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Chapter 10
Installment Sales Method
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. TRUE
3. FALSE (1 x 8/10 = 0.80)
4. TRUE (5 x .80 = 4)
5. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. D
3. D
4. B
5. A

PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Inst. receivable - 20x1
1/1/x1 -
Sales 1,000,000 400,000 Collections
600,000 12/31/x1

RGP = 400,000 x 20%(a) = 80,000

(a) Installment sales 1,000,000

Cost of sales (800,000)
Gross profit 200,000
Gross profit rate based on sales (200K / 1M) 20%
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Installment accounts receivable - Dec. 31, 20x1 600,000

Multiply by: Gross profit rate based on sales 20%
Deferred gross profit – Dec. 31, 20x1 120,000

OR

Deferred gross profit - unadjusted (1M – 800K) 200,000

Realized gross profit - 20x1 (80,000)
Deferred gross profit – Dec. 31, 20x1 120,000

2. C
Solution:
Inst. receivable - 20x1
beg. -
Sales (a) 1,000,000 400,000 Collections
600,000 end.

(a) Deferred gross profit (before year-end adjustment) 200,000

Divide by: Gross profit rate based on sales 20%
Installment sales 1,000,000

3. C
Solution:
Inst. receivable
beg. -
Sales 1,000,000 200,000 Collections
800,000 end.(a)

(a) (200,000 DGP, end. ÷ 25% GPR) = 800,000 receivable, end.

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4. D
Solution:
Sale 1,000,000
Cost of sale (750,000)
DGP, unadjusted 250,000
DGP, end. (200,000)
Realized gross profit 50,000

5. D
Solution:
Sale 1,000,000
Cost of sale (750,000)
DGP, unadjusted 250,000
Realized gross profit (220,000)
DGP, end. 30,000

6. A
Solution:
Sale 1,000,000
Cost of sale (750,000)
DGP, unadjusted 250,000
Realized gross profit (180,000)
DGP, end. 70,000

 70,000 DGP, end. ÷ 25% GPR = 280,000 ending receivable

7. B 160,000 RGP ÷ 25% GPR = 640,000 collections

8. A 200K DGP, beg. – 60K DGP, end. = 140K realized ÷ 25% =

560,000
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9. B
Solution:
20x1 installment accounts 16,250
Multiply by: 20x1 GPR based on sales 30%*/130%
DGP from 20x1 sales (adjusted balance) 3,750

20x2 installment accounts 90,000

Multiply by: 20x2 GPR based on sales 33⅓%*/133⅓%
DGP from 20x2 sales (adjusted balance) 22,500

* Note: The given GPRs are based on cost (not based on sales). Thus,
they are translated to ‘based on sales’ as shown above.

Deferred gross profit (before adjustment) 38,000

DGP from 20x1 sales (adjusted balance) (3,750)
DGP from 20x2 sales (adjusted balance) (22,500)
Realized gross profit in 20x2 11,750
Expenses relating to installment sales in 20x2 (1,500)
20x2 profit from installment sales 10,250

10. A
Solution:
20x1 20x2 20x3
Installment sales 300,000 375,000 360,000
Cost of sales 225,000 285,000 252,000
Gross profit 75,000 90,000 108,000
Gross profit rate based on sales 25% 24% 30%

20x1 Deferred gross profit, Dec. 31, 20x3 -

Divide by: Gross profit rate 25%
20x1 Installment receivable, Dec. 31, 20x3 -

20x2 Deferred gross profit, Dec. 31, 20x3 9,000

Divide by: Gross profit rate 24%
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20x2 Installment receivable, Dec. 31, 20x3 37,500

20x3 Deferred gross profit, Dec. 31, 20x3 72,000

Divide by: Gross profit rate 30%
20x3 Installment receivable, Dec. 31, 20x3 240,000

