```lOMoARcPSD|13224720
Advance Accounting Installment Sales Manual Millan
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Chapter 10
Installment Sales Method
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. TRUE
3. FALSE (1 x 8/10 = 0.80)
4. TRUE (5 x .80 = 4)
5. TRUE
PROBLEM 2: MULTIPLE CHOICE – THEORY
1. D
2. D
3. D
4. B
5. A
PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Inst. receivable 20x1
1/1/x
1
Sale
s
1,000,0
00
400,00
0
600,000
Collection
s
12/31/x1
RGP = 400,000 x 20%(a) = 80,000
(a)
Installment sales
1,000,000
Cost of sales
(800,000)
Gross profit
Gross profit rate based on sales
(200K / 1M)
200,000
20%
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Installment accounts receivable - Dec. 31,
20x1
Multiply by: Gross profit rate based on
sales
Deferred gross profit – Dec. 31, 20x1
600,000
20%
120,000
OR
Deferred gross profit - unadjusted (1M –
800K)
200,000
Realized gross profit - 20x1
(80,000)
Deferred gross profit – Dec. 31, 20x1
120,000
2. C
Solution:
Inst. receivable 20x1
beg.
-
Sales
1,000,0
00
(a)
400,000
600,00
0
Collection
s
end.
Deferred gross profit (before year-end
Divide by: Gross profit rate based on
sales
Installment sales
(a)
3. C
Solution:
Inst.
receivable
200,000
20%
1,000,000
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beg
.
Sal
es
1,000,0
00
200,00
0
800,000
Collection
s
end.(a)
(200,000 DGP, end. &divide; 25% GPR) = 800,000 receivable,
end.
(a)
4. D
Solution:
1,000,0
00
(750,00
0)
Sale
Cost of sale
DGP, end.
Realized gross
profit
250,000
(200,00
0)
50,000
5. D
Solution:
1,000,0
00
(750,00
0)
Sale
Cost of sale
Realized gross
profit
DGP, end.
6. A
Solution:
Sale
250,000
(220,00
0)
30,000
1,000,0
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00
(750,00
0)
Cost of sale
Realized gross
profit
DGP, end.
250,000
(180,00
0)
70,000
 70,000 DGP, end. &divide; 25% GPR = 280,000 ending
receivable
7. B 160,000 RGP &divide; 25% GPR = 640,000 collections
8. A 200K DGP, beg. – 60K DGP, end. = 140K realized &divide;
25% = 560,000
9. B
Solution:
20x1 installment accounts
Multiply by: 20x1 GPR based on sales
DGP from 20x1 sales (adjusted balance)
16,250
30%*/130%
3,750
20x2 installment accounts
Multiply by: 20x2 GPR based on sales
DGP from 20x2 sales (adjusted balance)
90,000
33⅓
%*/133⅓%
22,500
* Note: The given GPRs are based on cost (not based on
sales). Thus, they are translated to ‘based on sales’ as
shown above.
DGP from 20x1 sales (adjusted balance)
DGP from 20x2 sales (adjusted balance)
Realized gross profit in 20x2
Expenses relating to installment sales in
20x2
20x2 profit from installment sales
38,0
00
(3,750)
(22,500)
11,750
(1,500)
10,250
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10.
A
Solution:
Installment sales
Cost of sales
Gross profit
Gross profit rate based on
sales
20x1
300,00
0
225,00
0
20x2
375,00
0
285,00
0
75,000
90,000
20x3
360,00
0
252,00
0
108,00
0
25%
24%
30%
20x1 Deferred gross profit, Dec. 31, 20x3
Divide by: Gross profit rate
20x1 Installment receivable, Dec. 31,
20x3
25%
20x2 Deferred gross profit, Dec. 31, 20x3
Divide by: Gross profit rate
20x2 Installment receivable, Dec. 31,
20x3
9,000
24%
-
37,500
20x3 Deferred gross profit, Dec. 31, 20x3
Divide by: Gross profit rate
20x3 Installment receivable, Dec. 31,
20x3
240,000
Total installment receivable, Dec. 31,
20x3
277,500
11.
