ADVANCED FINANCIAL ACCOUNTING AND REPORTING

INSTALLMENT SALES

PROBLEMS
1. Assume the following data summarizing the transactions for two years of Cone Sales Corporation:
2021 2022
Sales:
Regular (on account) P250,000 P230,000
Installment:
Down payment 20,000 24,000
Balance (payable within 3 years at the start of each month,
80,000 96,000
apply 36% interest for 3 years)
Cost of Sales:
Regular 120,000 130,400
Installment 60,000 69,600
Collections:
Accounts Receivable 120,000 130,500
Installment contracts receivable
2021 Sales:
Applying to interest 26,000 18,000
Applying to principal 19,000 26,000
2022 Sales:
Applying to interest – 31,000
Applying to principal – 22,000
Operating expenses paid 50,000 65,000
Accrued interest receivable, December 31
2021 Sales 1,800 1,020
2022 Sales 2,250

Questions:
1. In 2021, for purposes of the installment method of accounting, what is the gross profit rate that must be used?
2. How much is the realized gross profit from installment sales in 2021?
3. How much is the realized gross profit from regular sales in 2021?
4. How much is the realized gross profit in 2021?
5. How much is the installment receivables as of December 31, 2021?
6. How much is the receivables that must be presented in the Statement of Financial Position as of December 31, 2021?
7. How much is the balance of deferred gross profit as of December 31, 2021?
8. What is the net income for 2021?
9. In 2022, for purposes of the installment method of accounting, what is the gross profit rate that must be used?
10. How much is the realized gross profit from installment sales in 2022?
11. How much is the realized gross profit from regular sales in 2022?
12. How much is the realized gross profit in 2022?
13. How much is the installment receivables as of December 31, 2022?
14. How much is the receivables that must be presented in the Statement of Financial Position as of December 31, 2022?
15. How much is the balance of deferred gross profit as of December 31, 2022?
16. What is the net income for 2022?

2. Assume that Felipe Company sells merchandise for cash, short-term credit and on the installment basis. The Company employs the
periodic inventory method in determining costs. At the end of 2022, the following information are available:

Cash sales P150,000

Charge sales 300,000
Installment sales 750,000
Merchandise inventory, January 1 120,000
Purchases 725,000
Freight-in 30,000
Repossessed merchandise 35,000
Merchandise inventory, December 31 130,000

Questions:
1. What is the amount of the cost of goods sold?
2. Assuming there are no additional facts, what must be the allocated cost of goods sold to: a. Cash sales
b. Charge sales
c. Installment sales
3. Assume that the selling prices for charge sales and installment sales of Felipe Company are higher than cash sales price by 20% and 25%,
respectively. What must be the allocated cost of goods sold to:
a. Cash sales
b. Charge sales
c. Installment sales
4. Assume that Felipe Company’s gross profit rate on selling price is 25% on cash sales, 35% on charge sales and 37% on installment sales.
What must be the allocated cost of goods sold to:
 a. Cash sales
b. Charge sales
c. Installment sales

3. On July 10, 2022, Toyota Motors, Inc. sold a new car to Mr. Sy for P850,000. The car costs Toyota P650,625. Mr. Sy paid 25% cash down-
payment and traded his old car. Toyota granted an allowance of P80,000 on the old car traded, the balance in equal monthly installment
payments. The monthly installment amounts to P30,000 inclusive of 12% interest on the unpaid balance of the principal amount of
obligation. The old car traded in has a selling price of P120,000 after expending reconditioning cost of P22,500.

After paying three installment, Mr. Sy suffered major financial setback incapacitating him to continue paying. The car was subsequently
repossessed. When reacquired, the car was appraised to have a fair value of P300,000.

Questions:
1. What is the gain (loss) on repossession?
2. Under the installment method, how much is the realized gross profit to be recognized at the end of the year?
3. How much is the net income for 2022 considering the transactions?
4. Kia Motors sells cars both on installment and cash basis. On March 30, 2022, Kia Motors sold a car to Mr. Tom for P525,000 costing
P414,000. A used car is accepted as downpayment, P128,000 being allowed on the trade-in. The used car can be resold for P160,200 after
reconditioning cost of P7,660. The company expects to make a 20% gross profit on the sale of used car. The balance of the sale is to be
paid on a 10-month installment basis starting May 1, 2022.

Mr. Tom defaulted payment starting November 1, 2022 and the car was immediately repossessed. The repossessed car was appraised at a
value of P93,750 at the time of repossession. Kia Motors had to incur additional costs of repair amounting to P9,250 before the car was
subsequently resold on December 1, 2022 for P128,750 cash to Mr. Lim.

Questions:
1. What is the gain (loss) in repossession?
2. What is the realized gross profit on December 31, 2022?
3. What is the net income for the year ended December 31, 2022?

5. Edward, Inc. uses the installment method of gross profit recognition. The following table pertains to its operations from 2020 to 2022:

2020 2021 2022

Installment sales P50,000 P80,000 P (7)
Cost of installment sales (1) (5) 91,800
Gross profit (2) (6) 28,200 Gross profit percentages (3) 25% (8)
Cash collections:
2020 sales (4) 25,000 10,000
2021 sales 20,000 50,000
2022 sales 45,000
Realized gross profit 1,100 10,500 (9)

Question: Please fill up the table above.

