Solution Chapter 7

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Chapter 7 Problem I

1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment. 20x5 P750 is profit. P250 is treated as a return of investment.

Following years: Each annual installment f P1,000 is profit.

2. 20x4: P4,000 is profit. 20x5: P1,000 is profit.

20x6: P750 is profit, and P250 is treated as return of investment.

Following years: Each annual installment is P1,000 is treated as a return of investment.

3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales

20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment. Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.

P425 per year is treated as return of investment.

Problem II 1. Entries in 20x4:

Cash……….……….. 3, 500 Mortgage Notes Receivable ……….. 20,500

Real Estate ………. 9,000 Gain on Sale of Real Estate ……….. 15,000 Cash ……… 500

Mortgage Notes Receivable ………. 500

Entry in 20x5:

Real Estate ………. 16,500 Loss on Repossession of Real Estate ……….. 3,500

Mortgage Notes Receivable ……… 20,000

2. Entries in 20x4

Cash ……… 3, 500 Mortgage Notes Receivable ……….. 20,500

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Real Estate ……….. 9,000 Deferred Gross Profit on Installment Sales ………... 15,000 Cash ………. 500

Mortgage Notes Receivable ………..….. 500 Receipt P500 cash in 20x4 applicable to principal of note

Deferred Gross Profit on Installment Sales ………... 2,500

Realized Gross Profit on Installment Sales………... 2,500 Gross Profit Percentages

15,000/24,000, or 62.5%

6.25% of P4,000 (collections in contract in 20x4) Or P2,500

Entry in 20x5

Real Estate………... 16,500 Deferred Gross Profit on Installment Sales ……….. 12,500

Mortgage Notes Receivable ……….. 20,000 Gain in Repossession of Real Estate ……….. 9,000

Problem III 1.

a. Installment Contracts Receivable 19X8……… 250,000

Installment Sales ……… 250,000

b. Cash ……….. 120,000

Installment Contracts Receivable 19X8 ……… 120,000

c. Cost of Installment Sales ……….. 200,000

Merchandise Inventory ……….. 200,000

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Deferred Gross Profit on Installment Sales 19X8 ……….. 4,000 Loss on Repossession ………... 1,500

Installment Contracts Receivable, 19X8 ………. 20,000 Gross Profit Percentages: 50,000/250,000, or 20%

Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000

Fair value of repossessed merchandise.. P 14,500 Less: Unrecovered cost:

Unpaid balance………P 20,000 Less: Deferred Gross Profit

20% x P20,000……… 4,000 16,000 Loss on repossession………. P 1,500

e. Expenses ……… 16,000

Cash ………. 16,000 2. Adjustment to Recognize Gross Profit on Installments Sales:

a. To set-up Cost of Installment Sales:

No entry (since perpetual inventory method is used)

b. To set-up Deferred Gross Profit on Installment Sales:

Cost of Installment Sales ………. 200,000 Deferred Gross Profit on Installment Sales-20x4.. ……… 50,000

c. Adjustment to Recognize Gross Profit on Installment Sales:

Deferred Gross Profit on Installment Sales – 20x4…………..……. 24,000

Realized Gross Profit on Installment Sales – 20x4 ………. 24,000 Realized Gross Profit: 20% of P120,000 (collections),

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d. Closing of nominal accounts.

Realized Gross Profit on Installment Sales – 20x4……… 24,000

Expenses ………. 16,000 Loss on Repossessions ………. 1,500 Income Summary ………. 6,500 To close the accounts for 20x4.

Problem IV 1.