C
Solution:
20x1 Deferred gross profit, Dec. 31, 20x2
Divide by: Gross profit rate
20x1 Installment accounts receivable, Dec.
31, 20x2
20x1 Installment accounts receivable, Dec.
31, 20x3*
Collection in 20x3 from 20x1 sales
72,000
30%
15,000
25%
60,000
60,000
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20x2 Deferred gross profit, Dec. 31, 20x2
Divide by: Gross profit rate
20x2 Installment accounts receivable, Dec.
31, 20x2
20x2 Installment accounts receivable, Dec.
31, 20x3*
Collection in 20x3 from 20x2 sales
54,000
24%
225,000
37,500
187,500
Installment sales - 20x3
20x3 Installment accounts receivable, Dec.
31, 20x3*
Collection in 20x3 from 20x3 sales
360,000
240,000
120,000
Total collections in 20x3
* See previous solution
367,500
12.
D
Solution:
Collection in 20x3 from 20x1 sales
Multiply by: Gross profit rate - 20x1 sales
Realized gross profit in 20x3 from 20x1
sales
60,000
Collection in 20x3 from 20x2 sales
Multiply by: Gross profit rate - 20x2 sales
Realized gross profit in 20x3 from 20x2
sales
187,500
Collection in 20x3 from 20x3 sales
Multiply by: Gross profit rate - 20x3 sales
Realized gross profit in 20x3 from 20x3
sales
120,000
25%
15,000
24%
45,000
Total realized gross profit in 20x3
OR
DGP from 20x1 sales, beg.
DGP from 20x1 sales, end.
30%
36,
000
96
,000
15,000
-
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Realized gross profit in 20x3 from 20x1 sales
15,000
DGP from 20x2 sales, beg.
54,000
(9,000
)
45,000
DGP from 20x2 sales, end.
Realized gross profit in 20x3 from 20x2 sales
DGP from 20x3 sales, unadjusted (360,000 252,000)
DGP from 20x3 sales, end.
Realized gross profit in 20x3 from 20x3 sales
Total realized gross profit in 20x3
13.
108,00
0
(72,00
0)
36,000
96,00
0
C
Date
9/30/x1
9/30/x1
10/31/x1
11/30/x1
12/31/x1
Totals
Collecti
on
Interes
t
Amortizat
ion
4,800
4,800
4,800
4,800
19,200
432
388
344
1,165
4,800
4,368
4,412
4,456
18,036
Princip
al
48,000
43,200
38,832
34,420
29,964
18,036 x 37.5%(1) = 6,764
(1)
(48,000 – 30,000) &divide; 48,000 = 37.50%
14.
A
Inventory
16,800
Deferred gross profit (29,964 x 37.5%)
11,237
Loss on repossession
1,927
Receivable
29,964
15.
D
Solution:
Inst. receivable 20x1
1/1/x
3
135,000
22,500
Writeoff
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52,500
60,000
Collection
s
12/31/x3
Inst. receivable 20x2
1/1/x
3
300,000
105,000
195,000
Collection
s
12/31/x3
Inst. receivable 20x3
Sale
s
495,000
105,000
390,000
Collections in 20x3
from:
- 20x1 sales (52,500 x
30%)
- 20x2 sales (105,000 x
40%)
- 20x2 sales (105,000 x
35%)
Total realized gross
profit
Collection
s
12/31/x3
15,
750
42,00
0
36,750
94,5
00
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16.
C
Solution:
20x Inventory
3
Deferred gross profit (22.5K x
30%)
Loss on repossession
(squeeze)
Installment account
receivable
17.
C
Solution:
e
Installment account receivable
(squeeze)
Installment sale
Under allowance
15,000
6,750
750
22,500
12,00
0
24,00
0
32,000
4,000
(8K TV &lt;
12K FV)
18.
C
Solution:
Fair value of old merchandise traded-in
Collections
Total
Multiply by: Gross profit rate (a)
Realized gross profit in year of sale
(a)
Sale price
Cost of sale
(16K &divide; 36K)
32,000
4,000
36,000
(20,00
0)
16,000
44.44
%
12,000
12,000
24,000
44.44%
10,667
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19.
