Chapter 7 Problems
Problem I 1. Entries in 20x4: Cash…………………………………………………………………….……….. Mortgage Notes Receivable ……………………………………………….. Real Estate ……………………………………………………………. 9,000 Gain on Sale of Real Estate ……………………………………….. 15,000 Cash ……………………………………………………………………………… Mortgage Notes Receivable ……………………………………….
3,500 20,500
500 500
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 Real Estate …………………………………………………………….. 9,000 Deferred Gross Profit on Installment Sales ………………............ 15,000 Cash ………………………………………………………………………………. 500 Mortgage Notes Receivable …………………………………..….. Receipt P500 cash in 20x4 applicable to principal of note Deferred Gross Profit on Installment Sales ………………………………... Realized Gross Profit on Installment Sales………………………... 2,500
500
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 II 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 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 ………………………………………………….. Merchandise Inventory ………………………………………….. 200,000
200,000
d. Merchandise Repossessions ……………………………………………… 14,500 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.. Less: Unrecovered cost: Unpaid balance…………………………P 20,000 Less: Deferred Gross Profit 20% x P20,000…………………… 4,000 Loss on repossession…………………….
P 14,500
16,000 P 1,500
e. Expenses ……………………………………………………………………… Cash ………………………………………………………………….
16,000 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: Installment Sales ……………………………………………………… 250,000 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…………..……. Realized Gross Profit on Installment Sales – 20x4 ………. 24,000
24,000
Realized Gross Profit: 20% of P120,000 (collections), or P24,000 d. Closing of nominal accounts. Realized Gross Profit on Installment Sales – 20x4………………… Expenses ………………………………………………………. 16,000 Loss on Repossessions ………………………………………. 1,500 Income Summary ……………………………………………. 6,500 To close the accounts for 20x4.
24,000
Problem IV 1. January to December 31
20x4
20x5
(1) To record regular sales: Accounts receivable
1,080,00 0
600,000
Sales
1,080,00 0
600,00
(2) To record installment sale: Cash Installment accounts receivable Installment Sales
60,000 300,000
144,000 336,000 360,000
480,000
(3) To record cost of sales: Periodic Method: No entry Perpetual Method: Regular Sales: Cost of Sales Merchandise inventory Installment Sales: Cost of installment sales Merchandise inventory (4) To record collections: Regular Sales: Cash Accounts receivable Installment Sales: Cash
480,000
864,000 480,000
252,000
864,000
312,000 252,000
144,000
312,000
360,000 144,000
108,000
360,000
204,000
Installment Accounts receivable – 20x2
72,000
72,000
36,000
60,000 72,000
Installment Accounts receivable – 20x3 Interest income (5) to record payment of operating expenses: Operating expenses
90,000
102,000
Cash
90,000
102,000
2. Adjusting entries (end of the year): (6) To recognize accrued interest receivable Interest receivable
1,440
Interest income
2,880 1,440
2,880
(7) To set-up Cost of Sales: Periodic Method: Cost of sales
480,000
Merchandise inventory
864,000 480,000
864,000
Perpetual Method: No entry (7) To set-up Cost of Installment Sales: Periodic Method: Cost of installment sales Shipment s on installment
252,000
sales
312,000 252,000
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
Deferred gross profit – 20x4
108,000
Deferred gross profit – 20x5 Gross profit rate – 20x4: P 108,000 / P360,000 = 30%. Gross profit rate – 20x5: P168,000 / P480,000 = (9) To record installment sales:
realized
gross
profit
312,000 168,000
35%.
on
Deferred gross profit – 20x4
39,600
*21,600
Deferred gross profit – 20x5
71,400
Realized gross profit
39,600
*P72,000 x 30%
20x4: Realized gross profit on installment sales: Collections applying as to principal..……………………………P132,000 Multiplied by: Gross profit rate……………………………………. 30% Realized gross profit…………………………………………………P 39,600
20x5: Realized gross profit on installment sales; Collections principal…………… Multiplies by: Gross %.......... Realized profit………………
–
20x4 P 72,000
profit gross
____30% P 21,600
20x5 *P204,00 0 ____35 % P 71,400
P 93,000
93,000
*P144,000 + P60,000 Closing entries: (10) To close realized gross profit account: Realized gross profit
39,600
Income summary
93,000 39,600
93,000
(11) To close other nominal accounts Sales Interest income
600,000
1,080,00 0
37,440
74,880
Cost of sales
480,000
864,000
Operating expenses
90,000
102,000
Income summary
67,440
188,880
(12) To close results of operations: Income summary
107,040
Retained earnings
281,880 107,040
281,880
Problem V 1. Type of Sale Regular Sales: Cash sales Credit sales Total regular sales Installment Sales Total Sales
Ratio to Total Sales
Amount P 225,000 ___450,000 P 675,000 _ 1,125,000 P 1,800,000
675/1,800 1,125/1,800
Allocated Cost P *146,250 **292,500 P 438,750 __731,250 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 Cash sales Credit sales Installment Sales Total Sales
Amount P 225,000 450,000 1,125,00 0 P 1,500,000
Amount based on Cash Sales (100%) P 225,000 375,000*
Ratio to Total Sales 225/1,500 375/1,500
Allocated Cost P 175,500 292,500
900,000** P 1,250,000
900/1,500
__ 702,000 P 1,170,000
Gross profit rate 30% 25%
Cost ratio 70% 75%
Allocated Cost* P 157,500 337,500
40%
60%
_ _675,000 P 1,170,000
*P450,000 / 120% = P375,000 **P1,125,000 / 125% = P900,000
3. Type of Sale Cash sales Credit sales Installment Sales Total Sales
Amount 225,000 450,000 1,125,00 0 P 1,800,000 P
* Amount of sale x cost ratio.
