Answers - Installment Sales - Dayag

Chapter 7 - INSTALLMENT SALES

Multiple Choice Problems

25. a - Costs not yet recovered.

26. c

Cost, 20x4 P 30,000

20x4 cost recovery (20,000)

Remaining cost, 12/31/x4 P 10,000

20x5 collection 15,000

Gross profit 20x5 P 5,000

27. d

Cost P 30,000

20x4 cost recovery ( 20,000)

20x5 cost recovery ( 10,000)

Remaining cost 0

The entire P20,000 payment received in 20x6 is recognized as gross profit.

28. d

Sale: Installment receivables 55,000

Inventory 30,000

Deferred gross profit 25,000

Payment: Cash 20,000

Installment receivables 20,000

Balance Sheet:

Installment receivables P55,000 20,000 P 35,000 Deferred gross profit ( 25,000)

Installment receivables (net) P 10,000

29. a

Sale: Installment receivables 55,000

Inventory 30,000

Deferred gross profit 25,000

2008: Cash 20,000


Cash 15,000


2009: Deferred gross profit 5,000

Realized gross profit 5,000

Balance Sheet:

Installment receivables P 20,000

Deferred gross profit ( 20,000)

Installment receivables (net) P 0

30. c

Note: Since the collectibility of the note is reasonably assured, the accrual basis should be

applied. Therefore, full gross profit is recognized in the year of sale.

Gross profit on sale:

Sales (P187,500 x 4.3553) P816,619

Cost of sales 637,500

Gross profit (realized) P179,119

31. c

Total Income for 20x4:

Gross profit (realized) No. 51 Interest revenue4 months: P816,619 x 10% x 4/12..

P179,119

_ 27,221

Total income for 20x4 P206,340

32. b


Gross profit (realized) already recognized in 20x4 P 0 Interest revenue 8 months in Year 1 (P81,662* x 8/12) P 54,441 4 months in Year 2 (P71,078* x 4/12) 23,693 78,134

Total Income for 20x5 P 78,134

*Schedule of Discount Amortization/Interest Income computation:

(1) (2) (3) (4)

Face Net Discount

Amount Unamortized Amount Amortization

Year of Note1 Discount (1) (2) 10% (3) 1 P1,125,000 P308,3813 P 816,6192 81,6625

2 937,500 226,7194 710,781 71,078

1 P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the previous

balance.

2 The present value of sales/receivables: P187,500 x 4.3553 = P816,619 3 P1,125,000 P816,619 4 (2) (4) 5 Discount amortization give rise to recognition of interest revenue/income.

33. a

Note: Since the collectibility of the note cannot be reasonably assured, the installment sales

method should be applied. Also, if the there is high degree of uncertainty as to collectibility,

the cost recovery method may be used.

Installment sale: Gross profit (P179,119/P816,619) 22% (rounded)

Gross profit earned in 20x4 (P0* x 22%) P 0

* no collections in 20x4.

34. a


Gross profit earned in 20x4 (P0* x 22%) P 0

Interest revenue (refer to No. 52 27,221

Total income for 20x4. P 27,221

35. d

Collections in 20x5 (August 31, 20x5) P 187,500

Less: Interest revenue/income from September 1, 20x4 to

August 31, 20x5 (refer to schedule of amortization in No. 53) 81,662

Collection as to principal P 105,838

x: Gross Profit % (refer to No. 54) 22%

Gross profit realized in 20x5 P 23,284

Add: Interest revenue/income for 20x5 (refer to No. 53) 78,134

Total Income for 20x5 P 101,418

36. d (P2,000,000 P1,500,000) P2,000,000 = 25%

37. a (P800,000 x .25) P90,000 = P110,000,

38. d P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.

39. a (P3,000,000 P2,100,000) P3,000,000 = 30%.

40. d (P1,200,000 .30) P120,000 = P240,000.

41. a P1,050,000 .30 = P315,000

P900,000 [(P1,200,000 + P1,050,000) .30] = P225,000.

42. b P24,000 P7,200 = P16,800 P16,800 P13,500 = P3,300 loss.

43. d [P5,600 x (1 .40)] (P2,100 P140) = P1,400.

44. d P8,400 P5,880 = P2,520 (P3,000 P300) P2,520 = P180 gain.

