RIFT VALLEY UNIVERSITY-BISHOFTU CAMPUS ASSIGNMENT ON ADVANCED FINANCIAL ACCOUNTING FOR ALL 3RD YEARSSTUDENTS DEADLINE -05/06/2020 Instruction: Choose the correct answer for each of the following questions and write the letter of the correct choice on the space provided. 1. Dalol Company, which began operations on January 2, Year 4, appropriately uses the installment method of accounting. The following information is available for the year ended December 31, Year 4. Gross profit on sales……………………………….……….40% Deferred gross profit, Dec. 31, Year 4………………….Br. 240,000 Cash collected, including down payments…………………450,000 What is the total amount of Dalol’s installment sales for the year ended December 31, Year 4? A. Br. 600,000 C. Br. 850,000 B. Br. 690,000 D. Br. 1,050,000 E. Some other amount 2. For a retailing enterprise that appropriately uses the installment method of accounting for installment sales of merchandise, doubtful installment receivables expense is recognized when: A. A customer defaults on an installment contract. B. An estimate of doubtful installment receivables is made at the end of an accounting period. C. There are uncollected deferred gross profits and carrying charges on an installment receivable. D. Reconditioning costs for repossessed merchandise are incurred. 3. An overallowance on a trade-in on an installment sale is debited to: A. Cost of installment sales. B. Overallowances on trade-ins expense. C. Inventories (trade-ins). D. None of the foregoing ledger accounts. 4. Deferred gross profit on installment sales is generally treated as a(n) A. Deduction from installment accounts receivable. B. Deduction from installment sales. C. Unearned revenue and classified as a current liability. D. Deduction from gross profit on sales. 5. The installment-sales method of recognizing profit for accounting purposes is acceptable if A. Collections in the year of sale do not exceed 30% of the total sales price. B. An unrealized profit account is credited. C. Collection of the sales price is not reasonably assured. D. The method is consistently used for all sales of similar merchandise. 6. The method most commonly used to report defaults and repossessions is A. Provide no basis for the repossessed asset thereby recognizing a loss. B. Record the repossessed merchandise at fair value, recording a gain or loss if appropriate. C. Record the repossessed merchandise at book value, recording no gain or loss. D. None of these. 7. Under the installment-sales method, A. Revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product. B. Gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale. C. Gross profit is not recognized until the amount of cash received exceeds the cost of the item sold. D. Revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received. 8. The realization of income on installment sales transactions involves A. Recognition of the difference between the cash collected on installment sales and the cash expenses incurred. B. Deferring the net income related to installment sales and recognizing the income as cash is collected. C. Deferring gross profit while recognizing operating or financial expenses in the period incurred. D. Deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected. 9. A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported? A. At the time of completion of the equipment (completion of production method) B. At the date of delivery (sales method) C. The installment-sales method D. The cost–recovery method 10. Under the cost-recovery method of revenue recognition, A. Income is recognized on a proportionate basis as the cash is received on the sale of the product. B. Income is recognized when the cash received from the sale of the product is greater than the cost of the product. C. Income is recognized immediately. D. None of these. 11. Oliver Co. uses the installment-sales method. When an account had a balance of $8,400, no further collections could be made and the dining room set was repossessed. At that time, it was estimated that the dining room set could be sold for Br2,400 as repossessed, or for Br3,000 if the company spent Br300 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a: A. Br5,880 loss. B. Br6,000 loss. C. Br600 gain. D.Br180 gain. 12. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of water, Winser does not recognize any revenue from water sales until the sales exceed the costs of exploration, the basis of revenue recognition being employed is the A. production basis. C. cash (or collection) basis. B. sales (or accrual) basis. D. cost recovery basis. 13. Seeman Furniture uses the installment-sales method. No further collections could be made on an account with a balance of $18,000. It was estimated that the repossessed furniture could be sold as is for $5,400, or for $6,300 if $300 were spent reconditioning it. The gross profit rate on the original sale was 40%. The loss on repossession was A. $4,800. B. $4,500. C. $12,000. D.$12,600. 14. Wagner Company sold some machinery to Granger Company on January 1, 2007. The cash selling price would have been $568,620. Granger entered into an installment sales contract which required annual payments of $150,000, including interest at 10%, over five years. The first payment was due on December 31, 2007. What amount of interest income should be included in Wagner's 2008 income statement (the second year of the contract)? A. $15,000 B. $47,548 C. $30,000 D. $41,862 15. Singer Company sells plasma-screen televisions on an installment basis and appropriately uses the installment-sales method of accounting. A customer with an account balance of $5,600 refuses to make any more payments and the merchandise is repossessed. The gross profit rate on the original sale is 40%. Singer estimates that the television can be sold as is for $1,750, or for $2,100 if $140 is spent to refurbish it. The loss on repossession is A. $3,850. B. $2,240. C. $1,610. D. $1,400. Use the following information for questions 16-17. During 2008, Steele Corporation sold merchandise costing $1,500,000 on an installment basis for $2,000,000. The cash receipts related to these sales were collected as follows: 2008, $800,000; 2009, $700,000; 2010, $500,000. 16. What is the rate of gross profit on the installment sales made by Steele Corporation during 2008? A. 75% B. 60% C. 40% D. 25% 17. If expenses, other than the cost of the merchandise sold, related to the 2008 installment sales amounted to $90,000, by what amount would Steele’s net income for 2008 increase as a result of installment sales? A. $110,000 B. $177,500 C. $200,000 D. $710,000 18. On January 1, 2007, Dole Co. sold land that cost $210,000 for $280,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of $112,595 starting on December 31, 2007. Because collection of the note is very uncertain, Dole will use the cost-recovery method. How much revenue from this sale should Dole recognize in 2007? A. $0 B. $21,000 C. $28,000 D. $70,000 Part II: Workout Items Exercise 1 The Ethelco Appliance Company recorded installment sales of Br600,000 in 2002. A record was kept of the different articles sold on the installment basis. At the end of the year the total cost of goods sold on the installment basis was calculated at Br405,000. The total collections on installment sales for the year were Br360,000. The estimated value of the merchandise repossessed was Br24,000, and balances owed on the repossessions were Br40,000. Perpetual inventory accounts were maintained. Instructions Prepare the journal entries required for the data above, including the entries: A. B. C. D. To set up the total realizable gross profit at the end of the year, To record the cash collections To record the repossessions, and To record the realized gross profit Exercise 2 The following partial information is available for the Cupp Company: Installment method sales Installment method cost of goods sold Gross profit percentage Cash receipts on installment method sales 2007 sales 2008 sales Realized gross profit on installment method sales 2007 sales 2008 sales $120,000 (A) (B) (C) $63,000 30% 25,000 (D) (E) 5,000 7,000 9,000 Required Compute the unknown amounts. (Note: It is not necessary to compute the amounts in the numerical sequence.) Exercise 3 The following information is available for the Butler Company in 2007, its first year of operations: Total credit sales (including installment method sales) $205,000 Total cost of goods sold (including installment method cost of goods sold) 130,000 Installment method sales 65,000 Installment method cost of goods sold 39,000 Cash receipts on credit sales (including installment method sales of $20,000) 120,000 Required 1. Prepare the journal entries for 2007. 2. If the company collected $45,000 in 2008 on its 2007 installment method sales, prepare the appropriate journal entries in 2008.