Total installment receivable, Dec. 31, 20x3 277,500

11. C
Solution:
20x1 Deferred gross profit, Dec. 31, 20x2 15,000
Divide by: Gross profit rate 25%
20x1 Installment accounts receivable, Dec. 31, 20x2 60,000
20x1 Installment accounts receivable, Dec. 31, 20x3* -
Collection in 20x3 from 20x1 sales 60,000

20x2 Deferred gross profit, Dec. 31, 20x2 54,000

Divide by: Gross profit rate 24%
20x2 Installment accounts receivable, Dec. 31, 20x2 225,000
20x2 Installment accounts receivable, Dec. 31, 20x3* 37,500
Collection in 20x3 from 20x2 sales 187,500

Installment sales - 20x3 360,000

20x3 Installment accounts receivable, Dec. 31, 20x3* 240,000
Collection in 20x3 from 20x3 sales 120,000

Total collections in 20x3 367,500

* See previous solution

12. D
Solution:
Collection in 20x3 from 20x1 sales 60,000
Multiply by: Gross profit rate - 20x1 sales 25%
Realized gross profit in 20x3 from 20x1 sales 15,000

Collection in 20x3 from 20x2 sales 187,500

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Multiply by: Gross profit rate - 20x2 sales 24%

Realized gross profit in 20x3 from 20x2 sales 45,000

Collection in 20x3 from 20x3 sales 120,000

Multiply by: Gross profit rate - 20x3 sales 30%
Realized gross profit in 20x3 from 20x3 sales 36,000

Total realized gross profit in 20x3 96,000

OR
DGP from 20x1 sales, beg. 15,000
DGP from 20x1 sales, end. -
Realized gross profit in 20x3 from 20x1 sales 15,000

DGP from 20x2 sales, beg. 54,000

DGP from 20x2 sales, end. (9,000)
Realized gross profit in 20x3 from 20x2 sales 45,000

DGP from 20x3 sales, unadjusted (360,000 - 252,000) 108,000

DGP from 20x3 sales, end. (72,000)
Realized gross profit in 20x3 from 20x3 sales 36,000

Total realized gross profit in 20x3 96,000

13. C
Date Collection Interest Amortization Principal
9/30/x1 48,000
9/30/x1 4,800 - 4,800 43,200
10/31/x1 4,800 432 4,368 38,832
11/30/x1 4,800 388 4,412 34,420
12/31/x1 4,800 344 4,456 29,964
Totals 19,200 1,165 18,036

18,036 x 37.5%(1) = 6,764

(1) (48,000 – 30,000) ÷ 48,000 = 37.50%
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14. A
Inventory 16,800
Deferred gross profit (29,964 x 37.5%) 11,237
Loss on repossession 1,927
Receivable 29,964

15. D
Solution:
Inst. receivable - 20x1
1/1/x3 135,000 22,500 Write-off
52,500 Collections
60,000 12/31/x3

Inst. receivable - 20x2

1/1/x3 300,000
105,000 Collections
195,000 12/31/x3

Inst. receivable - 20x3

Sales 495,000 105,000 Collections

390,000 12/31/x3

Collections in 20x3 from:

- 20x1 sales (52,500 x 30%) 15,750
- 20x2 sales (105,000 x 40%) 42,000
- 20x2 sales (105,000 x 35%) 36,750
Total realized gross profit 94,500
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16. C
Solution:
20x3 Inventory 15,000
Deferred gross profit (22.5K x 30%) 6,750
Loss on repossession (squeeze) 750
Installment account receivable 22,500

17. C
Solution:
Date Inventory – traded-in 12,000
Installment account receivable (squeeze) 24,000
Installment sale 32,000
Under allowance (8K TV < 12K FV) 4,000

18. C
Solution:
Fair value of old merchandise traded-in 12,000
Collections 12,000
Total 24,000
Multiply by: Gross profit rate (a) 44.44%
Realized gross profit in year of sale 10,667

(a) Sale price 32,000

Add: Under allowance 4,000
Adjusted sale price 36,000
Cost of sale (20,000)
Adjusted gross profit 16,000
Adjusted gross profit rate (16K ÷ 36K) 44.44%
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19. D
Solution:
Cash down payment 600,000
Collection from installment payment (600K + 540K) 1,140,000
Total collections 1,740,000
Cost of sale (4,000,000)
Excess of collection over cost -

Since the total collections do not exceed yet the cost of the
inventory sold, Sound Co. does not recognize any income yet.