January to December 31 20x4 20x5

(1) To record regular sales:

Accounts receivable 600,000 1,080,000

Sales 600,00 1,080,000

(2) To record installment sale:

Cash 60,000 144,000

Installment accounts receivable 300,000 336,000

Installment Sales 360,000 480,000

(3) To record cost of sales: Periodic Method: No entry Perpetual Method: Regular Sales:

Cost of Sales 480,000 864,000

Merchandise inventory 480,000 864,000 Installment Sales:

Cost of installment sales 252,000 312,000

Merchandise inventory 252,000 312,000 (4) To record collections: Regular Sales: Cash 144,000 360,000 Accounts receivable 144,000 360,000 Installment Sales: Cash 108,000 204,000

Installment Accounts receivable –

20x2 72,000 72,000

Installment Accounts receivable –

20x3 60,000

Interest income 36,000 72,000

(5) to record payment of operating expenses:

Operating expenses 90,000 102,000

Cash 90,000 102,000

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Adjusting entries (end of the year):

(6) To recognize accrued interest receivable

Interest receivable 1,440 2,880

(7) To set-up Cost of Sales: Periodic Method:

Merchandise inventory 480,000 864,000

Perpetual Method: No entry (7) To set-up Cost of Installment Sales: Periodic Method:

Shipment s on installment sales 252,000 312,000 Perpetual Method: No entry

(8) To set-up Deferred Gross Profit

Installment sales 360,000 480,000

Cost of installment sales 252,000 312,000 Deferred gross profit – 20x4 108,000

Deferred gross profit – 20x5 168,000

Gross profit rate – 20x4: P 108,000 / P360,000 = 30%. Gross profit rate – 20x5: P168,000 / P480,000 = 35%. (9) To record realized gross profit on installment

sales:

Deferred gross profit – 20x4 25,200 25,200

Deferred gross profit – 20x5 21,000

Realized gross profit 25,200 46,200

20x4: Realized gross profit on installment sales:

Collections applying as to principal..………P 72,000 Multiplied by: Gross profit rate………. 30% Realized gross profit………P 21,600 20x5: Realized gross profit on installment sales;

20x4 20x5

Collections – principal……… P 72,000 P 60,000 Multiplies by: Gross profit %... ____30% ____35%

Realized gross profit……… P 21,600 P 21,000 P 42,600 Closing entries:

(10) To close realized gross profit account:

Realized gross profit 21,600 42,600

Income summary 21,600 42,600

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Sales 600,000 1,080,000

Cost of sales 480,000 864,000

Operating expenses 90,000 102,000

(12) To close results of operations:

Retained earnings 89,040 231,480

Problem V 1.

Type of Sale Amount Ratio to Total Sales Allocated Cost

Regular Sales:

Cash sales P 225,000 P *146,250

Credit sales ___450,000 **292,500

Total regular sales P 675,000 675/1,800 P 438,750

Installment Sales _ 1,125,000 1,125/1,800 __731,250

Total Sales P 1,800,000 P 1,170,000

*P225,000/P1,800,000 x P1,170,000 = P146,250 **P450,000/P1,800,000 x P1,170,000 = P292,500

The allocation above was based on the assumptions that the markup for each type of sale is the same. Normally, the selling prices of the merchandise are not the same for each type of sales. 2.

Type of Sale Amount

Amount based on Cash Sales (100%)

Ratio to Total

Sales Allocated Cost Cash sales P 225,000 P 225,000 225/1,500 P 175,500 Credit sales 450,000 375,000* 375/1,500 292,500 Installment Sales 1,125,000 900,000* * 900/1,500 __ 702,000 Total Sales P 1,500,000 P 1,250,000 P 1,170,000 *P450,000 / 120% = P375,000 **P1,125,000 / 125% = P900,000 3.

Type of Sale Amount Gross profit rate Cost ratio Allocated Cost*

Cash sales P 225,000 30% 70% P 157,500

Credit sales 450,000 36% 64% 288,000

Installment Sales 1,125,000 40% 60% _ _675,000

Total Sales P 1,800,000 P 1,170,000

* Amount of sale x cost ratio. Problem VI

The entries are required under the periodic method:

Repossessed merchandise………... 68,400

Deferred gross profit – 20x4………... 48,000

Loss on repossession………... 3,600

Installment accounts receivable – 20x4………. 120,000

To record repossessed merchandise.

