Chapter 10_teacher's Manual_afar Part 1

Chapter 10 Installment Sales Method

PROBLEM 10-1: TRUE OR FALSE 1. TRUE 2. FALSE ₱0.80 = (₱1 x 8/10) 3. TRUE ₱4 = (₱5 x 8/10) 4. TRUE 5. TRUE 6. TRUE 7. TRUE 8. TRUE 9. TRUE 10. FALSE 40% 11. FALSE (5 / .20) = 25 12. FALSE (100 – (100 – 25)  25) = 75 13. FALSE 540 (DGP, end. 10 / 100 receivable, end. = 10% GPR) (100 receivable, end. + 500 collections) = 600 sale x 90% cost ratio = 540 cost of sale

PROBLEM 10-2: THEORY & COMPUTATIONAL 1. D 2.

Solutions:

R eq equir uirem emen entt (a): (a): 20x1 20x2 20x3

₱500,000 x 30% = 150,000 ₱300,000 x 30% = 90,000 ₱200,000 x 30% = 60,000

R eq equir uirem emen entt (b): 20x1 20x2 20x3

 500, 000 1M - 500,000 = 500,000  200, 000 1M – 500K 1M –  500K –  – 300K  300K = 200,000 1M – 500K 1M –  500K –  – 300K  300K –  – 200K  200K = 0

Requirement (c): 20x1 20x2

500,000, ending A/R x 30% = 150,000 200,000, ending A/R x 30% = 60,000

1

0, ending A/R x 30% = 0

20x3 3.

D

4.

B

5. C (200,000 ÷ 25%) = 800,000 ending A/R 1M sale price – price – 800,000  800,000 ending A/R = 200,000 collections during the year 6.

D 1M sale price – price – 750K  750K cost of sale = 250K total gross profit – profit  – 200K  200K deferred = 50K realized

7.

D 1M sale price – price – 750K  750K cost of sale = 250K total gross profit – profit  – 220K  220K realized = 30K deferred

8.

A 1M sale price – price – 750K  750K cost of sale = 250K total gross profit – profit  – 180K  180K realized = 70K deferred ÷ 25% = 280,000

9.

B 1M sale price – price – 750K  750K cost of sale = 250K total gross profit – profit  – 160K  160K realized = 90K deferred ÷ 25% = 360,000 ending A/R;

1M sale price – price – 360,000  360,000 ending A/R = 640,000 collection

10. Solution:

R eq equir uirem ement ent (a): The fair value of the repossessed inventory is computed as follows: Estimated selling price 12,000 Reconditioning costs (2,000) Normal profit margin (year of repossession) (12K x 30% ) (3,600) Fair value of repossessed property

6,400

The gain or loss on repossession is computed as follows: Date

Inventory (at fair value) Deferred gross profit (25K x 20% ) Los s on reposs reposs ess ion (s que queeze ze)) Installment account receivable

6,400 5,000

1,600 13,000

R eq equireme uirement ntss (b) and and (c): The collections in 20x2 from the 20x1 and 20x2 sales are computed as follows:

2

Installment receivable - 20x1 Beg.

90,000

13,000

47,000 30,000

Installment receivable - 20x2 Write-off Collection (squeeze)

Beg.

-

-

Sale

240,000

60,000

End.

180,000

Write-off Collection (squeeze) End.

The profit in 20x2 is computed as follows: Realized gross profit from: - 20x1 sale (47K x 20%) - 20x2 sale (60K x 30%)

9,400 18,000

Total realized g ros s profit in 20x2  – R equirement (b)

27,400

Loss on repossession

(1,600)

Profit in 20x2  – R equirement (c)

25,800

11. D

12. Solutions:

 S cenario 1 The amount of over (under) allowance is determined as follows: Trade-in value granted to customer 4,000 Fair value of merchandise traded-in (4,000) Over (Under) allowance -

R equirement (a): The journal entry to record the sale is as follows: Date

Inventory – traded-in (at fair value) Installment account receivable (squeeze) Installment sale

R equirement (b): The gross profit rate is computed as follows: Installment sale price (Over) Under allowance  Adjusted installment sale price Cost of sale

16,000 16,000 (10,000) 3

4,000 12,000 16,000

Gross profit

6,000

Gross profit rate

37.5%

The realized gross profit is computed as follows:

Trade-in value granted to customer (Over) under allowance Subsequent collections Total collections on installment sale Multiply by: Gross profit rate