45. d

20x4: P24,000 P0 = P24,000 collections x 39%P 9,360 20x5: P300,000 P60,000 P10,000 defaults = P230,000 x 42% 96,600 20x6: P480,000 P320,000 P5,000 defaults = P155,000 x 40% 62,000 Realized gross profit on installment sales in 20x6 P167,960

46. b

20x5 Sales 20x6 Sales Net

Market Values P 4,500 P 3,500

Less: Unrecovered Cost:

IAR, unpaid balances P10,000 P 5,000

x: Cost Ratio 50% 5,800 60% 3,000

Gain (loss) P (1,300) P 500 P( 800)

47. a

(1) Gain or Loss on repossession:

Estimated selling price P 1,700

Less: Normal profit (37% x P1,700) 629

Market value of repossessed merchandise P 1,071

Less: Unrecovered Cost:

Unpaid balance 20x3 P 2,200 Less: DGP x3 (P2,200 x34%) 748 1,452

Loss on repossession P( 381)

(2) Realized gross profit on installment sales:

20x2 Sales: (P24,020 P 0) x 35% P 8,407.0 20x3 Sales: (P344,460 P67,440 P2,200) x 34% 93,438.8 20x4 Sales: (P602,000 P410,090) x 37% 71,006.7 Realized gross profit on installment sales P 172,852.5

48. c

Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)

20x2 Sales: P 0

20x3 Sales: (P67,440 x 34%. 22,929.6

20x4 Sales: (P410,090 x 37%) 151,733.3

P 174,662.9 49. d*

Resale Value P 8,500

Less: Normal profit for 20x6 - year of repossession

[(P3,010,000 P1,896,300)/P3,010,000] x 8,500 3,145 Market Value of Repossessed Merchandise P 5,355

Less: Unrecovered Costs 20x5 Defaulted balance* (P27,000 P16,000) P 11,000 Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x

P11,000 ___3,740 __7,260

Loss on repossession P( 1,905)

Entry made:

Inventory of RM* 11,000

IAR-20x5 11,000

Correct Entry (Should be):

Inventory of RM (at MV) 5,355

DGP-20x5 3,740

Loss on repossession 1,905

IAR-20x5 11,000

Correcting Entry:

DGP-20x5 3,740

Loss on repossession 1,905

Inventory of RM 5,645**

50. c

Installment Sales P 3,600,000

Less: Over-allowance:

Trade-in allowance P1,500,000

Less: MV of Trade-in Merchandise:

Estimated Resale Price P 1,400,000

Less: Normal profit (25% x P1,400,000) 350,000

Reconditioning costs 150,000 900,000 600,000

Adjusted Installment Sales P 3,000,000

Less: Cost of I/S 2,500,000

Gross Profit P 500,000

Gross profit rate: P500,000/ P3,000,000 16 2/3%

x: Collections Trade-in merchandise (at MV) P 900,000 RGP on I/S in 20x4 P 150,000

51. c

Trade-in allowance P43,200

Less: MV of trade-in allowance:

Estimated resale price after reconditioning costs P36,000

Less: Reconditioning costs 1,800

Normal profit (15% x P36,000) 5,400 28,800

Over-allowance P 14,400

Installment sales P122,400

Less: Over-allowance 14,400

Adjusted Installment Sales P108,000

Less: Cost of Installment Sales 86,400

Gross profit P 21,600

Gross profit rate: P21,600/P108,000 20%

Realized gross profit:

Down payment P 7,200

Trade-in (at market value) 28,800

Installment collections:

(P108,000 P28,800 P7,200) / 10 mos. X 3 mos. 21,600 Total collections in 2008 P 57,600

x: Gross profit rate 20%

Realized gross profit P 11,520

52. d

(Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is recognized in the year of sale, because collection of the receivable is reasonably

assured.)

Finley Company

Computation of Income Before Income Taxes

On Installment Sale Contract

For the Year Ended December 31, 20x3

Sales P4,584,000

Cost of Sales 3,825,000

Gross Profit 759,000

Interest Revenue (Schedule I) 328,320

Income before Income Taxes P1,087,320

Schedule I

Computation of Interest Revenue on

Installment Sale Contract

Cash selling price (sales) P4,584,000

Payment made on January 1, 20x3 936,000

Balance outstanding at 12/31/x3 3,648,000

Interest rate 9%

Interest Revenue P 328,320

Quiz - VII

1. P920,000

20x4: P1,200,000 x 30% = P 360,000

20x5: P1,400,000 x 40% = 560,000 P920,000

2. P190,000

(P300,000 P750,000) x P250,000 = P100,000

[(P270,000 P900,000) x P300,000] + P100,000 = P190,000

3. P1,600 assume the use of installment sales method. It should be noted that if the collectability is highly uncertain or extremely uncertain, the use of cost recovery method is

preferable.