Problem VI
The entries are required under the periodic method:
Repossessed merchandise……………………………………...... Deferred gross profit – 20x4………………………………............ Loss on repossession………………………………………………... Installment accounts receivable – 20x4…………………….
68,400 48,000 3,600 120,000
To record repossessed merchandise.
Repossessed merchandise……………………………………...... Cash, etc (or various credits)……………………................
12,000 12,000
To record reconditioning costs
The loss on repossession is computed as follows: Estimated selling price after reconditioning costs.............. Less: Reconditioning costs……………………………………… P 12,000 Costs to sell and dispose…………………………………. 6,000 Normal profit (20% x 108,000) __21,600 ……………………………. Market value before reconditioning costs………………….. Less: Unrecovered cost Installment accounts receivable – 20x4, unpaid balance……………………………………... P120,000 Less: Deferred gross profit – 20x4 (P120,000 x __48,000 40%)..... Loss on repossession……………………………. Problem VII The entry to record the sale of the new vehicle under the periodic method: Trade-in Merchandise…………………………………............... Over-allowance on trade-in merchandise…………………. Cash………………………………………………………………….. Installment accounts receivable – 20x4……………............
P 108,000
__39,600 P 68,400
__72,000 P( 3,600)
840,000 360,000 2,400,00 0 3,360,00 0
Installment sales……………………………………….......
6,960,00 0
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…………………………………............... Cash………………………………………………………………….. Installment accounts receivable – 20x4……………............
840,000 2,400,00 0 3,360,00 0
Installment sales (net of over-allowance)……..............
6,600,00 0
To record installment sales with trade-in.
The over-allowance is computed as follows: Trade-in allowance………………………………….................. Less: Market value before reconditioning costs: Estimated resale price after reconditioning costs. Less: Reconditioning costs……………………………….. Costs to sell (5% x P1,680,000)…………………… Normal profit (20% x P1,680,000)…………….......
P1,200,00 0 P1,680,0 00 420,000 84,000 __336,00 0
__840,00 0
Over-allowance……………………………………………………
P 360,000
The gross profit rate on installment sales is computed as follows: Installment sales……………………………………………………………...... Less: Over-allowance………………………………………………………… Adjusted Installment Sales…………………………………………………… Less: Cost of installment sales………………………………………………. Gross profit………………………………………………………………………. Gross profit rate (P2,680,000/P6,600,000)………………………………..
P6,960,000 ___360,000 P6,600,000 __3,920,00 0 P2,680,000 40.60%
Further, the entry to record the reconditioning costs is as follows: Trade-in Merchandise…………………………………............... Cash, etc (or various credits)……………………..............
420,000 420,000
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)……… Down payment…………………………………………………………………… Installment collection (March 31 – December 31: P80,000 x 10 months) Total collections………………………………………………………………….. Multiplied by: Gross profit rate in 20x4……………………………………….. Realized gross profit on installment sales of new merchandise…………
P
840,000 2,000,000 ___800,000 P3,640,000 ___40.60% P1,477,840
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 ………………………………….. Interest Income …………………………………………………… Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
600 544
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 ……………………………………………………………………… Mortgage Notes Receivable ……………………………….. 50.00 Interest Income ………………………………………………… 550.00
600
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600P550, or P50, is reduction in principal) Dec. 31 Cash ………………………………………………………………………. Mortgage Notes Receivable ………………………………… 50.50 Interest Received ……………………………………………… 549.50
600.00
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 ………………………... Amount realized: (P25,000/150,000) x 57,200 2. 6/30x5: Cash …………………………………………………………………………… 30,000 Notes Receivable ……………………………………………………..
11,440
9,553
30,000
Deferred Gross Profit on Sale of Property ………………………………. 11,440 Realized Gross Profit on Sale of Property ………………………… Amount realized (P30,000/P150,000) x 57,200
6/30/x6 Cash …………………………………………………………………………. Notes Receivable …………………………………………………… Deferred Gross Profit on Sale of Property ……………………………… Realized Gross Profit on Sale of Property ………………………… 19,067
50,000 50,000 19,067
Amount Realized: (P50,000/P150,000) X 57,200 6/30/x7 Cash ………………………………………………………………………….. Notes Receivable …………………………………………………… Deferred Gross Profit on Sale of Property ………………………………. Realized Gross Profit on Sale of Property ………………………… 5,720
15,000 15,000 5,720
Amount Realized: (P15,000/P150,000) X 57,200
Problem X Installment Contracts Receivable ………………………………………… 200,000 Installment Sales ……………………………………………………… 200,000 Cost of Installment Sales …………………………………………………….. Merchandise Inventory ………………………………………………
120,000 120,000
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 34,000
Installment on Contracts Receivable – 20x5……………………... Installment on Contracts Receivable – 20x6……………………...
60,000
52,080
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 Realized Gross Profit on Installment Sales ……………………….………….. 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 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 ……………………………………. 214,500
P
WW EQUIPMENT, Inc. Income Statement For Year Ended December 31, 20x6
Sales ………………………………………………………............ 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 Gross Profit ……………………………………………………….. Less: Deferred Gross Profit on 19X34
Installment Sales P320,000
Regular Sales P125,000
232,000
110,000
342,000
P88,000
P15,000
P103,00 0 15,125
15,125
Total P445,00 0
………………………… Realized Gross Profit on current year’s sales ………………. Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ………………. Total Realized Gross Profit …………………………………….