4,000 6,000 10,000 37.5%

R ealized g ros s profit - 20x1

 3,750

 S cenario 2 The amount of over (under) allowance is determined as follows: Trade-in value granted to customer 4,000 Fair value of merchandise traded-in (3,000) Over allowance 1,000

R equirement (a): The journal entry to record the sale is as follows: Date Inventory – traded-in (at fair value)

Over allowance on trade-in

1,000

Installment account receivable (squeeze) Installment sale

R equirement (b): The gross profit rate is computed as follows: Installment sale price 16,000 Over allowance (1,000)  Adjusted installment sale price 15,000 Cost of sale (10,000) Gross profit 5,000 Gross profit rate

33.33%

4

3,000 12,000 16,000

The realized gross profit is computed as follows: Trade-in value granted to customer 4,000 (Over) under allowance (1,000) Subsequent collections 6,000 Total collections on installment sale 9,000 Multiply by: Gross profit rate 33.33%

R ealized g ros s profit - 20x1

 3,000

 S cenario 3 The amount of over (under) allowance is determined as follows: Trade-in value granted to customer 4,000 Fair value of merchandise traded-in (6,000) Under allowance (2,000)

R equirement (a): The journal entry to record the sale is as follows: Date Inventory – traded-in (at fair value) Installment account receivable (squeeze) Installment sale

Under allowance on trade-in R equirement (b): The gross profit rate is computed as follows: Installment sale price Under allowance  Adjusted installment sale price Cost of sale Gross profit

16,000 2,000 18,000 (10,000) 8,000

Gross profit rate

55.56%

The realized gross profit is computed as follows: Trade-in value granted to customer 4,000 (Over) under allowance 2,000 Subsequent collections 6,000 Total collections on installment sale 12,000 Multiply by: Gross profit rate 55.56%

R ealized g ros s profit - 20x1

6,667

5

6,000 12,000 16,000

 2,000

13. C 14. Solution: Total collections from 20x1 sales Cost of 20x1 sales Gross profit - 20x1 sales Total collections from 20x2 sales Cost of 20x2 sales Gross profit - 20x2 sales

10,000 (8,000) 2,000 12,000 (9,000) 3,000

G ros s profit recog nized in 20x2

 5,000

15. A

PROBLEM 10-3: EXERCISES 1. Solutions:

R equirement (a): Installment sales Cost of sales

1,000,000 (800,000)

Deferred g ros s profit - unadjus ted balance

200,000

R equirement (b): Installment sales Installment accounts receivable - Dec. 31, 20x1

C ollections in 20x1

1,000,000 (600,000)

400,000

Requirement (c): Installment sales Cost of sales Deferred gross profit - unadjusted balance Gross profit rate based on sales (200K / 1M)

1,000,000 (800,000) 200,000

 20%

R equirement (d): Collections in 20x1 Multiply by: Gross profit rate based on sales

R ealized g ros s profit - 20x1

400,000 20%

80,000

R equirement (e): Deferred gross profit - unadjusted balance Realized gross profit - 20x1

200,000 (80,000)

Deferred g ros s profit - adjus ted balance

120,000

OR

6

Installment accounts receivable - Dec. 31, 20x1 Multiply by: Gross profit rate based on sales

600,000 20%

Deferred g ros s profit - adjus ted balance

120,000

2.

Solutions:

R equirement (a): Deferred gross profit (before year-end adjustment) Divide by: Gross profit based on sales

Ins tallment s ales

200,000 20%

1,000,000

R equirement (b): Installment sales Collections in 20x1

1,000,000 (400,000)

Ins tallment acc ounts receivable - Dec. 31, 20x1

600,000

Requirement (c): Collections in 20x1 Multiply by: Gross profit rate based on sales

R ealized g ros s profit - 20x1

400,000 20%

80,000

R equirement (d): Deferred gross profit (before year-end adjustment) Realized gross profit - 20x1

200,000 (80,000)

Deferred g ros s profit - Dec. 31, 20x1

120,000

Reconciliations: Collections in 20x1 Installment accounts receivable - Dec. 31, 20x1

Ins tallment s ales

400,000 600,000

1,000,000

Installment accounts receivable - Dec. 31, 20x1 Multiply by: Gross profit rate based on sales

600,000 20%

Deferred g ros s profit - Dec. 31, 20x1

120,000

Deferred gross profit - Dec. 31, 20x1 Divide by: Gross profit based on sales

120,000 20%

Ins tallment acc ounts receivable - Dec. 31, 20x1

600,000

3. Solution: Installment sales Installment accounts receivable, Dec. 31, 20x1 Collections in 20x1

900,000 500,000

7

400,000

Multiply by: (100% - 60%)

40%

R ealized g ros s profit - 20x1 4.