4. Zero/Nil

When the cost recovery method is used, gross profit is recognized only after all costs have

been recovered.

20x5

P45,000 x 63% = P28,350 Cost of sale

P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5.

Costs still to be recovered.

5. P19,250

20x6

Relating to 20x5 sales:

P19,000 - P4,350 = P14,650 Gross profit recognized


P60,000 x 59% = P35,400 Cost of sale

P40,000 - P35,400 = 4,600 Gross profit recognized

P19,250 Recognized in 20x6

6. P21,000

20x7


Since all costs have been

recovered, all cash collected is

recognized as gross profit ...... P 2,000


Since all costs have been

recovered, all cash collected is

recognized as gross profit ...... 17,000


P85,000 x 60% = P51,000 Cost of sale

P53,000 - P51,000 = .......... 2,000 Gross profit

recognized

P21,000 Recognized in 20x7

7. P320,000

[(P1,000,000 P200,000) x (P1,000,000 P600,000)/P1,000,000 = P320,000

8. P390,000

P1,800,000 P1,080,000 = P720,000 (40% gross profit rate) P720,000 (P825,000 x 40%) = P390,000. 9. P 128,000

Installment Accounts Receivable, end of 20x4 P 320,000

x: Gross profit rate (66 2/3 / 166 2/3) _____40%

Deferred Gross Profit, end of 20x4 P 128,000

10. P25,168, determined as follows:

Gross profit percentages:

20x3: P136,000/P160,000 = 85%; 100% x 85% = 15%

20x4: P158,240/P184,000 = 86%; 100% x 86% = 14%

To deferred gross profit:

20x3: P160,000 x P136,000 = P24,000

20x4: P184,000 x P158,240 = 25,760

P49,760

Gross profit realized:

0.15 x P40,000 = P 6,000

0.15 x P89,600 = 13,440

0.14 x P36,800 = 5,152

P24,592

Balance of Gross Profit Deferred:

P49,760 - P24,592 = P25,168

11. P 0 all profit recognized in 20x5 12. P240 (P1,200/P2,000) x P400 13. P100 - (100% of costs were fully recovered prior to 20x7

14. P10 million, the amount of sale

15 . P450 [P1,000 P250 = P750 (P750 x 400/1,000)] = P450

16. P50 gain

Repossessed merchandise 500 Deferred gross profit 300 Installment Accounts receivable.. 750 Gain on repossession 50

17. 0 Unrecovered costs,1/1/20x4 100

Less: Collections 70

Unrecovered costs,1/1/20x5 30

Less: Collections 40

Profit 20x5 10

Profit 20x5 30

18. P10 refer to No. 17

19. P30 refer to No. 17 20. Zero

Unrecovered costs 20x4 120,000

Less: Collections 20x4 ______0

Unrecovered costs, 12/31/20x4 120,000

Additional costs 20x5 _20,000

Total costs 140,000

Less: Collections 20x5 80,000


Additional costs 20x6 20,000

Total costs 80,000



Additional costs 20x7 10,000

Total costs 50,000


Profit 20x7 50,000

21. P50,000 profit refer to No. 20 22. P105,000 = P68,250 / (100% - 35%)

23. P31,000 = P50,000 x (100% - 38%)

24. P43,700 Unrecovered costs Cost of installment sales for 20x5 installment sales 56,050

Less: Collections in 20x5 for 20x5 installment sales _22,800


Less: Collections in 20x6 for 20x5 installment sales (balancing figure) _43,700

Realized GP on I/S in 20x6 for 20x5 sales *10,450 *

Realized GP on I/S in 20x6 16,050

Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23) is

already recovered in 20x5 equivalent to collection __5,600

Realized GP on I/S in 20x6 for 20x5 installment sales *10,450

25. Zero costs is not yet fully recovered, the profit should be recognized Unrecovered costs Cost of installment sales for 20x4 (No. 23) 31,000



26. P41,000 Unrecovered costs Cost of installment sales for 20x4 installment sales 31,000



Less: Collections in 20x5 for 20x4 installment sales 46,400

Realized GP on I/S in 20x5 for 20x4 installment sales 41,000

Realized GP on I/S in 20x5 for 20x5 installment sales:

