Problem 1

On January 2, 2020, Bilis Co. sold land that cost 600, 000 for 800, 000, receiving a note bearing
interest at 10%. The note will be paid in three annual installments of 321, 700 starting on
December 31, 2020. Because collection of the note is very uncertain, Bilis will use the cost
recovery method.
How much revenue from this sale should Bilis recognize in 2020?
Problem 2
LuzViMinda Co. which began operations on January 1, 2019, appropriately uses the installment
method of accounting. The following information is available for 2019:
Installment accounts receivable - 12/31/2019 800, 000
Deferred gross profit – 12/31 (before recognition
of realized gross profit for 2019) 560, 000
Gross profit on sales 40%
For the year ended December 31, 2019, cash collections and realized gross profit on sales should
be.
Problem 3
The Green Valley Subdivision sells residential subdivision lots in installment. The following
information was taken from the accounting records of Green Valley Subdivision as at December
31, 2020:
Installment accounts receivable, 1/01/2020 755, 000
Installment accounts receivable, 12/31/2020 840, 000
Unrealized gross profit, 1/01/2020 339,750
Installment sales 950, 000
How much the realized profit in 2020?
Problem 4
The following data pertain to installment sales of Dummy’s Store:
 Down payment, 20%
 Installment sales: 545, 000 in Year 1; 785, 000 in Year 2; and 968, 000 in Year 3.
 Mark-up on cost, 35%.
 Collections after down payment: 40% in year of sale, 35% in the year after sale,
and 25% in the third year.
a) How much is the realized gross profit in Year 1?
b) How much is the unrealized gross profit for installment sales made during Year 2?
c) How much is the installment accounts receivable at the end of Year 3?
d) How much is the unrealized gross profit at the end of Year 3?

THEORIES
1) Smart Co. is engaged in extensive exploration for water in Batangas. If, upon discovery of
water, Smart does not recognize any revenue from the water sales until the sales exceed
the costs of exploration, the basis of revenue recognition being employed is?
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?
3) The method most commonly used to report defaults and repossessions is?
 4) What does the excess of the trade-in value over the fair value of a traded-in merchandise
in a sale accounted for under the installment sales method represents?

SOLUTION
Problem 1
Under the cost recovery method, no profit of any type is recognized until the cumulative
receipts (principal and interest) exceed the cost of the asset sold. The cost of 60, 000 is not yet
recovered in 2020, thus no amount of revenue will be recognized.

Problem 2
Installment sales (560,000 / 40%) 1,400,000
Less: Installment Accounts Receivable 12/31/2019 800,000
Cash Collections – 2019 600,000
Multiply by Gross Profit Rate on sales 40%
Realized Gross Profit, 2019 240,000

Problem 3
Installment accounts receivable, 01/01/2020 755,000
Add Installment sales 950,000___
Total 1,705,000
Less: Installment Accounts Receivable, 12/31/2020 840,000
Collections in 2020 865,000
Multiply by Gross Profit rate on Sale (339,750/755,000) 45%
Realized Gross Profit in 2020 389,250

Problem 4
a) Down payment (545,000 x 20%) 109,000
Installments (545,000 x 80% x 40%) 174,400
Total Collections in Year 1 283,400
Multiply by gross profit Rate 35/135
Realized Gross Profit in Year 1 73, 474

b) Installment sales – year 2 785, 000

Less: Down payment (20%) 157, 000
Balance 628, 000
Less: Collections at year of sale (628,000 x 40%) 251, 200
Receivable balance-Year 2 sales at the end of Year 2 376, 800
Multiply by the Gross Profit Rate 35/135
Unrealized gross profit at the end of Year 2 97, 689
 Year 2 Year 3
c) Installment sales 785,000 968,000
Down payment (20%) (157,000) (193,600)
Balance 628, 000 774,400
Collections:
Year of sale (251, 200) (309, 760)
Year after sale (219, 800) -____
Installment accounts receivable, Year 3 157, 000_ 464, 640__

d) Installment accounts receivable, Year 3 621, 640

Multiply by gross profit rate on sales __35/135
Unrealized gross profit, Year 3 161, 166

THEORIES
1. Cost recovery basis
2. Net realizable value minus normal profit
3. Repossessed merchandise are recorded at fair value and record gain or loss if iny
4. Over allowance