160,000

Solutions:

R equirement (a): Deferred gross profit, before year-end adjustment Divide by: Gross profit on sales Total sales Installment accounts receivable, Dec. 31, 20x1

560,000 40% 1,400,000 (800,000)

C ollections - 20x1

600,000

R equirement (b): Collections - 20x1 Multiply by: Gross profit on sales

600,000 40%

R ealized g ros s profit - 20x1 5.

 240,000

Solution:

20x1 installment accounts

16,250 30%/130% 3,750

Multiply by: Gross profit rate based on sales Deferred gross profit (after adjustment) - 20x1 sales 20x2 installment accounts Multiply by: Gross profit rate based on sales Deferred gross profit (after adjustment) - 20x2 sales

90,000 33 1/3%/133 1/3% 22,500

Total deferred gross profit (after adjustment)

26,250

Deferred gross profit (before adjustment) Deferred gross profit (after adjustment) Expenses relating to installment sales

38,000 (26,250) 11,750 (1,500)

Profi t from ins tallment s ales - 20x2

10,250

R ealized g ros s profit - 20x2

6.

Solutions:

R equirement (a): The gross profit rates are computed as follows: Installment sales Cost of sales Gross profit Gross profit rate based on sales

 20x 1

20x 2

20x 3

300,000 225,000 75,000

375,000 285,000 90,000

360,000 252,000 108,000

25%

8

24%

30%

20x1 Deferred gross profit, Dec. 31, 20x3 Divide by: Gross profit rate 20x1 Installment accounts receivable, Dec. 31, 20x3

25% -

20x2 Deferred gross profit, Dec. 31, 20x3 Divide by: Gross profit rate 20x2 Installment accounts receivable, Dec. 31, 20x3

9,000 24% 37,500

20x3 Deferred gross profit, Dec. 31, 20x3 Divide by: Gross profit rate 20x3 Installment accounts receivable, Dec. 31, 20x3

72,000 30% 240,000

Total ins tallment acc ounts receivable, Dec. 31, 20x3

277,500

R equirement (b): 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 during 20x3 from 20x1 sales

15,000 25% 60,000 60,000

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 during 20x3 from 20x2 sales

54,000 24% 225,000 37,500 187,500

Installment sales - 20x3 20x3 Installment accounts receivable, Dec. 31, 20x3 Collection during 20x3 from 20x3 sales

360,000 240,000 120,000

Total collections duri ng 20x3

367,500

Requirement (c): Collection during 20x3 from 20x1 sales Multiply by: Gross profit rate - 20x1 sales Realized gross profit in 20x3 from 20x1 sales Collection during 20x3 from 20x2 sales Multiply by: Gross profit rate - 20x2 sales

9

60,000 25% 15,000 187,500 24%

Realized gross profit in 20x3 from 20x2 sales

45,000

Collection during 20x3 from 20x3 sales Multiply by: Gross profit rate - 20x3 sales Realized gross profit in 20x3 from 20x3 sales

120,000 30% 36,000

Total realized g ros s profit in 20x3

7.

96,000

Solutions:

R equirement (a): 20x1 installment account receivable, Dec. 31, 20x2 20x1 installment account receivable, Dec. 31, 20x3 Collections in 20x3 from 20x1 sales Multiply by: Gross profit rate - 20x1 Realized gross profit in 20x3 from 20x1 sales

112,500* (60,000) 52,500 30% 15,750

20x2 installment account receivable, Dec. 31, 20x2 20x2 installment account receivable, Dec. 31, 20x3 Collections in 20x3 from 20x2 sales Multiply by: Gross profit rate - 20x2 Realized gross profit in 20x3 from 20x2 sales

300,000 (195,000) 105,000 40% 42,000

20x3 installment sales 20x3 installment account receivable, Dec. 31, 20x3 Collections in 20x3 from 20x3 sales Multiply by: Gross profit rate - 20x3 Realized gross profit in 20x3 from 20x1 sales

495,000 (390,000) 105,000 35% 36,750

Total realized g ros s profit - 20x3

94,500

* (135,000 less 22,500 unpaid balance in repossessed merchandise) = 112,500

R equirement (b): 20x3 Inventory (at fair value) Deferred gross profit (22.5K x 30%) Los s on reposs ess ion (s queeze) Installment account receivable

10

15,000 6,750

750 22,500

8. Solution: Cash down payment Collection from installment payment (900K + 540K) Total collections Cost of sale Excess of collection over cost

600,000 1,440,000 2,040,000 (4,000,000) -

Since total collections do not exceed the cost of sale, no income shall be recognized by Sound Co.