Unrecovered costs Cost of installment sales for 20x5 installment Sales 56,050

Less: Collections in 20x5 for 20x5 installment sales 22,800

Unrecovered costs, 12/31/20x4 33,250 ____-0-

Realized GP on I/S in 20x5 41,000

27. P 45,000

Installment receivable = P200,000

Deferred gross profit = P80,000 (P200,000 x 40%)

Fair value = P75,000

Repossessed inventory P 75,000

Deferred gross profit P 80,000

Loss on repossession (plug) P 45,000

Installment receivable P 200,000

28. Zero

P450,000 cost P300,000 collections = P150,000 unrecovered costs

29. P300,000

20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost

recovered in 20x4, the other P150,000 of cost recovered in 20x5, so

P150,000 of gross profit recognized in 20x5, leaving P300,000 recognized in

20x6.

20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000

of cost recovered in 20x5, the other P400,000 of cost recovered in 20x5, so

P0 of gross profit recognized in 20x6.

Total: P300,000 + P0 = P300,000

30. d

20x4 Sales: Installment receivables = P900,000 P300,000 (x4 collections) - P300,000 (x5 collections) = P 300,000

Deferred gross profit = P450,000 P0 (all x4 collections to cost recovery - P150,000 (P150,000 of x5

collections to cost recovery) = 300,000

Net installment receivable for 20x4 sales = P 0

20x5 Sales: Installment receivables = P1,500,000 P500,000 (x5 collections)= P1,000,000 Deferred gross profit = P600,000 P0 (all x5 collections to

cost recovery) = P 600,000

Net installment receivable for 20x5 = P 400,000

Total = P 400,000

31. 24%.

Determined from the repossession entry:

Deferred gross profit P2,400

= 24% Installment accounts receivable P10,000

32. 35%

Installment sales P120,000

Cost of sales 78,000

Gross profit P 42,000

Gross profit P42,000

- = 35% gross profit rate Installment sales P120,000

33.

a. 20x4 Deferred gross profit balance P 12,000

Gross profit rate 25%

Beginning accounts receivable P 48,000

Beginning accounts receivable P 48,000

Ending accounts receivable (20,000)

Cash collected P 28,000

b. 20x5 Deferred gross profit balance P 26,400

Gross profit rate 24%

Beginning accounts receivable* P110,000

Beginning accounts receivable* P110,000

Ending accounts receivable* (50,000)

Cash collected P 60,000

c. 20x6 Installment sales20x6 P120,000 Accounts receivable20x6 (90,000) Cash collected P 30,000

34. P31,900

Total realized gross profit in 20x6

From 20x4 P28,000 25% = P 7,000

20x5 P60,000 24% = 14,400

20x6 P30,000 35% = 10,500

P31,900

*Excluding accounts receivable for repossessed merchandise.

35. 20x4 , P33,750; 20x5), P95,250

Gross profit realized in 20x4

Installment sales = [(P300,000 P165,000)/P300,000] x P75,000 = P33,750

Gross profit realized in 20x5 (:

From 20x4 sales = [(P300,000 P165,000)/P300,000] x P105,000 = P47,250

From 20x5 sales = [(P450,000 P270,000)/P450,000] x P120,000 = 48,000

P95,250

36. 20x4, P148,750; 20x5 =, P275,250

20x4 20x5

Sales P450,000 P450,000

Cost of sales 335,000 270,000

Gross profit P115,000 P180,000

Gross profit realized on installment sales 33,750 95,250

Total gross profit P148,750 P275,250

37. 20x4 =, P148,750; 20x5 =, P275,250

. 20x4 20x5

Installment accounts receivable P225,000 P450,000

Less: Deferred gross profit 101,250 186,000

Net of deferred gross profit P123,750 P264,000

Theories 1. False 6. True 11. True 16. True 21. True 26. True

2. True 7. False 12. False 17. True 22. True 27. True

3. False 8. True 13. False 18. False 23. True 28. False

4. True 9. False 14. True 19. False 24. True 29. True

5. True 10. True 15. True 20. True 25. True

30. c 35. b 40. a 45. b 50. d 55. d

31. b 36. d 41. e 46. c 51. c 56. b

32. b 37. d 42. b 47. c 52. b 57. d

33. b 38. e 43. b 48. c 53. a 58. c

34. c 39. c 44. d 49. d 54. b 59. c

60. C 65. b

61. B 66. b

62. b 67. d

63. c 68. d

64. d 69. c

Answers - Installment Sales - Dayag

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