Chapter 7 - INSTALLMENT SALES Multiple Choice Problems 25. a - Costs not yet yet recovered. 26. c Cost, 20x4 20x4 cost recovery Remaining cost, 12/31/x4 20x5 collection Gross profit – profit – 20x5 20x5
P 30,000 (20,000) P 10,000 15,000 P 5,000
27. d Cost 20x4 cost recovery 20x5 cost recovery Remaining cost
P 30,000 ( 20,000) ( 10,000) 0
The entire P20,000 payment received in 20x6 is recognized as gross profit. 28. d Sale:
Installment receivables Inventory Deferred gross profit
Payment: Cash Installment receivables
55,000 30,000 25,000 20,000 20,000
Balance Sheet: Installment receivables P55,000 – P55,000 – 20,000 20,000 Deferred gross profit Installment receivables (net)
P 35,000 ( 25,000) P 10,000
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)
55,000 30,000 25,000 20,000 20,000 15,000 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, assured, the accrual basis should be applied. Therefore, full gross profit is profit is recognized in the year of sale. Gross profit on sale:
Sales (P187,500 x 4.3553) Cost of sales Gross profit (realized)
P816,619 637,500 P179,119
31. c Total Income for 20x4: Gross profit (realized) – (realized) – No. No. 51 Interest revenue — 4 months: P816,619 x 10% x 4/12.. Total income for 20x4
P179,119 _ 27,221 P206,340
32. b Total Income for 20x5: Gross profit (realized) – (realized) – already already recognized in 20x4 Interest revenue – revenue – 8 months in Year 1 (P81,662* x 8/12) 4 months in Year 2 (P71,078* x 4/12) Total Income for 20x5
P P 54,441 23,693
0
78,134 P 78,134
*Schedule of Discount Amortization/Interest Income computation:
Year 1 2
(1) Face Amount of Note1 P1,125,000 937,500
(2) Unamortized Discount P308,3813 226,7194
(3) Net Amount (1) – (1) – (2) (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 – P1,125,000 – P816,619 P816,619 4 (2) – (2) – (4) (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. applied . Also, if the there is high degree of uncertainty as uncertainty as to collectibility, collectibility, the cost recovery method may 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. 35. d Collections in 20x5 (August 31, 20x5) Less: Interest revenue/income from September 1, 20x4 to
P
0
P
0 27,221 P 27,221
P 187,500
August 31, 20x5 (refer to schedule of amortization in No. 53) Collection as to principal x: Gross Profit % (refer to No. 54) Gross profit realized in 20x5 Add: Interest revenue/income for 20x5 (refer to No. 53) Total Income for 20x5
81,662 P 105,838 22% P 23,284 78,134 P 101,418
36. d (P2,000,000 – (P2,000,000 – P1,500,000) P1,500,000) ÷ P2,000,000 = 25% 37. a
(P800,000 x .25) – .25) – P90,000 P90,000 = P110,000,
38. d
P700,000 x .25 .25 = P175,000; P500,000 x .25 .25 = P125,000.
39. a
(P3,000,000 – (P3,000,000 – P2,100,000) P2,100,000) ÷ P3,000,000 = 30%.
40. d
(P1,200,000 .30) – .30) – P120,000 P120,000 = P240,000.
41. a
P1,050,000 .30 = P315,000 P900,000 – P900,000 – [(P1,200,000 [(P1,200,000 + P1,050,000) .30] = P225,000.
42. b
P24,000 – P24,000 – P7,200 P7,200 = P16,800 P16,800 – P16,800 – P13,500 P13,500 = P3,300 loss.
43. d
[P5,600 x (1 – (1 – .40)] – .40)] – (P2,100 – (P2,100 – P140) P140) = P1,400.
44. d
P8,400 – P8,400 – P5,880 P5,880 = P2,520 (P3,000 – (P3,000 – P300) – P300) – P2,520 P2,520 = P180 gain.