Repossessed merchandise………... 12,000

Cash, etc (or various credits)………... 12,000 To record reconditioning costs

The loss on repossession is computed as follows:

Estimated selling price after reconditioning costs... P 108,000 Less: Reconditioning costs……… P 12,000

Costs to sell and dispose………. 6,000

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Market value before reconditioning costs……….. P 68,400 Less: Unrecovered cost

Installment accounts receivable – 20x4,

unpaid balance………... P120,000

Less: Deferred gross profit – 20x4 (P120,000 x 40%)... __48,000 __72,000

Loss on repossession………. P( 3,600)

Problem VII

The entry to record the sale of the new vehicle under the periodic method: Trade-in Merchandise………... 840,000 Over-allowance on trade-in merchandise………. 360,000

Cash……….. 2,400,000

Installment accounts receivable – 20x4………... 3,360,000

Installment sales………... 6,960,000 To record installment sales with trade-in.

Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales, the entry would be as follows:

Trade-in Merchandise………... 840,000

Cash……….. 2,400,000

Installment accounts receivable – 20x4………... 3,360,000

Installment sales (net of over-allowance)……... 6,600,000 To record installment sales with trade-in.

The over-allowance is computed as follows:

Trade-in allowance………... P1,200,000 Less: Market value before reconditioning costs:

Estimated resale price after reconditioning costs. P1,680,00 0 Less: Reconditioning costs……….. 420,000 Costs to sell (5% x P1,680,000)……… 84,000

Normal profit (20% x P1,680,000)………... __336,000 __840,000

Over-allowance……… P 360,000

The gross profit rate on installment sales is computed as follows:

Installment sales………... P6,960,000

Less: Over-allowance……… ___360,000

Adjusted Installment Sales……… P6,600,000

Less: Cost of installment sales………. __3,920,000

Gross profit………. P2,680,000

Gross profit rate (P2,680,000/P6,600,000)……….. 40.60% Further, the entry to record the reconditioning costs is as follows:

Trade-in Merchandise………... 420,000

Cash, etc (or various credits)………... 420,000 To record reconditioning costs.

Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4 is computed as follows:

Trade-in merchandise (market value before reconditioning costs)……… P 840,000

Down payment……… 2,000,000

Installment collection (March 31 – December 31: P80,000 x 10 months) ___800,000

Total collections……….. P3,640,000

Multiplied by: Gross profit rate in 20x4……….. ___40.60% Realized gross profit on installment sales of new merchandise………… P1,477,840

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Problem VIII

1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance: Oct. 31 Cash ……… 20,000

Mortgage Notes Receivable ………. 55,000

Real Estate ………. 60,000 Deferred Gross Profit on Installment Sales ………. 15,000

Nov. 30 Cash ………. 1,150 Mortgage Notes Receivable ……… 600 Interest Income ………. 550 Interest Received: P55,00 at 12% for 1 month, or P550

Dec. 31 Cash ……… 1,144 Mortgage Notes Receivable ……….. 600 Interest Income ……… 544 Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544

31 Deferred Gross Profit on Installment Sales ……….. 4,240

Realized Gross Profit on Installment Sales ……… 4,240 Gross Profit Percentage: 15,000/75,000, or 20%

Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240

2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the contract:

Dec. 31 Cash ……… 20,000.00 Mortgage Notes Receivable ……… 55,000.00

Real Estate ……… 60,000.00 Deferred Gross Profit on Installment Sales ……….. 15,000.00

Nov. 30 Cash ……… 600 Mortgage Notes Receivable ……….. 50.00

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Interest Income ……… 550.00

Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50, is reduction in principal)

Dec. 31 Cash ………. 600.00 Mortgage Notes Receivable ……… 50.50 Interest Received ……… 549.50

Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in principal.

31 Deferred Gross Profit on Installment Sales ……… 4,020.10

Realized Gross Profit on Installment Sales ……… 4,020.10 Gross Profit Percentage: 15,000/75,000, or 20%

Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or P4,020.10 Problem IX 1. 6/30x4: Cash………. 25,000 Notes Receivable ……… 125,000 Accumulated Depreciation (3.1/2[2% of P90,000]) ……… 6,300 Depreciation Expense (1/2[2% of P90,000]) ……… 900 Land ……… 10,000 Building ……….. 90,000 Deferred Gross Profit on Sale of Property ……… 57,200

