTATION OF OVER-ALLOWANCE ON TRADE-IN
Trade-in allowance granted xxxx
Less: True worth of merchandise traded-in
Selling price after reconditioning xxxx
Less: Reconditioning costs xxxx
Selling & admin. Expenses xxxx
Desired profit xxxx xxxx xxxx
Over-allowance on trade-in xxxx
DISPOSITION OF OVER-ALLOWANCE ON TRADE-IN
The over-allowance on trade-in is carried as a separate account in the books because the trade in
should be recorded at no more than the company would pay on its purchase.
Entry:
Trade-in merchandise (at true worth) xxxx
Overallowance on merchandise traded-in xxxx
Installment accounts receivable xxxx
Installment Sales xxxx
In computing the gross profit rate on installment sales, the over-all allowance on merchandise traded-in
is deducted from the installment sales. When closing the books, the balance of the overallowance on
merchandise trade-in is closed against installment sales.
INSTALLMENT SALES PROBLEMS
AND EXERCISES
1. Using the cost-recovery method of revenue recognition, profit on an installment sale is recognized
a. On the date of the installment sale.
b. In proportion to the cash collections.
c. After cash collections equal to the cost of goods sold have been received.
d. On the date the final cash collection is received
2. When assets that have been sold and accounted for by the installment method are subsequently repossessed and returned
to inventory, they should be recorded on the books at
a. selling price
b. the amount of the installment receivable less associated deferred gross profit..
c. Net realizable value.
d. Net realizable value minus normal profit.
3. When assets that have been sold and accounted for by the installment method are subsequently repossessed and returned
to inventory, they should be recorded on the books at
a. selling price
b. the amount of the installment receivable less associated deferred gross profit..
c. Net realizable value.
d. Net realizable value minus normal profit.
4. Wren Co. sells equipment on installment contracts. Which of the following statements best justifies Wren's use of the
cost-recovery method of revenue recognition to account for these installment sales?
a. The sales contract provides that title to the equipment passes to the purchaser only when all payments have been made.
b. No cash payments are due until one year from the date of sale.
c. Sales are subject to a high rate of return.
d. There is no reasonable basis for estimating collectibility.
5. A sells on the installment basis, with service contracts paid in full at the date of sale. The collections from service
contracts should be recorded as an increase in:
a. Deferred revenue account
b. Sales receivable valuation account
c. Valuation account of stockholders’ equity
d. Service revenue account
6. According to the cost recovery of accounting, the gross profit on installment sale is recognize in income:
a. After cash collections equal to the cost of sales are received.
b. In proportion to cash collections.
c. On the date of final cash collection is received.
d. On the date of sale.
7. Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal
monthly amounts, which include 12% interest. What is the balance of an installment note receivable 6 months after
the sales?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.
8. On January 2, 2020, Harvey Co. sold a plant to Julia, Inc. for P1.5 million. On that date, the
plant's carrying cost was P1 million. Julia gave Harvey P300,000 cash and a P1.2 million note,
payable in four annual installments of P300,000 plus 12% interest. Ivory made the first principal
and interest payment of P444,000 on December 31, 2020. Harvey uses the installment method of
revenue recognition. In its 2020 income statement, what amount of realized gross profit should
Harvey report?
a. P344,000
b. P200,000
c. P148,000
d. P100,000
9. Dolphy Co., which began operations on January 1, 2019, appropriately uses the installment method of
accounting to record revenues. The following information is available for the years ended December 31, 2019
and 2020:
2019 2020
Sales P 1,000,000 P 2,000,000
Gross profit realized on
Sales made in:
2019 150,000 90,000
2020 - 200,000
Gross profit percentages 30% 40%
What amount of installment accounts receivable should Dolphy report in its December 31, 2020, balance
sheet?