45. d 20x4: P24,000 – P24,000 – P0 = P24,000 collections x 39%P 20x5: P300,000 – P300,000 – P60,000 – P60,000 – P10,000 P10,000 defaults = P230,000 x 42% 20x6: P480,000 – P480,000 – P320,000 – P320,000 – P5,000 P5,000 defaults = P155,000 x 40% Realized gross profit on installment sales in 20x6
9,360 96,600 62,000 P167,960
46. b Market Values Less: Unrecovered Cost: IAR, unpaid balances x: Cost Ratio Gain (loss)
20x5 Sales P 4,500 P10,000 50%
5,800 P (1,300)
20x6 Sales P 3,500 P 5,000 60% P
3,000 500
Net
P( 800)
47. a (1) Gain or Loss on repossession: Estimated selling price Less: Normal profit (37% x P1,700) Market value of repossessed merchandise Less: Unrecovered Cost: Unpaid balance – balance – 20x3 20x3 Less: DGP – DGP – x3 x3 (P2,200 x34%) Loss on repossession
P 1,700 629 P 1,071 P 2,200 748
1,452 P( 381)
(2) Realized gross profit on installment sales: 20x2 Sales: (P24,020 – (P24,020 – P P 0) x 35% 20x3 Sales: (P344,460 – (P344,460 – P67,440 – P67,440 – P2,200) P2,200) x 34% 20x4 Sales: (P602,000 – (P602,000 – P410,090) P410,090) x 37% Realized gross profit on installment sales
P
8,407.0 93,438.8 71,006.7 P 172,852.5
48. c Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %) 20x2 Sales: P 0 20x3 Sales: (P67,440 x 34%. 20x4 Sales: (P410,090 x 37%) 49. d* Resale Value Less: Normal profit for 20x6 - year of repossession [(P3,010,000 – [(P3,010,000 – P1,896,300)/P3,010,000] P1,896,300)/P3,010,000] x 8,500 Market Value of Repossessed Merchandise Less: Unrecovered Costs – Costs – 20x5 20x5 Defaulted balance* (P27,000 – (P27,000 – P16,000) 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
22,929.6 151,733.3 P 174,662.9 P 8,500 3,145 P 5,355
P 11,000 ___3,740
__7,260 P( 1,905)
11,000 11,000
Correct Entry (Should be): Inventory of RM (at MV) DGP-20x5 Loss on repossession IAR-20x5
5,355 3,740 1,905
Correcting Entry: DGP-20x5 Loss on repossession Inventory of RM
3,740 1,905
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 Adjusted Installment Sales Less: Cost of I/S Gross Profit Gross profit rate: P500,000/ P3,000,000 x: Collections – Collections – Trade-in Trade-in merchandise (at MV) RGP on I/S in 20x4
11,000
5,645**
P 3,600,000 P1,500,000 P 1,400,000 350,000 150,000
900,000
600,000 P 3,000,000 2,500,000 P 500,000 16 2/3% P 900,000 P 150,000
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
P43,200 P36,000 1,800 5,400
Installment sales Less: Over-allowance Adjusted Installment Sales Less: Cost of Installment Sales Gross profit Gross profit rate: P21,600/P108,000 Realized gross profit: Down payment Trade-in (at market value) Installment collections: (P108,000 – (P108,000 – P28,800 – P28,800 – P7,200) P7,200) / 10 mos. X 3 mos. Total collections in 2008 x: Gross profit rate Realized gross profit
28,800 P 14,400
P122,400 14,400 P108,000 86,400 P 21,600 20%
P
7,200 28,800
21,600 P 57,600 20% P 11,520
52. d (Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is recognized in the year of sale, because collection of the receivable is reasonably assured.) Finley Company Computation of Income Before Income Taxes On Installment Sale Contract For the Year Ended December 31, 20x3 Sales P4,584,000 Cost of Sales 3,825,000 Gross Profit 759,000 Interest Revenue (Schedule I) 328,320 Income before Income Taxes P1,087,320 Schedule I Computation of Interest Revenue on Installment Sale Contract Cash selling price (sales) P4,584,000 Payment made on January 1, 20x3 936,000 Balance outstanding at 12/31/x3 3,648,000 Interest rate 9% Interest Revenue P 328,320
Quiz - VII 1. P920,000
20x4: P1,200,000 x 30% = P 360,000 20x5: P1,400,000 x 40% = 560,000
P920,000
2. P190,000 (P300,000 ÷ P750,000) x P250,000 = P100,000 [(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000 3.
P1,600 – assume the use of installment sales method. It should be noted that if the collectability is highly uncertain or extremely uncertain, the use of cost recovery method is preferable.
4. Zero/Nil When the cost recovery method is used, gross pro fit is recognized only after all costs have been recovered. 20x5 P45,000 x 63% = P28,350 Cost of sale P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5. Costs still to be recovered. 5. P19,250 20x6 Relating to 20x5 sales: P19,000 - P4,350 = P14,650 Gross profit recognized Relating to 20x6 sales: P60,000 x 59% = P35,400 Cost of sale P40,000 - P35,400 = 4,600 Gross profit recognized P19,250 Recognized in 20x6 6. P21,000 20x7 Relating to 20x5 sales: Since all costs have been recovered, all cash collected is recognized as gross profit ...... P 2,000 Relating to 20x6 sales: Since all costs have been recovered, all cash collected is recognized as gross profit ...... 17,000 Relating to 20x7 sales: P85,000 x 60% = P51,000 Cost of sale P53,000 - P51,000 = .......... 2,000 Gross profit recognized P21,000 Recognized in 20x7 7. P320,000 [(P1,000,000 – [(P1,000,000 – P200,000) P200,000) x (P1,000,000 – (P1,000,000 – P600,000)/P1,000,000 P600,000)/P1,000,000 = P320,000 8.