20. C
Solution:
Total collections from 20x1 sales (14,000 + 6,000) 20,000
Cost of 20x1 sales (16,000)
Excess collection in 20x2 4,000
Total collections from 20x2 sales 24,000
Cost of 20x2 sales (18,000)
Excess collection in 20x2 6,000
Gross profit recognized in 20x2 10,000
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PROBLEM 4: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirement (a):
20x1 20x2
Installment sales 1,000,000 1,300,000
Cost of sales 700,000 845,000
Gross profit 300,000 455,000
GPR based on sales 30% 35%

20x1 20x2
Collections in 20x1 from:
- 20x1 sales (500K x 30%) 150,000

Collections in 20x2 from:

- 20x1 sales (300K x 30%) 90,000
- 20x2 sales (650K x 35%) 227,500
Total realized gross profit 150,000 317,500

Requirement (b):
20x1 20x2
Inst. Receivable on 12/31/x1 from:
- 20x1 sales (1M - 500K) 500,000

Inst. receivable on 12/31/x2 from:

- 20x1 sales (1M - 500K - 300K) 200,000
- 20x2 sales (1.3M - 650K) 650,000
Total installment receivable 500,000 850,000

Requirement (c):
20x1 20x2
DGP on 12/31/x1 from:
- 20x1 sales (500K inst. Rec'ble x 30%) 150,000

DGP on 12/31/x2 from:

- 20x1 sales (200K inst. Rec'ble x 30%) 60,000
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- 20x2 sales (650K inst. Rec'ble x 35%) 227,500

Total Deferred Gross Profit 150,000 287,500

2. Solution:
Requirement (a):
Date Inventory (a) 8,500
Deferred gross profit (13K x 20%(b)) 2,600
Loss on repossession (squeeze) 1,900
Installment receivable (25K – 12K) 13,000

(a) Estimated resale price 15,000

Reconditioning costs (2,000)
Normal profit margin (15K x 30%) (4,500)
“Fair value” of repossessed inventory 8,500

(b) (150K sales in 20x1 – 120K COS in 20x1) ÷ 150K sales in 20x1 = 20% GPR in 20x1

Requirement (b):
Inst. receivable - 20x1 Inst. receivable - 20x2
Beg. 90,000 13,000 Write-off
47,000 Collection Sale 240,000 60,000 Collection
30,000 End. 180,000 End.

Collections in 20x2 from:

20x1 sales: (47,000 x 20%) 9,400
20x2 sales: (60,000 x 30%(c) ) 18,000
Total realized gross profit in 20x2 27,400
(c) (240K sales in 20x2 – 168K COS in 20x2) ÷ 240K sales in 20x2 = 30% GPR in 20x2

Requirement (c):
Total realized gross profit in 20x2 – see requirement (b) 27,400
Loss on repossession – see requirement (a) (1,900)
Profit in 20x2 25,500
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3. Solution:
Requirement (a):
Date Inventory – traded-in 3,000
Over allowance (4,000 – 3,000) 1,000
Installment receivable (squeeze) 12,000
Installment sale 16,000

Requirement (b):
Fair value of old merchandise traded-in 3,000
Collections 6,000
Total 9,000
Multiply by: Gross profit rate (b) 33.33%
Realized gross profit in year of sale 3,000

(b) Sale price 16,000

Less: Over allowance (1,000)
Adjusted sale price 15,000
Cost of sale (10,000)
Adjusted gross profit 5,000
Adjusted gross profit rate (5K ÷ 15K) 33.33%