6. The following table pertains to Jacob, Inc. which uses the cost recovery method for all installment sales.

2020 2021 2022

Installment sales P92,000 P103,000 P (1)
Cost of installment sales (2) 62,830 74,750
Gross profit (3) (4) (5) Gross profit percentages 36% (6) 35%
Cash collections:
2020 sales 27,200 48,300 12,200
2021 sales 36,600 (7)
2022 sales 43,450
Realized gross profit (8) (9) 19,250

Question: Please fill up the table above.

MULTIPLE CHOICE QUESTIONS A. THEORIES

1. A type of sale which provides for a series of payments over a period of time.
a. Credit sale
b. Auction sale
c. Installment sale
d. Barter sale
2. In installment sale, revenue is recognized:
a. At the point of sale
b. After the point of sale
c. Before the point of sale
d. All of the above
3. Under the cost recovery method, revenue is recognized until:
a. Collections are equal to the amount of cost of goods sold
b. Collections are more than the cost of goods sold.
c. Collections are less than the cost of goods sold
d. The selling price is collected
 4. Under the gross profit realization method, first collections are regarded as
a. Expenses
b. Revenue
c. Cost recovery
d. Return of investment
5. Under this method, cash collection is regarded as a partial recovery of cost and a partial realization of profit.
a. Cost recovery method
b. Gross profit realization method
c. Installment method
d. None of the above
6. Under the installment method, the difference between the selling price and the cost of sale is recorded as:
a. Deferred gross profit
b. Income
c. Asset
d. Expense
7. Under the installment method, realized gross profit is computed at the end of each year by:
a. Multiplying the total collections by the gross profit rate based on cost
b. Multiplying the total collections by the gross profit based on sales
c. Multiplying the selling price by the gross profit rate
d. Multiplying the cost of sales by the gross profit rate
8. At time of repossession, repossessed merchandise is debited at its:
a. Original cost
b. Unrecovered cost
c. Fair value after reconditioning cost
d. Fair value before reconditioning cost
9. Installment accounts receivable account is classified in the balance sheet under:
a. Current asset
b. Fixed asset
c. Other asset
d. Non-current asset

10. In the balance sheet, deferred gross profit account is classified as:
a. Current asset
b. Deferred credits
c. Current liability
d. Long-term liability

B. COMPUTATIONAL
1. Superman Company started operations on January 2, 2022. The following information is gathered for 2022:
Installment accounts receivable, December 31 P1,500,000
Deferred gross profit, December 31 (before adjustment) 1,050,000
Gross profit rate based on sales 25%

What is the realized gross profit on sales for 2022? a. P1,350,000

b. P1,125,000
c. P 810,000
d. P 675,000

2. Gross profit rates of Batman Company were 35%, 33% and 30% of sales for 2020, 2021 and 2022, respectively. The following account
balances are available at the end of 2022:
Installment account Deferred gross profit (before
Year of Sale
receivable adjustment)
2020 P6,000 P7,230
2021 61,500 60,750
2022 195,000 120,150

What is the total realized gross profit to be reported in the Statement of Comprehensive Income for the year ended December 31,
2022? a. P107,235
 b. P102,105
c. P 61,650
d. P 97,235

3. Presented below are the information taken from the books of Four Sisters Company
2021 2022
Sales:
Regular P125,000 P187,500
Installment 62,500 100,000
Cost of goods sold:
Regular 75,000 112,500
Installment 31,250 45,000 Operating expenses 25,000 31,250
Collection of account from:
Regular sales 100,000 137,500
Installment sales – 2021 37,500 25,000
Installment sales – 2022 – 62,500

What is the net income for the year ended December 31, 2022? a. P78,125
b. P93,750
c. P98,750
d. P90,625

4. The following data pertain to installment sales of Heart’s Store:

Downpayment, 20% Installment sales:
2020 P545,000
2021 785,000
2022 968,000 Mark up on cost, 35%
Collections after downpayment are:
40% during the year of sale
35% during the year after
25% on the third year

What is the Deferred Gross Profit – 2021 at December 31, 2021? a. P 97,689
b. P131,880
c. P141,112
d. P114,063

5. JGG Company began operations on June 1, 2022. The following information extracted from its records at year-end:
Cost of installment sales P1,093,750
Cost of regular sales 1,050,000
Mark-up on installment sale 140% of cost
Mark-up on regular sales 33 1/3 on sales
Balances at December 31, 2022 968,000
Installment accounts receivable 1,575,000
Accounts receivable 735,000
Operating expenses 70% of realized gross profit

What is the net income for the year ended December 31, 2022? a. P341,250
b. P267,750
c. P190,157
d. P174,000

6. My Home, Inc. sells appliances on installment basis. Below are some of the information from the records of the company.
2022 2021 2020
Cost of sales P850,000 P686,000 P596,160
Gross profit on sale 32% 30% 28%
Collections on:
2022 sales 425,000
2021 sales 258,000 320,000
 2020 sales 185,000 152,000 280,000

During 2021, write-offs of 2020 unpaid accounts were made amounting to P7,200. During 2022, repossessions were made on defaulted
accounts on 2021 sales for which unpaid balance amounted to P4,200. The fair value of the repossessed merchandise is P3,800.