9.
P390,000 P1,800,000 – P1,800,000 – P1,080,000 P1,080,000 = P720,000 (40% gross profit rate) P720,000 – P720,000 – (P825,000 (P825,000 x 40%) = P390,000. P 128,000 Installment Accounts Receivable, end of 20x4 x: Gross profit rate (66 2/3 / 166 2/3)
P 320,000 _____40%
Deferred Gross Profit, end of 20x4
P 128,000
10. P25,168, determined as follows: Gross profit percentages: 20x3: P136,000/P160,000 = 85%; 100% x 85% = 15% 20x4: P158,240/P184,000 = 86%; 100% x 86% = 14% To deferred gross profit: 20x3: P160,000 x P136,000 = 20x4: P184,000 x P158,240 =
Gross profit realized: 0.15 x P40,000 = 0.15 x P89,600 = 0.14 x P36,800 =
P24,000 25,760 P49,760
P 6,000 13,440 5,152 P24,592
Balance of Gross Profit Deferred: P49,760 - P24,592 = P25,168 11. P 0 – all all profit recognized in 20x5 12. P240 – P240 – (P1,200/P2,000) (P1,200/P2,000) x P400 13. P100 - (100% of costs were fully recovered prior to 20x7 20x7 14. P10 million, the amount of sale 15 . P450 – P450 – [P1,000 – [P1,000 – P250 P250 = P750 – P750 – (P750 (P750 x 400/1,000)] = P450 16. P50 gain Repossessed merchandise……………………………………… 500 Deferred gross profit……………………………………………… profit……………………………………………… 300 300 Installment Accounts receivable…………………….. receivable…………………….. 750 Gain on repossession…………………………………… 50 17. 0 Unrecovered costs,1/1/20x4 Less: Collections Unrecovered costs,1/1/20x5 Less: Collections Profit – Profit – 20x5 20x5 Profit – Profit – 20x5 20x5
100 70 30 40 10 30
18. P10 – P10 – refer refer to No. 17 19. P30 – P30 – refer refer to No. 17 20. Zero Unrecovered costs – costs – 20x4 20x4 Less: Collections – Collections – 20x4 20x4 Unrecovered costs, 12/31/20x4 Additional costs – costs – 20x5 20x5 Total costs Less: Collections – Collections – 20x5 20x5 Unrecovered costs, 12/31/20x5 Additional costs – costs – 20x6 20x6
120,000 ______0 120,000 _20,000 140,000 80,000 60,000 20,000
Total costs Less: Collections – Collections – 20x6 20x6 Unrecovered costs, 12/31/20x6 Additional costs – costs – 20x7 20x7 Total costs Less: Collections – Collections – 20x7 20x7 Profit – Profit – 20x7 20x7
80,000 40,000 40,000 10,000 50,000 100,000 50,000
21. P50,000 profit – profit – refer refer to No. 20 22. P105,000 = P68,250 / (100% - 35%) 23. P31,000 = P50,000 x (100% - 38%) 24. P43,700 Unrecovered costs – costs – Cost Cost of installment sales for 20x5 installment sales Less: Collections in 20x5 for 20x5 installment sales Unrecovered costs, 12/31/20x5 Less: Collections in 20x6 for 20x5 installment sales (balancing figure) Realized GP on I/S in 20x6 for 20x5 sales
56,050 _22,800 33,250 43,700 _ 43,700 *10,450
*
Realized GP on I/S in 20x6 Less: Realized GP on I/S in 20x6 f or 20x5 I/S since cost of P31,000 (No. 23) is already recovered in 20x5 equivalent to collection Realized GP on I/S in 20x6 for 20x5 installment sales
16,050 __5,600 *10,450
25. Zero – Zero – costs costs is not yet fully recovered, the profit should be recognized Unrecovered costs – costs – Cost Cost of installment sales for 20x4 (No. 23) Less: Collections in 20x4 for 20x4 installment sales Unrecovered costs, 12/31/20x4
31,000 _22,800 8,200
26. P41,000 Unrecovered costs – costs – Cost Cost of installment sales for 20x4 installment sales Less: Collections in 20x4 for 20x4 installment sales Unrecovered costs, 12/31/20x4 Less: Collections in 20x5 for 20x4 installment sales Realized GP on I/S in 20x5 for 20x4 installment sales Realized GP on I/S in 20x5 for 20x5 i nstallment sales: Unrecovered costs – costs – Cost Cost of installment installment sales for 20x5 installment installment Sales Less: Collections in 20x5 for 20x5 installment sales Unrecovered costs, 12/31/20x4 Realized GP on I/S in 20x5