Deferred Gross Profit on Sale of Property ……… 9,553

Realized Gross Profit on Sale of Property ………... 9,553 Amount realized: (P25,000/150,000) x 57,200

2. 6/30x5: Cash ……… 30,000

Notes Receivable ……….. 30,000 Deferred Gross Profit on Sale of Property ………. 11,440

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Amount realized (P30,000/P150,000) x 57,200

6/30/x6 Cash ………. 50,000

Notes Receivable ……… 50,000 Deferred Gross Profit on Sale of Property ……… 19,067

Realized Gross Profit on Sale of Property ……… 19,067 Amount Realized: (P50,000/P150,000) X 57,200

6/30/x7 Cash ……….. 15,000

Notes Receivable ……… 15,000 Deferred Gross Profit on Sale of Property ………. 5,720

Realized Gross Profit on Sale of Property ……… 5,720 Amount Realized: (P15,000/P150,000) X 57,200

Problem X

Installment Contracts Receivable ………. 200,000

Cost of Installment Sales ……….. 120,000

Merchandise Inventory ……… 120,000

Cost of Sales: 60% of P200,000

Installment Sales ……….. 200,000

Cost of Installment Sales ……… 120,000 Deferred Gross Profit on Installment Sales ……… 60,000

Cash ………. 124,000 Installment on Contracts Receivable – 20x4………... 30,000 Installment on Contracts Receivable – 20x5………... 34,000 Installment on Contracts Receivable – 20x6………... 60,000

Deferred Gross Profit on Installment Sales -20x4 ……… 13,800 Deferred Gross Profit on Installment Sales-20x5 ………... 14,280 Deferred Gross Profit on Installment Sales -20x6 ………... 24,000

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Realized Gross Profit

20x4: 46% of P30,000 or P13,800 20x5: 42% of P34,000 or P14,280 20x6: 40% of P60,000 or P24,000

Problem XI

1. Calculation of gross profit percentage on installment sales

20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment

sales 20x6 ………. 27.5% 20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts

receivable 20x5 ……….. 30% 20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts

receivable 20x4 ……….. 32% 2. WW EQUIPMENT, Inc. Balance Sheet December 31, 20x6 Assets Cash ………... P27,500 Installment Accounts Receivable 20x6 ……….. P 55,000

20x5 ……….. 12,000 20x4 ……….. 3,000 70,000 Accounts receivable ………. 17,000 Inventory ……….... 60,000 Other Assets ………... 40,000 Total Assets ……… P 214,500 Liabilities Accounts payable ……… P 40,000 Deferred Gross Profit 20x6 ……… P 15,125

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20x5 ……… 3,600 20x4 ……… 960 19,685 Total Liabilities P 59,685 Stockholders’ Equity Capital Stock ……….. P 100,000 Retained Earnings ……….. P 68,400 Balance, Jan. 1, 20x6 ………. 13,585 Balance, Dec. 31, 20x6 ………. 54,185 Total Stockholder’s Equity ……… P154,815

Total Liabilities and Stockholder’s Equity ………. P 214,500 WW EQUIPMENT, Inc.

Income Statement

For Year Ended December 31, 20x6

Installment

Sales Regular Sales Total Sales ………... P320,000 P125,000 P445,000 Cost of goods sold:

Merchandise Inventory, Jan. 1 ………P 52,000 Purchases ………... 350,000 Merchandise Available for sale ... 402,000

Less: Merchandise Inv. Dec. 31 ………… 60,000 232,000 110,000 342,000

Gross Profit ……….. P88,000 P15,000 P103,000

Less: Deferred Gross Profit on 19X34 ……… 15,125 15,125

Realized Gross Profit on current year’s sales ………. P78,875 P15,000 P87,875 Add: realized gross profit on prior years’ sales on

Installment basis (see gross profit schedule) ………. 50,040

Total Realized Gross Profit ………. P137,915

Operating Expenses ………... 151,500

Net Loss ……….. P 13,585

WW EQUIPMENT, Inc.