P78,875
P15,000
P87,875 50,040 P137,91 5 151,50 0 P 13,585
Operating Expenses …………………………………………... Net Loss …………………………………………………………..
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 Installment contracts receivable, P320,000 less collections P265,000 Or P55,000; P55,000 x 27.5% ………………………………………………………… P 15,125 Realized Gross Profit: 20x6 Collections on Installment Contracts Receivable ………... P265,000 P27,000 Installment sales gross profit percentage ………………….. 27.5%
20x5
20x4 P138,000
30%
32% Realized Gross Profit …………………………………………….. P 72,875 P 8,640
P 41,400
Installment Sales …………………………………………………… 320,000 Cost of Installment Sales …………………………………………. 232,000 Deferred Gross profit -20x6……………………………………………… 88,000 Deferred Gross Profit, 20x6 ……………………………............... Deferred Gross Profit, 20x5 ……………………………............... Deferred Gross Profit, 20x4 ……………………………............... Realized Gross Profit on Installment sales…………… Income Summary ………………………………………………… Shipment on Installment of Sales ……………………………… Merchandise Inventory, Jan. 1, 20x6 ……………….
72,875 41,400 8,640 122,915 170,000 232,000
52,000 Purchases ………………………………………………
350,000
Merchandise Inventory, Dec. 31, 20x6 …………………….. Income Summary ……………………………………
60,000 60,000
Sales ………………………………………………………………. Income Summary ……………………………………. Realized Gross Profit on Installment Sales………..………... Income Summary …………………………………….
125,000
Income Summary ………………………………………………
151,500
125,000 122,915 122,915
Operating Expenses ………………………………...
151,500
Retained Earnings …………………………………………….. Income Summary …………………………………...
13,585 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……………………………… Deferred Gross profit, 20x5……………………………… Deferred Gross Profit, 20x4……………………………… Loss on Repossessions………………………….. 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
1,900 4,000 3,600 9,500
GG SALES CORPORATION Income Statement For Year Ended December 31, 20x6
Sales ………………………………………………………............ 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 Gross Profit ……………………………………………………….. Less: Deferred Gross Profit on 20x6 sales (see schedule) Realized Gross Profit on current year’s sales ………………. Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ………………. Deduct loss on repossession …………………………………. Total Realized Gross Profit ……………………………………. Operating Expenses …………………………………………… Net Loss …………………………………………………………..
Installment Sales P500,000
Regular Sales P192,000
Total P692,000
310,000
150,000
460,000
P190,000 32,300
P42,000
P103,000 32,300
P157,700
P42,000
P199,700 100,650 P300,350 3,500 P296,850 300,000 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 20x5 ………………… 20,000 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 ……………………….. 257,000 4. Installment Sales ……………………………………………………………….. 500,000 Cost of Installment Sales ……………………………………………….. Deferred Gross Profit, 20x6 …………………………………………….. Deferred Gross Profit, 20x6 …………………………………………………… 157,500 Deferred Gross Profit, 20x5 …………………………………………………… 84,000
P
310,000 190,000
Deferred Gross Profit, 20x4 …………………………………………………… 16,650 Realized Gross Profit on Installment Sales… …………………………
258,350
Income Summary ……………………………………………………………… 185,000 Shipment on Installment Sales ……………………………………………… 310,000 Merchandise Inv, January 1, 20x6 ……………………………………. Purchases …………………………………………………………………. Repossessed Merchandise ……………………………………………..
30,000 455,000 10,000
Merchandise Inv, December 31, 20x6……..………………………………. Income Summary ……………………………………………………….. Sales …………………………………………………………………………….... Income Summary …………………………………………………………
35,000 192,000
192,000
Realized Gross Profit on Installment Sales…………………………………..258,350 Income Summary ……………………………………………………….. Income Summary ……………………………………………………………… Loss on Repossession …………………………………………………….
3,500
Income Summary ……………………………………………………………… Operating Expenses ……………………………………………………..
300,000
Retained Earnings ……………………………………………………………… Income Summary ………………………………………………………….
35,000
258,350 3,500 300,000
3,150 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: 20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35% 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 20x5: 34% x P274,820 93,438.80 20x6; 37% x P191,910 71,006.70 Total 2. Deferred gross profit 20x5………………………………………………………
P
8,407.00
P172,852.50 748.00
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…………………………………………………………….. Inventory of repossessed merchandise………………………………..
381.00 381.00
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. Problem XIV – HH Instruments 1. Installment Contracts Receivable ……………………………………. Merchandise Inventory (Piano) ……………………………… Deferred Gross Profit on Installment Sales ………………… 600.00
2.
3.
4.
1,600.00 1,000.00
Cash ……………………………………………………….......................... Installment Contracts Receivable ……………………………
160.00
Cash …………………………………………………………........................ Interest Income …………………………………………………… Installment Contracts Receivable …………………………….