How much is the total deferred gross profit as of December 31, 2022? a. P443,680
b. P440,404
c. P428,080
d. P440,176

For numbers 7 and 8

7. Sulu Company is a dealer of air conditioners. For the period May 1, 2022 to May 31, 2022, Sulu Company gives a trade discount of 10% to
all its buyers. On May 1, 2022, five units of air conditioners with a total list price of P100,000 and total cost of P59,800 were sold to Mr.
Ramos. Sulu Company granted an allowance of P10,000 for Mr. Ramos’ used air conditioners as trade in although the current fair value is
P12,000. The balance was payable as follows: 20% of the balance paid at the time of purchase, the rest is payable in 10 months starting
June 1, 2022. A 15% gross profit rate is usual from the sale of second hand air conditioners.

After six months of paying, Mr. Ramos defaulted in the payment of December 1, 2022. The five units were repossessed and it would
require P2,000 reconditioning cost for each unit before it could be resold for P6,000 each.

How much is the gain (loss) on repossession to be recognized on December 1, 2022? a. P3,360
b. (P3,360)
c. P1,760
d. (P1,760)

8. What is the total realized gross profit under the installment method to be adjusted on December 31, 2022?
a. P23,240
b. P19,040
c. P18,496
d. P22,576

9. Computers, Inc. sells computers on the installment basis. For the year ended December 31, 2022, the following were reported:
Cost of installment sales P525,000
Loss on repossessions 13,500
Fair value of repossessed merchandise 112,500
Account defaulted 180,000
Deferred gross profit, December 31 108,000

How much was collected during the year? a. P210,000

b. P264,000
c. P390,000
d. P415,715

For items 10-11

10. SM Appliance Company uses the installment method of accounting. Pertinent data from the company’s records show the following:
2020 2021 2022
Installment sales P750,000 P937,500 P900,000
Cost of inst. Sales 562,500 712,500 630,000
DGP, December 31
2020 sales 141,250 45,000 –
2021 sales – 150,000 30,000
2022 sales – – 195,000

How much is the total collection during 2022? a. P930,000

b. P750,000
c. P250,000
d. P850,000

11. What is the total balance of the Installment Accounts Receivable account as of December 31, 2022?
 a. P775,000
b. P750,000
c. P770,000
d. P800,000

12. Gothong, Inc. sells automatic voltage regulators costing P700 at a price of P1,200. Cardinal Audio buys a dozen voltage regulators on
installment and trade-in six (6) of its old units at a trade-in value of P300 each. Gothong, Inc. spends P25 to recondition the old units and
sells them P315. Gothong, Inc. expects a 10% gross profit from the sale of used voltage regulators. How much is the over-allowance
granted by Gothong, Inc. on the trade-in? a. P249
b. P150
c. P339
d. P189

13. Microstation, Inc. sold computer equipment on installment basis on October 1, 2022. The cost to the company was P60,000 but the
installment sales price was set at P85,000. Terms of payment included the acceptance of a used computer equipment with a trade-in
value of P30,000. Cash of P5,000 was paid in addition to the trade-in equipment with the balance to be paid in ten (1) monthly
installments due at the end of each month commencing the month of sale. The estimated selling price of the used computer equipment
after reconditioning cost of P1,250 is P25,000. A 15% gross profit was usual from the sale of used equipment. What is the gross profit to
be realized from the 2022 collections? a. P34,000
b. P10,000
c. P 8,000
d. P 4,000

14. On December 31, 2021, Jacinto Steel, Inc. sold construction equipment to Anthony Company for
P3,600,000. The equipment had cost P2,400,000. Anthony Company paid P600,000 cash on December 31, 2021 and signed a P3,000,000
note bearing interest at 10% payable in five annual installments of P600,000. Jacinto Steel, Inc. appropriately accounted for the sale
under the installment method. On December 31, 2022, Anthony Company paid P900,000 including interest of P300,000. For the year
ended December 31, 2022, what total amount of revenue should Jacinto Steel, inc. recognized from the construction equipment sale and
financing? a. P300,000
b. P200,000
c. P500,000
d. P240,000

15. ACA Video Company sells Betamax equipment. It maintains its accounting records on a calendar year basis. On October 1, 2021, ACA
Video Company sold a television set to Mr. Santiago. The cost of the set was P18,000, and the set was sold for P24,000. A down payment
of P6,000 was received along with a contract calling for subsequent payment of P1,000 on the first day of each month starting on the
following month. No interest was added to the contract. Mr. Santiago paid the monthly installments promptly on November 1 and
December 1 in 2022. He also made seven installment payments in 2022 after which he defaulted on the contract. The set was then
repossessed on November 1, 2022. Assuming the repossessed set has a fair value of P4,000, what is the gain (loss) on repossession to be
recognized?
a. (P2,750)
b. P2,750
c. P 750
d. P1,500