Analysis of Gross Profit on Installment Sales Schedule to Accompany Income Statement

For Year Ended December 31, 20x6 Deferred Gross profit on installment sales, 20x6

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Installment contracts receivable, P320,000 less collections P265,000

Or P55,000; P55,000 x 27.5% ……… P 15,125

Realized Gross Profit:

20x6 20x5 20x4

Collections on Installment Contracts Receivable ………... P265,000 P138,000 P27,000 Installment sales gross profit percentage ……….. 27.5% 30% 32%

Realized Gross Profit ……….. P 72,875 P 41,400 P 8,640

Cost of Installment Sales ………. 232,000 Deferred Gross profit ……… 88,000

Deferred Gross Profit, 20x6 ………... 72,875 Deferred Gross Profit, 20x5 ………... 41,400 Deferred Gross Profit, 20x4 ………... 8,640 Realized Gross Profit on Installment sales……… 122,915

Income Summary ……… 170,000

Shipment on Installment of Sales ……… 232,000

Merchandise Inventory, Jan. 1, 20x6 ………. 52,000

Purchases ……… 350,000

Merchandise Inventory, Dec. 31, 20x6 ……….. 60,000

Sales ………. 125,000

Income Summary ………. 125,000

Realized Gross Profit on Installment Sales………..………... 122,915

Income Summary ………. 122,915

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Operating Expenses ………... 151,500

Retained Earnings ……….. 13,585

Income Summary ………... 13,585

Problem XII

1. Calculation of gross profit percentage on installment sales

20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment

sales 20x6 ……… 38% 20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment

accounts receivable 20x5 ………. 40% 20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment

accounts receivable 20x4 ………. 45%

2.

Deferred Gross Profit, 20x6……… 1,900 Deferred Gross profit, 20x5……… 4,000 Deferred Gross Profit, 20x4……… 3,600

Loss on Repossessions……….. 9,500 Cancellation of deferred gross profit,

balances upon repossessions: 20x6: 38% of P5,000, or P1,900 20x5: 40% of P10,000, or P4,000 20x4: 45% of P8,000, or P3,600

Installment

Sales Regular Sales Total

Sales ………... P500,000 P192,000 P692,000

GG SALES CORPORATION Income Statement

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Cost of goods sold:

Merchandise Inventory, Jan. 1 ……… P 30,000 Purchases ………... 445,000 Repossessed Merchandise ……….. 10,000 Merchandise Available for sale ... 495,000

Less: Merchandise Inv. Dec. 31 ………… 35,000 310,000 150,000 460,000

Gross Profit ……….. P190,000 P42,000 P103,000

Less: Deferred Gross Profit on 20x6 sales (see schedule) 32,300 32,300 Realized Gross Profit on current year’s sales ………. P157,700 P42,000 P199,700 Add: realized gross profit on prior years’ sales on

Installment basis (see gross profit schedule) ………. Deduct loss on repossession ……….

100,650 P300,350 3,500

Total Realized Gross Profit ………. P296,850

Operating Expenses ……… 300,000

Net Loss ……….. P 3,150

Analysis of Gross Profit on Installment Sales Schedule to Accompany Income Statement

For Year Ended December 31, 20x6

Deferred gross profit on Installment sales – before defaults, 19X8:

Installment contracts receivable, P500,00, less collections, P415,000, or

P85,000; P85,000 x 38% ………. P 32,300

Realized Gross Profit:

20x6 20x5 20x4 Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000 Installment sales gross profit percentage ……….. 38% 40% 45% Realized gross profit ………..P157,700 P 84,000 P 16,650

GG SALES CORPORATION Balance Sheet December 31, 20x6

Assets

Cash ………... P 25,000 Installment Accounts Receivable 20x6 ………P 80,000

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20x4 ……… 5,000 105,000 Accounts receivable ……….. 40,000 Inventory ………. 35,000 Other Assets ……… 52,000 Total Assets ……….P 257,000 Liabilities Accounts payable ………. P 75,000

Deferred Gross Profit 20x6 ………. P 30,400 20x5 ………. 8,000 20x4 ………. 2,250 40,650 Total Liabilities P 115,650 Stockholders’ Equity Capital Stock ………. P100,000 Retained Earnings ………. P 44,500 Balance, Jan. 1, 20x6 ……… 3,150 Balance, Dec. 31, 20x6 ……… 41,350