160.00
Cash ……………………………………………………………...................... Interest Income ……………………………………………………. Installment Contracts Receivable ……………………………… Deferred Gross Profit on Installment of Sales ………………………….. 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)
160.00
160.00 14.40 145.60
225.45
11.47 148.53
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 XV – Big Bear 20x4: Installment receivables Inventory
250,000
150,000
Deferred gross profit Cash
100,000 80,000
Installment receivables 20x5: Cash
80,000 120,000
Installment receivables Deferred gross profit Realized gross profit 20x6: Cash
Installment receivables
Installment receivables Inventory Deferred gross profit Cash
120,000 50,000
50,000
50,000
50,000
300,000 210,000 90,000 135,000
Installment receivables Deferred gross profit Realized gross profit
135,000 40,500
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 XVI – 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 Cost of sales Gross profit Interest revenue--4 months: P816,619 x 10% x 4/12 = Total income for 20x5 = P179,119 + P27,221 =
P816,61 9 637,500 P179,119 _ 27,221 P206,340
(2) No reasonable assurance – assume the use of installment sales method Installment sale: Gross profit (P179,119/P816,619) = Gross profit earned in 20x5 (P0 x 22%)
22% rounded P
0
Interest revenue
27,221
Total income for 20x5
P 27,221
IFRS 15 Based Problems Problem XVII – 5-Step Process
Recognize revenue in the accounting period when the performance obligation is satisfied. Step 1: Identify the contract with customers. A contract is an agreement between two parties that creates enforceable rights or obligations. In this case, Maritime Ship Manufacturers contract to deliver cargo ships to Kim and Dreicy Shipping Lines. Step 2: Identify the separate performance obligations in the contract. Maritime Ship Manufacturers has only one performance obligation—to deliver cargo ships to Kim and Dreicy Shipping Lines. If Maritime Ship Manufacturers also agreed to maintain the cargo ships, a separate performance obligation is recorded for this promise. Step 3: Determine the transaction price. Transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring a good or service. In this case, the transaction price is straight forward—it is P720,000,000. Step 4: Allocate the transaction price to the separate performance obligations. In this case, Maritime Ship Manufacturers has only one performance obligation—to deliver cargo ships to Kim and Dreicy Shipping Lines. Step 5: Recognize revenue when each performance obligation is satisfied. Maritime Ship Manufacturers recognizes revenue of P800 million for the sale of the cargo ships to Kim and Dreicy Shipping Lines when it satisfies its performance obligation—the delivery of the cargo ships to Kim and Dreicy Shipping Lines.
Problem XVIII – Contracts and Recognition
The entry on July 31, 20x7, to record the sale and related cost of goods sold is as follows: Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,00 . . 0 Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... Cost of34,20 sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... The entry to record the receipt of cash on August 31, 20x7 is a follows: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57,00 ..... 0 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......
57,000
34,200
57,000
A key attribute of the revenue arrangement is that the signing of the contract by the two parties is not recorded until one or both of the parties perform under the contract. Until performance occurs, no net asset or net liability occurs.
Problem XIX – Contracts and Recognition
The above new contract, AB recognizes additional total revenue of P63,720,000, computed as follows Original contract [(120,000 units – 72,000 units) x P900]………………………P 43,200,000 New product (24,000 units x P855)……………………………………………….. 20,520,000 Total revenue after the modification………………………………….…………P 63,720,000 In this situation, the contract modification for the additional 24,000 products is, as a result, a new and separate contract, which does not affect the accounting for the original contract.
Problem XX – Prospective Modification
For AB, the amount recognized as revenue for each of the remaining products would be a blended price of P885, computed as shown: Products not delivered under original contract (P900 x 48,000)……………P43,200,000 Products to be delivered under contract modification (24,000 x P855)…. 20,520,000 Total remaining revenue……………………………………………………………P 63,720,000 Revenue per remaining unit (P63,720,000 ÷ 72,000)= P885, blended price Note: Under the prospective approach, this computation differs from that in the separate performance obligation approach is that revenue on the remaining units (i.e., 72,000 units) is recognized at the blended price.
Prospective Modification. Under the prospective approach, a blended price (P885) is used for sales in the periods after the modification. Revenue Recognized Prior to Modification Separate performance obligation P64,800,000* No separate performance obligation - prospectively
P64,800,000*
Revenue Recognized After Modification P 63,720,000
Total Revenue Recognized P128,520,000
P 63,720,000
P128,520,000
* 72,000 x P900 Note: As pointed out, whether a modification is treated as a separate performance obligation or prospectively, the same amount of revenue is recognized before and after the modification. However, under the prospective approach, a blended price (P885) is used for sales after the modification.
Problem XXI – Identifying Separate Performance Obligations
The license and the consulting services are distinct but interdependent, and therefore should be accounted for as one performance obligation.
Problem XXII – Identifying Separate Performance Obligations
1. The sale of the computer and related assurance warranty are one performance obligation as they are interdependent and interrelated with each other. 2. The extended warranty is separately sold and is not interdependent.
Problem XXII – Estimating Variable Consideration
The probability-weighted method is the most predictive approach for the management to determine the transaction price: 60% chance of P160,000,000………………………………………………………………P 96,000,000 30% chance of P154,000,000[P160,000,000 – (10% x P60,000,000)]..……………… 46,200,000 10% chance of P148,000,000[P160,000,000 – (10% x P60,000,000) x 2]…………… 14,800,000 P157,000,000 Problem XXIII – Revenue Recognition Constraint The following items should be taken into consideration by Ging and Associates: 1. Recognized the management fee each quarter based on the performance of its services during the year. 2. The incentive fee should not be recorded until the end of the year. Therefore, this fee is constrained (not recognized) until the incentive is determinable at the end of the year.
Problem XXIV – Extended Payment Terms July 1, 20x7: Record the Sale Notes 894,697. receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... Unearned Interest income (discount on notes receivable). . . . . . Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,000. . ... 00 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....
540,000.0 0 354,697.8 0 354,000.0 0
December 31, 20x7: Record interest revenue: Unearned interest income (Discount on notes receivable). . . . . . . . . . 32,400.0 . ... 0 Interest income (12% x ½ x P540,000). . . . . . . . . . . . . . . . . . . . . . . .....
32,400.00
The revenue that James Company should record on July 1, 20x7 should amount to P540,000. While the amount of revenue (i.e., interest income) that should be report related to this transaction on December 31, 20x7 also amounted to P32,400. For practical considerations, companies are not required to reflect the time value of money if the time period for payment is less than a year.