PROBLEM 10-4: CLASSROOM ACTIVITY 1. Solutions:

R equirement (a): ₱400,000 x 25% = 100,000 ₱150,000 x 25% = 37,500 ₱ 50,000 x 25% = 12,500

20x1 20x2 20x3

R equirement (b): 600K – 400K = 200,000 600K – 400K – 150K = 50,000 600K – 400K – 150K – 50K = 0

20x1 20x2 20x3

Requirement (c): 20x1 20x2 20x3

200,000, ending A/R x 25% = 50,000 500,000, ending A/R x 25% = 12,500 0, ending A/R x 25% = 0

2.

Solutions: C as e 1: 112,000 ÷ 35% = 320,000

C as e 2: 269,500 ÷ 35% = 770,000 A/R, end 900,000 – 770,000 = 130,000 Case 3: 900K  –  585K = 315K total gross profit  –  200K deferred = 115,000 realized C as e 4: 300,000 x 35% = 105,000 realized 900K  –  585K = 315K total gross profit  –  105K realized =  210,000

deferred 11

Case 5: 900K  –  585K = 315K total gross profit  –  220K realized = 95,000 deferred  Case 6: 900K  –  585K = 315K total gross profit  –  180K realized = 135,000 deferred ÷ 35% = 385,714 A/R , end. C as e 7: If the realized gross profit is ₱147,000, how much is the total collections during the year? 147K ÷ 35% = 420,000 total collections

3.

Solution:

R equirement (a): The fair value of the repossessed inventory is computed as follows: Estimated selling price 24,000 Reconditioning costs (4,000) Normal profit margin (year of repossession) (24K x 30% ) (7,200)

Fair value of repos s es s ed property

12,800

The gain or loss on repossession is computed as follows: Date

Inventory (at fair value) Deferred gross profit (25K x 20% ) Los s on reposs es s ion (s queeze) Installment account receivable

12,800 10,000

 3,200 26,000

R equirements (b) and (c): The collections in 20x2 from the 20x1 and 20x2 sales are computed as follows: Installment receivable - 20x1 Beg.

180,000

26,000

94,000 60,000

Installment receivable - 20x2 Write-off Collection (squeeze)

Beg. Sale

End.

480,000

-

120,000 360,000

The profit in 20x2 is computed as follows: Realized gross profit from: 12

Write-off Collection (squeeze) End.

- 20x1 sale (94K x 20%) - 20x2 sale (120K x 30%)

18,800 36,000

Total realized g ros s profit in 20x2  – R equirement (b)

54,800

Loss on repossession

(3,200)

Profit in 20x2  – R equirement (c)

51,600

4.

Solution:

 S cenari o 1 The amount of over (under) allowance is determined as follows: Trade-in value granted to customer 8,000 Fair value of merchandise traded-in (8,000) Over (Under) allowance -

R equirement (a): The journal entry to record the sale is as follows: Date

Inventory – traded-in (at fair value) Installment account receivable (squeeze) Installment sale

R equirement (b): The gross profit rate is computed as follows: Installment sale price (Over) Under allowance  Adjusted installment sale price Cost of sale Gross profit

32,000 32,000 (20,000) 12,000

Gross profit rate

37.5%

The realized gross profit is computed as follows: 13

8,000 24,000 32,000

Trade-in value granted to customer (Over) under allowance Subsequent collections Total collections on installment sale Multiply by: Gross profit rate

8,000 12,000 20,000 37.5%

R ealized g ros s profit - 20x1

7,500

 S cenario 2 Solution: The amount of over (under) allowance is determined as follows: Trade-in value granted to customer 8,000 Fair value of merchandise traded-in (6,000) Over allowance 2,000

R equirement (a): The journal entry to record the sale is as follows: Date Inventory – traded-in (at fair value)

6,000

Over allowance on trade-in

 2,000

Installment account receivable (squeeze) Installment sale

24,000

R equirement (b): The gross profit rate is computed as follows: Installment sale price 32,000 Over allowance (2,000)  Adjusted installment sale price 30,000 Cost of sale (20,000) Gross profit 10,000 Gross profit rate

33.33%

The realized gross profit is computed as follows: Trade-in value granted to customer 8,000 (Over) under allowance (2,000) Subsequent collections 12,000 Total collections on installment sale 18,000 Multiply by: Gross profit rate 33.33%