Total Stockholder’s Equity ………. 141,350 Total Liabilities and Stockholder’s Equity ……….. P 257,000

4. Installment Sales ……….. 500,000

Cost of Installment Sales ……….. 310,000 Deferred Gross Profit, 20x6 ……….. 190,000

Deferred Gross Profit, 20x6 ……… 157,500 Deferred Gross Profit, 20x5 ……… 84,000 Deferred Gross Profit, 20x4 ……… 16,650

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Income Summary ……… 185,000 Shipment on Installment Sales ……… 310,000

Merchandise Inv, January 1, 20x6 ………. 30,000

Purchases ………. 455,000

Repossessed Merchandise ……….. 10,000

Merchandise Inv, December 31, 20x6……..………. 35,000

Income Summary ……….. 35,000

Sales ……….... 192,000

Realized Gross Profit on Installment Sales……….. 258,350

Income Summary ……….. 258,350 Income Summary ……… 3,500 Loss on Repossession ………. 3,500 Income Summary ……… 300,000 Operating Expenses ……….. 300,000 Retained Earnings ……… 3,150 Income Summary ………. 3,150 Problem XIII 1.

Deferred gross profit – 20x4……….………. 8,407.00 Deferred gross profit – 20x5……….………. 93,438.80 Deferred gross profit – 20x6……….………. 71,006.70

Realized Gross Profit on Installment Sales (20x4 – 20x6)….. 172,852.50

Computation of GP rates:

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20x5: P285,120/P432,000 = 66%, cost rate; GP rate = 100% - 66% = 34% 20x6: P379,260/P602,000 = 63%, cost rate; GP rate = 100% - 63% = 37%

Calculation of collections in 20x6:

20x4: Beginning balance P 24,020

20x5: P344,460 (beginning balance) – P67,440 (ending balance) –

P2,200 (write-offs on default) 274,820

20x6: P602,000 (sales) – P410,090 (ending balance) 191,910

Calculation of realized gross profit:

20x4: 35% x P24,020 P 8,407.00

20x5: 34% x P274,820 93,438.80

20x6; 37% x P191,910 71,006.70

Total P172,852.50

2. Deferred gross profit 20x5……… 748.00

Inventory of Repossessed Merchandise………. 748.00

To reduce by 20x5 deferred gross profit related to defaulted contract and requiring cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date); inventory now reported at P2,200 (balance of installment contract), less P748 or P1,452.

Loss on repossession……….. 381.00 Inventory of repossessed merchandise……….. 381.00 To reduce inventory to “market” as follows: to realize a gross profit of 37% on a

resale estimated at P1,700, the repossessed merchandise should be reported at a value of 63% of P1,700, or P1,071; the inventory then requires a further write-down of P381 (P1,452 – P1,071)

Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248 (P1,700 – P1,452), the later period would actually have to absorb a loss as a result of such valuation. Recording the goods at resale value reduced by the company’s usual profit margin on sales is recommended, for such practice will charge the next period with no more than the utility of the goods carried forward.

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Problem XIV – HH Instruments

1. Installment Contracts Receivable ………. 1,600.00

Merchandise Inventory (Piano) ……… 1,000.00 Deferred Gross Profit on Installment Sales ……… 600.00 Cash ………... 160.00

Installment Contracts Receivable ……… 160.00 2. Cash ………... 160.00

Interest Income ……… 14.40 Installment Contracts Receivable ………. 145.60 Cash ………... 160.00

Interest Income ………. 11.47 Installment Contracts Receivable ……… 148.53 3. Deferred Gross Profit on Installment of Sales ……….. 225.45

Realized Gross Profit on Installment of Sales ……… 225.45 Gross Profit Percentage: 37.5% (P600/P1,600)

Realized Gross Profit for 20x4: 37.5% of 601.19 (sum of payments on installment contract)

4. Merchandise Inventory (piano) ………... 560.00 Deferred Gross Profit on Installment of Sales ………... 374.55 Loss on Repossessions ………. 64.36