D
Solution:
Cash down payment
600,000
1,140,
000
1,740,
000
(4,000,
000)
Collection from installment payment (600K
+ 540K)
Total collections
Cost of sale
Excess of collection over cost
-
Since the total collections do not exceed yet the
cost of the inventory sold, Sound Co. does not
recognize any income yet.
20.
C
Solution:
Total collections from 20x1 sales (14,000 +
6,000)
20,0
00
(16,
000)
4,0
00
24,0
00
(18,
000)
6,0
00
Cost of 20x1 sales
Excess collection in 20x2
Total collections from 20x2 sales
Cost of 20x2 sales
Excess collection in 20x2
Gross profit recognized in 20x2
10,000
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PROBLEM 4: FOR CLASSROOM DISCUSSION
1. Solutions:
Requirement (a):
20x1
Installment sales
1,000,000
Cost of sales
700,000
Gross profit
300,000
GPR based on sales
30%
20x2
1,300,000
845,000
455,000
35%
20x1
Collections in 20x1 from:
- 20x1 sales (500K x 30%)
20x2
150,000
Collections in 20x2 from:
- 20x1 sales (300K x 30%)
- 20x2 sales (650K x 35%)
Total realized gross profit
90,000
227,500
150,000
317,500
Requirement (b):
20x1
20x2
Inst. Receivable on 12/31/x1 from:
- 20x1 sales (1M - 500K)
500,000
Inst. receivable on 12/31/x2 from:
- 20x1 sales (1M - 500K - 300K)
200,000
- 20x2 sales (1.3M - 650K)
650,000
Total installment receivable
500,000
850,000
20x1
20x2
Requirement (c):
DGP on 12/31/x1 from:
- 20x1 sales (500K inst. Rec'ble x
30%)
150,000
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DGP on 12/31/x2 from:
- 20x1 sales (200K inst. Rec'ble x
30%)
- 20x2 sales (650K inst. Rec'ble x
35%)
60,000
227,500
Total Deferred Gross Profit
150,000
2. Solution:
Requirement (a):
Dat Inventory (a)
e
Deferred gross profit (13K x
20%(b))
Loss on repossession
287,500
8,500
2,600
1,900
13,000
(squeeze)
Installment receivable (25K
– 12K)
(a)
15,0
00
(2,0
00)
(4,5
00)
8,5
00
Estimated resale price
Reconditioning costs
Normal profit margin (15K x 30%)
“Fair value” of repossessed inventory
(b)
(150K sales in 20x1 – 120K COS in 20x1) &divide; 150K sales in 20x1 = 20%
GPR in 20x1
Requirement (b):
Inst. receivable 20x1
Be 90,00 13,00
Writeg.
0
0
off
47,00
0
30,00
0
Collecti Sa
on
le
End.
Inst. receivable - 20x2
240,0
00
60,0
00
180,
000
Collection
End.
Collections in 20x2 from:
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20x1 sales: (47,000 x 20%)
20x2 sales: (60,000 x 30%(c) )
Total realized gross profit in 20x2
9,400
18,000
27,400
(c)
(240K sales in 20x2 – 168K COS in 20x2) &divide; 240K sales in 20x2 = 30%
GPR in 20x2
Requirement (c):
Total realized gross profit in 20x2 – see
requirement (b)
Loss on repossession – see requirement (a)
Profit in 20x2
27,400
(1,900)
25,500
3. Solution:
Requirement (a):
e
Over allowance (4,000 –
3,000)
Installment receivable (squeeze)
Installment sale
16,00
0
3,000
1,000
12,00
0
Requirement (b):
Fair value of old merchandise traded-in
Collections
Total
Multiply by: Gross profit rate (b)
Realized gross profit in year of sale
(b)
Sale price
Less: Over allowance
Cost of sale
(5K &divide; 15K)
16,000
(1,000)
15,000
(10,00
0)
5,000
33.33
%