27. P 45,000 Installment receivable = P200,000 Deferred gross profit = P80,000 (P200,000 x 40%) Fair value = P75,000 Repossessed inventory P 75,000 Deferred gross profit P 80,000 Loss on repossession (plug) P 45,000 Installment receivable 28. Zero P450,000 cost 29. P300,000
P 200,000
P300,000 collections = P150,000 unrecovered costs
31,000 _25,600 5,400 46,400 41,000
56,050 22,800 33,250
____-041,000
20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost recovered in 20x4, the other P150,000 of cost recovered in 20x5, so P150,000 of gross profit recognized in 20x5, leaving P300,000 recognized in 20x6. 20x5 sales: Cost = P900,000; P500,000 collected collected in 20x5, P400,000 collected in 20x6. P500,000 of cost recovered in 20x5, the other P400,000 of cost recovered in 20x5, so P0 of gross profit recognized in 20x6. Total: P300,000 + P0 = P300,000 30. d 20x4 Sales: Installment receivables = P900,000 P900,000 – – P300,000 P300,000 (x4 collections) - P300,000 (x5 collections) = Deferred gross profit = P450,000 – P450,000 – P0 P0 (all x4 collections to cost recovery - P150,000 (P150,000 of x5 collections to cost recovery) = Net installment receivable for 20x4 sales = 20x5 Sales: Installment receivables = P1,500,000 P1,500,000 – – P500,000 P500,000 (x5 collections)= Deferred gross profit = P600,000 – P600,000 – P0 P0 (all x5 collections to cost recovery) = Net installment receivable for 20x5 = Total = 31. 24%. Determined from the repossession entry: Deferred gross profit Installment accounts receivable 32. 35% Installment sales Cost of sales Gross profit Gross profit Installment sales
P 300,000
300,000 P 0 P1,000,000 P 600,000 P 400,000 P 400,000
P2,400 ———— = = 24% P10,000
P120,000 78,000 P 42,000 P42,000 ———— - = 35% gross profit rate P120,000
33. a. 20x4 Deferred gross profit balance Gross profit rate Beginning accounts receivable Beginning accounts receivable Ending accounts receivable Cash collected
P 12,000 ÷ 25% P 48,000 P 48,000 (20,000) P 28,000
b. 20x5 Deferred gross profit balance Gross profit rate Beginning accounts receivable* Beginning accounts receivable* Ending accounts receivable* Cash collected
P 26,400 ÷ 24% P110,000 P110,000 (50,000) P 60,000
c. 20x6 Installment sales — 20x6 20x6 Accounts receivable — 20x6 20x6 Cash collected
P120,000 (90,000) P 30,000
34. P31,900 Total realized gross profit in 20x6 From 20x4 P28,000 × 25% = 20x5 P60,000 × 24% = 20x6 P30,000 × 35% =
P 7,000 14,400 10,500 P31,900 *Excluding accounts receivable for repossessed merchandise.
35. 20x4 , P33,750; 20x5), P95,250 Gross profit realized in 20x4 [(P300,000 P165,000)/P300,000] x P75,000 = Installment sales = Gross profit realized in 20x5 (: [(P300,000 P165,000)/P300,000] x P105,000 = From 20x4 sales = From 20x5 sales =
[(P450,000 P270,000)/P450,000] x P120,000 =
P33,750
P47,250 48,000 P95,250
36. 20x4, P148,750; 20x5 =, P275,250
Sales Cost of sales Gross profit Gross profit realized on installment sales Total gross profit
37. 20x4 =, P148,750; 20x5 =, P275,250 . Installment accounts receivable Less: Deferred gross profit Net of deferred gross profit
20x4 P450,000 335,000 P115,000 33,750 P148,750
20x5 P450,000 270,000 P180,000 95,250 P275,250
20x4 P225,000 101,250 P123,750
20x5 P450,000 186,000 P264,000
21.
True True True True True
26. 27. 28. 29.
True True False True
d c b
55. 56. 57. 58. 59.
d b d
Theories 1.
2. 3. 4. 5. 30.
31. 32. 33. 34.
False True False True True c b b b c
6.
7. 8. 9. 10.
True False True False True
12. 13. 14. 15.
35.
b
40.
36. 37. 38. 39.
d
41. 42. 43. 44.
d e c
11.
True False False True True a e b b
d
16.
17. 18. 19. 20. 45.
46. 47. 48. 49.
True True False False True
b c c c
d
22. 23. 24. 25. 50.
51. 52. 53. a 54. b
c
c
60.
61. 62. 63. 64.
C B b c
d
65.
b b d
66. 67. 68. d 69. c