Installment Contracts Receivable ……… 998.81 Deferred Gross profit cancelled upon repossession:

37.5% of P998.81 (balance in installment contracts receivable account) or P 374.55

Problem XIV – Big Bear 20x4:

Installment receivables 250,000

Inventory 150,000 Deferred gross profit 100,000 Cash 80,000

Installment receivables 80,000 20x5:

Cash 120,000

Installment receivables 120,000 Deferred gross profit 50,000

Realized gross profit 50,000 20x6:

Cash 50,000

Installment receivables 50,000 Installment receivables 300,000

Inventory 210,000 Deferred gross profit 90,000

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Cash 135,000

Realized gross profit 40,500 Gross profit deferred at sale = 30% x P300,000 = P90,000.

Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500 (Or cash collected x GP% =P135,000 x 30% = P40,500)

Problem XV – Tappan Industrial

(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale. Determination of selling price:

PVn = R(PVAFn/i) Table IV

PVn = P187,500 x 4.3553 n = 6, i = 10% PVn = P816,619 (rounded)

Gross profit on sale:

Sales P816,619

Cost of sales 637,500

Gross profit P179,119

Interest revenue--4 months: P816,619 x 10% x 4/12 = _ 27,221

Total income for 20x5 = P179,119 + P27,221 = P206,340

(2) No reasonable assurance – assume the use of installment sales method

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

Gross profit earned in 20x5 (P0 x 22%) P 0

Interest revenue 27,221

Total income for 20x5 P 27,221

Multiple Choice Problems 1. c 20x4: P1,200,000 x 30% = P 360,000 20x5: P1,400,000 x 40% = 560,000 P920,000 2. d – [P225,000 + (P120,000/40%)] 3. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000. 4. d

Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%

20x4 Sales: P120,000/ 30% P 400,000 20x5 Sales: P440,000/ 40% 1,100,000 P 1,500,000 5. b – [(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000 6. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000.

7. c P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate) P480,000 – (P288,000 ×.4) = P364,800.

(21)

8. c P300,000 + P50,000 = P350,000

P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate) (P300,000 – P100,000) x 30% = P60,000.

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

10. a – 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.

P8,000 x (P30,000 – P24,000)/P30,000 = P1,600 11. b –

20x4: P500,000 x 30% = P 150,000

20x5: P600,000 x 40% = 240,000 P390,000 12. d – same with No. 4

13. b

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

14. b

20x4: P150,000 – (P568,620 x 10%) = P93,138. 20x5: (P568,620 – P93,138) x 10% = P47,548. 15. d

Realized Gross Profit on Installment Sales in 20x6:

20x4 sales: P10,000 x 22%P 2,200

20x5 sales: P50,000 x 25% 12,500

20x6 sales: P45,000 x P28,200 / (P28,200+P91,800) 10,575 P 25,275

Realized Gross Profit on Sales in 20x5 P 10,500

Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%) 5,000

Realized Gross Profit in 20x5 for 20x4 sales P 5,500

Divided by: Collections in 20x5 for 20x4 sales P 25,000

Gross Profit % for 20x4 sales 22%

16. a

Installment Sales Method:

20x3 Sales: P240,000 x 25/125P 48,000 20x4 Sales: P180,000 x 28/128 39,375

Realized Gross Profit on Installment SalesP 87,375 Cost Recovery Method:

20x3 Cost: P480,000 / 1.25 P384,000

Less: Collections in 20x3 140,000

Collections in 20x4 240,000

Unrecovered Cost, 12/31/20x4 P 4,000

Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts. All cash receipts, both interest and principal portions, are applied first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all costs have been recovered, the recognized revenue after the cost recovery represents income (interest and realized gross profit). This method is used only when the circumstances surrounding a sale are so uncertain that earlier recognition is impossible.

(22)

(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 18. 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

P174,662.9 19. a – refer to No. 16 for discussion.

