Chapter 7 - INSTALLMENT SALES
Multiple Choice Problems
25. a - Costs not yet recovered.
26. c
Cost, 20x4
20x4 cost recovery
Remaining cost, 12/31/x4
20x5 collection
Gross profit – 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 – 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, 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)
Cost of sales
Gross profit (realized)
P816,619
637,500
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
P179,119
_ 27,221
P206,340
32. b
Total Income for 20x5:
Gross profit (realized) – already recognized in 20x4
Interest 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) – (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.
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 – 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 – P5,880 = P2,520
(P3,000 – P300) – P2,520 = P180 gain.
45. d
20x4: P24,000 – P0 = P24,000 collections x 39%P
20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42%
20x6: P480,000 – P320,000 – 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 – 20x3
Less: DGP – 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 – P 0) x 35%
20x3 Sales: (P344,460 – P67,440 – P2,200) x 34%
20x4 Sales: (P602,000 – 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 – 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
22,929.6
151,733.3
P 174,662.9
P 8,500
3,145
P 5,355
P 11,000
___3,740
Entry made:
Inventory of RM*
IAR-20x5
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 –Trade-in merchandise (at MV)
RGP on I/S in 20x4
__7,260
P( 1,905)
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 – P28,800 – 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 profit 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 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000
8.
9.
P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (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 profit recognized in 20x5
12. P240 – (P1,200/P2,000) x P400
13. P100 - (100% of costs were fully recovered prior to 20x7
14. P10 million, the amount of sale
15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450
16. P50 gain
Repossessed merchandise……………………………………… 500
Deferred gross profit……………………………………………… 300
Installment Accounts receivable……………………..
750
Gain on repossession……………………………………
50
17. 0
Unrecovered costs,1/1/20x4
Less: Collections
Unrecovered costs,1/1/20x5
Less: Collections
Profit – 20x5
Profit – 20x5
100
70
30
40
10
30
18. P10 – refer to No. 17
19. P30 –refer to No. 17
20. Zero
Unrecovered costs – 20x4
Less: Collections – 20x4
Unrecovered costs, 12/31/20x4
Additional costs – 20x5
Total costs
Less: Collections – 20x5
Unrecovered costs, 12/31/20x5
Additional costs – 20x6
120,000
______0
120,000
_20,000
140,000
80,000
60,000
20,000
Total costs
Less: Collections – 20x6
Unrecovered costs, 12/31/20x6
Additional costs – 20x7
Total costs
Less: Collections – 20x7
Profit – 20x7
80,000
40,000
40,000
10,000
50,000
100,000
50,000
21. P50,000 profit – refer to No. 20
22. P105,000 = P68,250 / (100% - 35%)
23. P31,000 = P50,000 x (100% - 38%)
24. P43,700
Unrecovered costs – 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
*10,450
*
Realized GP on I/S in 20x6
Less: Realized GP on I/S in 20x6 for 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 – costs is not yet fully recovered, the profit should be recognized
Unrecovered costs – 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 – 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 installment sales:
Unrecovered costs – Cost of installment sales for 20x5 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 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 – P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 – 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 – P500,000 (x5 collections)=
Deferred gross profit
= P600,000 – 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
P
300,000
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
Accounts receivable—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
Theories
1.
2.
3.
4.
5.
30.
31.
32.
33.
34.
False
True
False
True
True
6.
7.
8.
9.
10.
True
False
True
False
True
c
b
b
b
c
35.
b
40.
36.
37.
38.
39.
d
41.
42.
43.
44.
d
e
c
11.
12.
13.
14.
15.
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
21.
22.
23.
24.
25.
50.
51.
52.
53.
54.
True
True
True
True
True
26.
27.
28.
29.
True
True
False
True
d
c
b
55.
56.
57.
58.
59.
d
b
d
a
b
c
c
60.
61.
62.
63.
64.
C
B
b
c
d
b
66. b
67. d
68. d
69. c
65.