a. P1,100,000
b. P1,300,000
c. P1,700,000
d. P1,900,000
10. London Co., which began operations on January 2, 2020, appropriately uses the installment sales method of
accounting. The following information is available for 2015:
For the year ended December 31, 2020, cash collections and realized gross profit on sales should be
Cash collections Realized gross profit
a. P 480,000 P 320,000
b. P 480,000 P 240,000
c. P 600,000 P 320,000
d. P 600,000 P 240,000
11. The Brownlee Inc. began operating at the beginning of the calendar year 2020 and, using the installment method of
accounting, presented the following data for the first year:
Installment sales P400,000
Gross margin based on cost 66- 2/3 %
Inventory, Dec. 31, 2020 P 80,000
General and administrative expenses 40,000
Inst Accts receivable, Dec. 31, 2020 320,000
The balance of the deferred gross profit account should be:
a. P192,000
b. P128,000
c. P 96,000
d. P 80,000
13. How much is the balance of Unrealized Gross Profit as at December 31, 2020?
a. P378,000
b. P339,750
c. P427,500
d. P389,250
14. Slaughter Enterprises uses the installment method of accounting and it has the following data at the
year-end:
Based on the information given above, the total realized gross profit in 2020 was:
a. P 50,000
b. P105,000
c. P112,500
d. P200,000
16. The cost of installment sales for the year 2021 was:
a. P900,000
b. P918,000
c. P932,000
d. P940,000
17. On January 1, 2019, Blackwater Co. sold a used machine to Trooper, Inc. for P525,000. On this date, the machine
had a depreciated cost of P367,500. Trooper paid P75,000 cash on January 1, 2019 and signed a P450,000 note bearing
interest at 10%. The note was payable in three annual installments of P150,000 beginning January 1, 2020. Blackwater
appropriately accounted for the sale under the installment method. Trooper made a timely payment of the first
installment on January 1, 2020 of P195,000, which included interest of P45,000 to date of payment. at December 31,
2020, Blackwater has deferred gross profit of
a. P105,000
b. P 99,000
c. P 90,000
d. P 76,500
18. Holmes Corporation started operations on January 1, 2016 selling home appliances and furniture sets both for cash
and on installment basis. Data on the installment basis sales operations of the Company gathered for the years ending
December 31, 2016 and 2017 were as follows:
2016 2017
Installment sales ₱400,000 ₱500,000
Cost of installment basis 240,000 350,000
Cash collected on installment sales:
2014 installment sales 210,000 150,000
2015 installment sales 300,000
Additional information:
On January 5, 2018, an installment sales on 2016 was defaulted and the merchandise with an appraised value of
₱5,000 was repossessed. Related installment receivable balance on
January 5, 2018 was ₱8,000.
Recording the repossessed merchandise at its appraised value, gain or loss on the repossession should be:
a. No gain or loss
b. ₱200 gain
c. ₱1,800 gain
d. ₱3,000 loss
19. On January 1, 2018, Augustus Company sold land that cost ₱60,000 for ₱80,000, receiving a note bearing
interest at 10%. The note will be paid in three annual installments of ₱32,170 starting on December 31, 2018.
Because collection of the note is very uncertain, Colt will use the cost recovery method. How much revenue (profit
from sale and interest) from this sale should Colt recognize in 2018?
a. ₱0
b. ₱6,000
c. ₱8,000
d. ₱20,000
20. Zero, Inc. was involved in two default and repossession cases during the year:
I. A refrigerator was sold to Sweet Sixteen for P 18,000, including a 35% mark up on selling price. Sweet
made a down payment of 20%, four of the remaining 16 equal payments, and then defaulted on further
payments. The refrigerator was repossessed, at which time the fair value was determined to be P 6,000.
II. An oven that cost P 12,000 was sold to Teen Eighteen for P 16,000 on the installment basis. Teen made a
down payment of P 2,400 and paid P 800 a month for six months, after which he defaulted. The oven was
repossessed and the estimated value at the time of repossession was determined to be P 7,500.
What is the gain or loss on repossession that Zero, Inc. must report for financial reporting purposes?
a. P1,100 loss
b. P1,020 loss
c. P 900 gain
d. P 120 loss