Cost, January 1, 20x4 P 60,000

Less: Collections including interest – 20x4 32,170 Unrecovered Cost, December 31, 20x4 P 27,830

20. b (P300,000 ÷ P750,000) x P250,000 = P100,000 [(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000. 21. d [P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400. 22. d P8,400 – P5,880 = P2,520 (P3,000 – P300) – P2,520 = P180 gain. 23. b P24,000 – P7,200 = P16,800 P16,800 – P13,500 = P3,300 loss. 24. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25% 25. a (P800,000 x .25) – P90,000 = P110,000, 26. d P700,000 x .25 = P175,000; P500,000 x .25 = P125,000. 27. a (P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%. 28. d (P1,200,000 × .30) – P120,000 = P240,000. 29. a P1,050,000 × .30 = P315,000 P900,000 – [(P1,200,000 + P1,050,000) × .30] = P225,000. 30. c (P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3% (P3,600,000 × .20) + [(3,600,000 × .80) × 4/12)] = P1,680,000 P1,680,000 × 33 1/3% = P560,000. 31. b [(P3,600,000 × .20) + (P3,600,000 × .80 x 8/12] – P2,400,000 = P240,000.

(23)

32. a P0. 33. c

Sale: Installment receivables 4,500,000

Inventory 3,600,000 Deferred gross profit 900,000 Payment: Cash 500,000

Realized gross profit 100,000 Balance Sheet:

Installment receivables (4,500,000 – 500,000) P 4,000,000 Deferred gross profit (900,000 – 100,000) 800,000 Installment receivables (net) P 3,200,000 34. b

12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000] 2,000,000

Installment receivables 2,000,000 Deferred gross profit [P2,000,000 x (900/4,500)] 400,000

Realized gross profit 400,000 Balance sheet:

Deferred gross profit: P800,000 400,000 = P400,000

Realized gross profit of P400,000 would be reported in the income statement. 35. b – refer to No. 16 discussion.

Cost, January 1, 20x4……….P 500,000 Less: Collections including interest – 20x4……….P241,269

Collections including interest – 20x5……… 241,269 482,538 Unrecovered Cost, December 31, 20x5……….P 17,462 36. 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%

(24)

37. a - Costs not yet recovered. 38. 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 39. 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. 40. d

Sale: Installment receivables 55,000

Inventory 30,000

Deferred gross profit 25,000

Payment: Cash 20,000

Balance Sheet:

Installment receivables P55,000 – 20,000 P 35,000

Deferred gross profit ( 25,000)

Installment receivables (net) P 10,000

41. 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

42. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000 43. a Gross profit % = (P900,000 P450,000)/P900,000 = 50% 20x4: 50% x P300,000 = P150,000

44. c

20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50% 50% x P300,000 received in 2010 = P150,000

(25)

40% x P400,000 received in 2010 = P160,000 Total: P150,000 + P160,000 = P310,000

45. c

20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)

- P300,000 (x5 collections) = P 300,000 Deferred gross profit = P450,000 – P150,000 (x4 collections)

- P150,000 (x5 collections) = 150,000 Net installment receivable for 20x4 sales = P 150,000 20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000

Deferred gross profit = P600,000 – P200,000 (x5 collections) = 400,000

Net installment receivable for 20x5 = P 600,000

Total = P 750,000

46. a

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

47. b - P450,000 cost P300,000 collections = P150,000 unrecovered costs 48. b

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 49. 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

50. b – same with No. 59. 51. 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

(26)

Gross profit (realized) P179,119 52. c

Total Income for 20x4:

Gross profit (realized) – No. 51

Interest revenue—4 months: P816,619 x 10% x 4/12.. P179,119 _ 27,221

Total income for 20x4 P206,340

53. 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 816,619}2 _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.} 54. 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. 55. 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

56. 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

(27)

57. 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** 58. 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 59. 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) 60. 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 Theories

(28)

1. True 6. True 11. False 16. True 21. c 26. a 31. c 2

.

True 7. True 12. True 17. True 22. d 27. b 32. c

3 .

False 8. True 13. True 18. b 23. d 28. d 33. c

4 .

False 9. True 14. True 19. c 24. c 29. b 34. b

5 . True 10 , False 15, True 20. c 25. b 30. d 35. b 36. c 41. d 37. d 42. c 38. b 43. c 39. b 44. c 40. d 45.