Problem XXV – Volume Discount
The entries that Samsung recognize as revenue for the first three months of 20x7 (March 31, 20x7) are as follows: Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400 .... Sales [P420,000 (P420,000 x 407,400 3%)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Samsung should reduce its revenue by P12,600 (P420,00 x 3%) because it is probable that it will provide this rebate. Assuming Samsung’s customer meets the discount threshold, Samsung makes the following entry: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .407,400 . . . . .. Accounts 407,400 receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . If Samsung’s customer fails to meet the discount threshold, Samsung makes the following entry upon payment. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .420,000 . . . . .. Accounts 407,400 receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales discount 12,600 lost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,400 . . . . .. Accounts 407,400 receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Problem XXVI – One or Multiple Performance Obligations
The following items should be taken into consideration by Ube Company: 1. The performance obligations relate to building construction, maintenance of the building and operate the condominium (buildings). 2. As pointed out, Ube Company can determine standalone values for the building, and the maintenance building. 3. The company then can make a best estimate of the price for operating the condominium (buildings), using the adjusted market assessment approach or expected cost plus a margin approach. 4. Ube Company next applies the relative fair value method at the inception of the transaction to determine the proper allocation to each performance obligation. 5. Once the allocation is been properly determined, Ube Company recognizes revenue independently for each performance obligation using regular revenue recognition criteria. 6. If, alternatively, the standalone selling price for operating the condominium (building) is highly variable or uncertain, Ube Company may use a residual approach. In this case, Ube Company uses the fair values of the high rise building and the maintenance agreements and subtracts their fair value from the total transaction price to arrive at a residual value for operating the condominium (buildings):
Total transaction price………………………………………………… Less: Fair value of the high rise building…………………………… P xxx Building maintenance………………………………………….. _xxx Residual value – Amount allocated for operating the condominium (buildings)…………………………………………..
P xxx _xxx P xxx
Problem XXVII – Multiple Performance Obligations
The following items should be taken into consideration by AA Maritime Industries, Inc. The first condition for separation into a standalone unit for the bridge simulator is met. That is, the bridge simulator, installation, and training are distinct and not interdependent - they are three separate products or services, and each of these items has a standalone selling price. The total revenue of P42,000,000 should be allocated to the three components based on their relative fair values. 1. The fair value of the bridge simulator should be considered P42,000,000, the installation fee is P840,000, and the training is P420,000. The total fair value to consider amounted to: Bridge simulator (P40,740,000/P42,000,000) x P40,740,000……………………... P39,517,800 Installation (P840,000/P42,000,000) x 814,800 P40,740,000…………………………….. Training (P420,000/P42,000,000) x___407,400 P40,740,000…......................................... Total…………………………………………………………………………………….. P40,740,000 2.
AA Maritime Industries, Inc makes the following entry on November 1, 20x7, to record both sales revenue and service revenue on the installation, as well as unearned service revenue: Cash. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .40,740,0 .... 00 Service revenue (installation). . . . . . . . . . . . . . . . . . . . . . . .... Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
814,800 407,400 39,517,80 0
(Not required) Assuming the cost of the bridge simulator is P28,518,000 the entry on November 1, 20x7 to record cost of goods sold is as follows: Cost of goods sold. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .28,518,0 ..... 00 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...
28,518,00 0
As indicated by the above entries, AA Maritime Industries, Inc recognizes revenue from the sale of the bridge simulator once the installation is completed on November 1, 20x7. In addition, it recognizes revenue for the installation fee because these services have been performed. 3. AA Maritime Industries, Inc recognized the training revenues on a straight-line basis starting on November 1, 20x7, or P101,000 (P407,400/4 months) per month for four (4) months. The journal entry on December 31 20x7 to recognize the training revenue of two (2) months in 20x7 is as follows: Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000 .. Service revenue (P101,000 x 2 months). . . . . . . . . . . . . . . ...
202,000
Therefore, AA Maritime Industries, Inc recognizes revenue on December 31, 20x7, in the amount of P40,534,600 (P39,517,800 + P814,800 + P202,000). AA Maritime Industries, Inc makes the following journal entry on December 31, 20x7 to recognize the training revenue in 20x8, assuming adjusting entries are made at year-end: Unearned service revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,400 .. Service revenue (P407,400 – P202,000). . . . . . . . . . . . . . . ...
205,400
Problem XXVIII – Discounted Transaction Price
The following items should be taken into consideration by Toby’s Store: As indicated, the standalone price for product 1, 2, 3, and 4 is P21,240, but the bundled price for all four products is P18,600. The discount applies to the performance obligations related to products 1, 3, and 5. Accordingly, Toby’s Store: allocates the discount to product 1, 3, and 4, and not to products 2, as follows: Allocated Amounts Product 1, 3, and 4…………………………………… P 16,200 Product 2……………………………………………….. 6,000 Total……………………………………………………… P 17,200
Problem XXIX – Timing of Revenue Recognition - Point in time when revenue should be
recognized The following items should be taken into consideration by Cerise Outsourcing Company: Cerise Outsourcing Company does not create an asset with an alternative use because it is prohibited from redirecting the software to another customer. Cerise Outsourcing Company is entitled to payments for performance to date and expects to complete the project. Consequently, Cerise Outsourcing Company concludes that the contract meets the criteria for recognizing revenue over time.
Problem XXX – Right of Return
The following entries in relation to the sale are as follows: 1. NN records the sale as follows with the expectation that three products will be returned: Cash. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 ... Sales (P100 x (240 – 13,400 6)]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Refund Liability (P100 x 6 600 units). . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales (P14,400 – 14,040 P360). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated inventory returns (P60 x 6). . . . . . . . . . . . . . . . . . . . . . . . . . 360 .. Inventory (P60 x 240 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...
14,400
2. When a return occurs, assuming 4 units were returned: NN records the following entries : Refund Liability (4 units x P100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 ... Accounts 400 Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Returned Inventory (4 x P60) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Estimated inventory returns . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . ..
240 240
Companies record the returned asset in a separate account from inventory to provide transparency.
Problem XXXI – Repurchase Agreement
MM Inc., an equipment dealer, sells equipment on January 1, 20x7, to RR Company for P200,000. It agrees to repurchase this equipment on December 31, 20x8, for a price of P242,000. 1. Assuming an interest rate of 10 percent is imputed from the agreement, MM makes the following entry to record the financing on January 1, 20x7: Cash. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 ... Liability to RR Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 2. MM Inc. records interest on December 31, 20x8, as follows : Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liability to RR Company (P240,000 10%). . . . . . . . . . . . . . . . . . . . . .
24,000 x
24,000
3. MM Inc. records interest and retirement of its liability to RR Company on December 31, 20 x9,
as
follows: Interest 26,400 Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liability to RR Company [P240,000 + P24,000) x 10%]. . . . . . . . . . . . . . . . Liability to RR290,400 Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . Cash [P240,000 + P24,000 + P26,400] . . . . . . . . . . . . . . . . . . . . . . . . . . ..
26,400
290,400
Problem XXXII – Bill and Hold
GG Company determines when it has satisfied its performance obligation to transfer a product by evaluating when CC obtains control of that product. For CC to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria should be met: The reason for the bill-and-hold arrangement must be substantive. The product must be identified separately as belonging to CC. The product currently must be ready for physical transfer to CC Gianne cannot have the ability to use the product or to direct it to another customer. In this case, it appears that the above criteria were met, and therefore revenue recognition should be permitted at the time the contract is signed. GG makes the following entry to record the sale: Accounts 1,080,00 receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... GG
1,080,000
makes an entry to record the related cost of goods sold as follows. Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .672,000 ... Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....
Problem XXXIII - Warranties
672,000
JJ Company sold 2,400 units during 20x7 at a total price of P14,400,000, with a warranty guarantee that the product was free of any defects. The cost of each unit sold is P9,600,000. The term of the assurance warranty is two years, with an estimated cost of P72,000. In addition, Jack sold extended warranties related to 800 units for three years beyond the two-year period for P28,800. 1.
To record the revenue and liabilities related to the warranties: Cash (P14,400,000 +14,428,8 P28,800). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00 Warranty expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
.... Warranty liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... Unearned Warranty Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... .. 2.
72,000 28,800 14,000,00 0
To reduce inventory and recognize cost of goods sold: Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600,00 . ... 0 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....
9,600,000
Problem XXXIV – Non-refundable Upfront Fee Considerations
The following items should be taken into consideration by Physical Gym: 1. In this case, the membership fee arrangement may be viewed as a single performance obligation (similar services are provided in all periods). That is, Physical Gym is providing a discounted price in the second and third years for the same services, and this should be reflected in the revenue recognized in those periods. 2. Physical Gym determines the total transaction price to be P144,000 - the upfront fee of P14,400 and the 3 years of monthly fees of P129,600 (P3,600 x 36 months) - and allocates it over the 3 years. 3. In relation to No. 2, the Physical Gym would report revenue of P4,000 [(P144,000 / 36 months) each month for 3 years.
Problem XXXV - Contract Assets
On February 1, 20x7, Janine records the following entry: Contract Asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000 .... Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......
72,000
On February 1, JJ does not record an accounts receivable because it does not have an unconditional right to receive the P240,000 unless it also transfers Product Y to DD. When JJ transfers Product Y on March 1, 20x7, it makes the following entry: Accounts 240,000 receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract Asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....
72,000 168,000
Problem XXXVI - Contract Liabilities
There is no entry is required on March 1, 20x7 for the following reasons: Neither party has performed on the contract. Neither party has an unconditional right as of March 1, 20x7.
On receiving the cash on April 15, 20x7, Asser records the following entry: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 24,000 .... Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....
24,000
On satisfying the performance obligation on July 31, 20x7, Janine records the following entry to record the sale: Unearned Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 ... Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....
24,000
In addition, Asser records cost of goods sold as follows: Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 ... Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....
18,000
Costs to Fulfill a Contract Companies divide fulfillment costs (contract acquisition costs) into two categories: Those that give rise to an asset. Those that are expensed as incurred. Companies recognize an asset for the incremental costs if these costs are incurred to obtain a contract with a customer. In other words, incremental costs are those that a company would not incur if the contract had not been obtained, such as: a. Sales commissions; b. Direct labor, direct materials, and allocation of costs that relate directly to the contract (e.g., costs of contract management and supervision, insurance, and depreciation of tools and equipment); and; c. Costs that generate or enhance resources of the company that will be used in satisfying performance obligations in the future. Such costs include intangible design or engineering costs that will continue to give rise to benefits in the future. Other costs that are expensed as incurred include general and administrative expenses (unless those costs are explicitly chargeable to the customer under the contract) as well as costs of waste, labor, or other resources to fulfill the contract that were not reflected in the price of the contract. In summary, companies only capitalize costs that are direct, incremental, and recoverable (assuming that the contract period is more than one year).
Problem XXXVII - Contract Costs
The following items should be taken into consideration by Espi Outsoucing Company: The P48,000 selling commission costs related to obtaining the contract are recognized as an asset. The design services cost of P72,000 and the hardware for the platform of P240,000 are also capitalized. As the technology platform is independent of the contract, the pattern of amortization of this platform may not be related to the terms of the contract. The migration and testing costs of P156,000 are expensed as incurred; in general, these costs are not recoverable.
Multiple Choice Problems 1. b –
2. d 2,200
20x4: P500,000 x 30% = P 150,000 20x5: P600,000 x 40% = 240,000
P390,000
Realized Gross Profit on Installment Sales in 20x6: 20x4 sales: P10,000 x 22%P
12,500 10,575
20x5 sales: P50,000 x 25% 20x6 sales: P45,000 x P28,200 / (P28,200+P91,800) P 25,275
Realized Gross Profit on Sales in 20x5 10,500
P
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 25,000 Gross Profit % for 20x4 sales 3. a
P 22%
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 Less: Collections in 20x3 Collections in 20x4 Unrecovered Cost, 12/31/20x4
P384,000 140,000 240,000 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.
4. a
P0.
5. c 6. e, 20x6 – 0; 20x7 - 0
Unrecovered costs,1/1/20x4 Less: Collections 1/1//20x4 Add: Sales on account Total Less: 1/1/20x5 Collections in 20x4 Unrecovered costs,1/1/20x5 1/1//20x5 Add: Sales on account Total Less: 1/1/20x6 Collections in 20x5 Unrecovered costs,1/1/20x6 1/1//20x6 Add: Sales on account Total Less: 1/1/20x7 Collections in 20x6 Unrecovered costs,1/1/20x7 1/1//20x7 Add: Sales on account Total Less: 1/1/20x8 Collections in 20x7 Unrecovered costs,1/1/20x8
7. b 20x4: P150,000 – (P568,620 x 10%) = P93,138.
110,000 0 15,000 15,000 10,500 __4,500 105,500 10,500 30,000 40,500 25,500 15,000 90,500 25,500 60,000 85,500 40,500 45,000 45,500 40,500 24,000 64,500 70,000 ____-045,500
20x5: (P568,620 – P93,138) x 10% = P47,548. 8. a – refer to No. 3 for discussion. Cost, January 1, 20x4 Less: Collections including interest – 20x4 Unrecovered Cost, December 31, 20x4 9. c
P
60,000 32,170 P 27,830
(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.
10. b [(P3,600,000 .20) + (P3,600,000 .80 x 8/12] – P2,400,000 = P240,000. 11. b – refer to No. 3 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 12. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000. 13. 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. 14. c P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate) P480,000 – (P288,000 ×.4) = P364,800. 15. d – [P225,000 + (P120,000/40%)] 16. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000. 17. 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
18. c Sale: Installment receivables Inventory 3,600,000 Deferred gross profit 900,000 Payment: Cash Installment receivables 500,000 Deferred gross profit Realized gross profit 100,000 Balance Sheet: Installment receivables (4,500,000 – 500,000) 4,000,000 Deferred gross profit (900,000 – 100,000) 800,000 Installment receivables (net)
4,500,000
500,000 100,000
P
P 3,200,000
19. 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. 20. No requirement 21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000 22. a
Gross profit % = (P900,000 P450,000)/P900,000 = 50% 20x4: 50% x P300,000 = P150,000
23. c 20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50% 50% x P300,000 received in 2010 = P150,000 20x5 sales: Gross profit % = (P1,500,000 P900,000)/P1,500,000 = 40% 40% x P400,000 received in 2010 = P160,000 Total: P150,000 + P160,000 = P310,000 24. c 20x4 Sales: 300,000 150,000 150,000
Installment receivables = P900,000 – P300,000 (x4 collections) - P300,000 (x5 collections) = P
Deferred gross profit = P450,000 – P150,000 (x4 collections) - P150,000 (x5 collections) = Net installment receivable for 20x4 sales
=
P
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 25. a - Costs not yet recovered. 26. b Cost, 20x4 20x4 cost recovery Remaining cost, 12/31/x4 20x5 collection Gross profit – 20x5 27. d Cost 20x4 cost recovery 20x5 cost recovery Remaining cost
P 30,000 (20,000) P 10,000 15,000 P 5,000 P 30,000 ( 20,000) ( 10,000) 0
The entire P20,000 payment received in 20x6 is recognized as gross profit. 28. a Sale:
Installment receivables Inventory Deferred gross profit
Payment: Cash Installment receivables
55,000
20,000
Balance Sheet: Installment receivables P55,000 – 20,000 Deferred gross profit Installment receivables (net) 29. a
Sale:
Installment receivables Inventory Deferred gross profit 2008: Cash Installment receivables Cash Installment receivables 2009: Deferred gross profit Realized gross profit Balance Sheet: Installment receivables Deferred gross profit Installment receivables (net)
30,000 25,000 20,000 P 35,000 ( 25,000) P 10,000
55,000 30,000 25,000 20,000 15,000
20,000 15,000 5,000 5,000 P 20,000 ( 20,000) 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 revenue—4 months: P816,619 x 10% x 4/12.. Total income for 20x4 32. b Total Income for 20x5: Gross profit (realized) – already recognized in 20x4 0 Interest revenue – 8 months in Year 1 (P81,662* x 8/12) 4 months in Year 2 (P71,078* x 4/12) 78,134 Total Income for 20x5 78,134 *Schedule of Discount Amortization/Interest Income computation:
P179,119 _ 27,221 P206,340
P P 54,441 23,693 P
Year 1 2
(1) Face Amount of Note1 P1,125,000 937,500
(2) Unamortized Discount P308,3813 226,7194
(3) Net Amount (1) – (2) P 816,6192 710,781
(4) Discount Amortization 10% (3) 81,6625 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%) * no collections in 20x4. 34. a Total Income for 20x4: Gross profit earned in 20x4 (P0* x 22%) Interest revenue (refer to No. 52 Total income for 20x4.
P
0
0
P
27,221 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 – (70% x P8,400) = P2,520 (P3,000 – P300) – P2,520 = P180 gain. Note: The selling price to be used in determining gain or loss should be more profitable to the company which is P3,000 instead of P2,400 as repossessed. Theoretically, the gain is not recognized but since the requirement is gain or loss on repossession, therefore, P180 is the indicated 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
Net Market Values Less: Unrecovered Cost: IAR, unpaid balances x: Cost Ratio Gain (loss) 47. a
20x6 Sales
P 4,500 P10,000 50%
5,800 P (1,300)
P 3,500
P 5,000 60% P
(1) Gain or Loss on repossession: Estimated selling price 1,700 Less: Normal profit (37% x P1,700) Market value of repossessed merchandise Less: Unrecovered Cost: Unpaid balance – 20x3 Less: DGP – x3 (P2,200 x34%) 1,452 Loss on repossession
P( 800)
P 629 P 1,071 P 2,200
(2) Realized gross profit on installment sales: 20x2 Sales: (P24,020 – P 0) x 35% 20x3 Sales: (P344,460 – P67,440 – P2,200) x 34% 93,438.8 20x4 Sales: (P602,000 – P410,090) x 37% Realized gross profit on installment sales 48. c
3,000 500
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
748 P( 381) P
8,407.0
71,006.7 P 172,852.5
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 Less: Normal profit for 20x6 - year of repossession [(P3,010,000 – P1,896,300)/P3,010,000] x 8,500 Market Value of Repossessed Merchandise Less: Unrecovered Costs – 20x5 Defaulted balance* (P27,000 – P16,000) Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x P11,000 Loss on repossession Entry made: Inventory of RM* IAR-20x5 Correct Entry (Should be): Inventory of RM (at MV) DGP-20x5 Loss on repossession IAR-20x5 Correcting Entry: DGP-20x5 Loss on repossession Inventory of RM 50. c Installment Sales Less: Over-allowance: Trade-in allowance Less: MV of Trade-in Merchandise: Estimated Resale Price Less: Normal profit (25% x P1,400,000) Reconditioning costs 600,000 Adjusted Installment Sales 3,000,000 Less: Cost of I/S 2,500,000 Gross Profit Gross profit rate: P500,000/ P3,000,000 x: Collections –Trade-in merchandise (at MV) 900,000 RGP on I/S in 20x4 150,000
P 8,500 3,145 P 5,355 P 11,000 ___3,740
11,000
5,355 3,740 1,905
3,740
__7,260 P( 1,905)
11,000
11,000
1,905 5,645** P 3,600,000
P1,500,000 P 1,400,000 350,000 150,000
900,000 P
P
500,000 16 2/3% P P
51. c Trade-in allowance Less: MV of trade-in allowance: Estimated resale price after reconditioning costs Less: Reconditioning costs Normal profit (15% x P36,000) Over-allowance Installment sales Less: Over-allowance Adjusted Installment Sales Less: Cost of Installment Sales Gross profit Gross profit rate: P21,600/P108,000
P43,200 P36,000 1,800 5,400 28,800 P 14,400 P122,400 14,400 P108,000 86,400 P 21,600 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 53. c 54. d 55. d 56. a 57. d 58. a (P900,000 .65) + (P890,000 .25) + (P880,000 .05) + (P870,000 .05) = P895,000. 59. d (P55,000 P50,000) 7/12 = P2,917. 60. c P37,000 (P37,000 .03) = P35,890.
61. b P6,750,000 .85 = P5,737,500. 62. d P75,000 + P50,000 + P25,000 = P150,000 P75,000/ P150,000 P120,000 = P60,000 P50,000/ P150,000 P120,000 = P40,000 P25,000/ P150,000 P120,000 = P20,000. 63. c P75,000 + P50,000 + P25,000 = P150,000 (P25,000/ P150,000) P120,000 = P20,000. 64. a P160,000 + P25,000 = P185,000. P160,000/ P185,000 P180,000 = P155,676 P25,000/ P185,000 P180,000 = P24,324 65. b P3,000 .2 = P600; P3,000 P600 = P2,400 66. c P1,500/ P3,000 = 5; P200 .5 = P100. 67. c 68. a 69. b - P10,000 + P275,000 + P85,000 + P15,000 + P25,000 = P410,000.
Theories 1.
False
6.
2.
True
7. False
3.
False
8. True
4.
True
9. False
5.
True
10 True .
30 . 31 . 32 . 33 . 34 .
c
35 . 36 . 37 . 38 . 39 .
b
40.
d
60. 61. 62. 63. 64.
c b b c d
65. 66. 67. 68. 69.
b b b c
True
11.
True
16.
True
21 .
True
26.
True
12 . 13 . 14 . 15 .
False
17 . 18 . 19 . 20 .
True
22 . 23 . 24 . 25 .
True
27.
True
True
28.
False
True
29.
True
a
45.
b
d
55.
d
41.
e
46.
c
c
56.
b
d
42.
b
47.
c
b
57.
d
e
43.
b
48.
c
a
58.
c
c
44.
d
49.
d
50 . 51 . 52 . 53 . 54 .
b
59.
c
b b d d c
70. 71. 72. 73. 74.
d c b d a
75. 76. 77. 78. 79.
c b b d a
80. 81. 82.
b c a
False True True
False False True
True