R ealized g ros s profit - 20x1

6,000 14

32,000

 S cenario 3 Solution: The amount of over (under) allowance is determined as follows: Trade-in value granted to customer 8,000 Fair value of merchandise traded-in (12,000) Under allowance (4,000)

R equirement (a): The journal entry to record the sale is as follows: Date Inventory – traded-in (at fair value) Installment account receivable (squeeze) Installment sale

Under allowance on trade-in

12,000 24,000 32,000

4,000

R equirement (b): The gross profit rate is computed as follows: Installment sale price Under allowance  Adjusted installment sale price Cost of sale Gross profit

32,000 4,000 36,000 (20,000) 16,000

Gross profit rate

55.56%

The realized gross profit is computed as follows: Trade-in value granted to customer 8,000 (Over) under allowance 4,000 Subsequent collections 12,000 Total collections on installment sale 24,000 Multiply by: Gross profit rate 55.56%

R ealized g ros s profit - 20x1 5.

13,334

Solution:

Total collections from 20x1 sales Cost of 20x1 sales Gross profit - 20x1 sales Total collections from 20x2 sales

20,000 (19,000) 4,000 24,000

15

(18,000) 6,000

Cost of 20x2 sales Gross profit - 20x2 sales

G ros s profit recog nized in 20x2

10,000

PROBLEM 10-5: THEORY

1. C 2. C 3. C 4.  A 5. B

6. 7. 8. 9. 10.

C B A B B

11. 12. 13. 14. 15.

C  A B C D

PROBLEM 10-6: THEORY

 A  A  A C D

1. 2. 3. 4. 5.

 A  A  A B A

6. 7. 8. 9. 10.

PROBLEM 10-7: MULTIPLE CHOICE (COMPUTATIONAL) Solutions: 1.

A 200K – 60K = 140K realized ÷ 25% = 560,000

2.

C

Date 9/30/x1 9/30/x1 10/31/x1 11/30/x1 12/31/x1 Totals

C ollection 4,800 4,800 4,800 4,800 19,200

Interes t 432 388 344 1,165

18,035 x 37.5% = 6,763

16

A mortization 4,800 4,368 4,412 4,456 18,035

P ri nci pal 48,000 43,200 38,832 34,420 29,965

3. A Inventory Deferred gross profit (29,965 x 37.5%)

16,800 11,237

Los s on reposs es s ion

1,928

Receivable

4.

29,965

C

The 20x1 sale is computed as follows:

Date

C ollection

Interes t

A mortizatio

158,000

Date of sale 20x1

(a)  108,000

Princ ipal

71,000 (squeeze)

7,000 (given)

64,000 (given)

(squeeze)

94,000(a) (start)

N/R – 14,000 discount on N/R = 94,000 carrying amount 12/31/x1

The cost of goods sold is computed as follows: Inventory beg. Purchases

90,850

100,850

10,000 The gross profit rate in 20x1 is computed as follows: Sales COGS

158,000 (90,850)

Gross profit

67,150

Gross profit rate

42.50%

The realized gross profit rate is computed as follows: Collections of principal 64,000 Gross profit rate 42.50%  27,200 Realized gross profit

17

COGS (squeeze) end.

5.

B

The collection on principal of 20x1 receivable in 20x2 is computed as follows:

Date

C ollection

Date of sale 20x1 20x2

(b)  72,000

Interes t

71,000

7,000

A mortization

Pri nci pal

64,000 34,000 (squeeze)

158,000 94,000 60,000 (b) (start)

N/R – 12,000 discount on N/R = 60,000 carrying amount 12/31/x2

The collection on principal of 20x2 receivable in 20x2 is computed as follows: Total collection on principal in 20x2 Less: Collection from 20x1 receivable Collection from 20x2 receivable

100,000 (34,000) 66,000

The 20x2 sale is computed as follows:

Date

C ollection

Interes t

A mortizatio

Princ ipal 170,000

Date of sale 20x2

66,000 (see above)

(squeeze)

104,000(c) (start)

(c )  

120,000 N/R  –  16,000 discount on N/R = 104,000 carrying amount 12/31/x1

The cost of goods sold is computed as follows: Inventory beg. Purchases

89,250

105,250

16,000 The gross profit rate in 20x1 is computed as follows: Sales COGS

170,000 (89,250)

Gross profit

80,750

Gross profit rate

47.50%

The realized gross profit rate is computed as follows:

18

COGS (squeeze) end.

From 20x2 sale: Collections of principal from 20x2 sale Gross profit rate – 20x2 Realized gross profit in 20x2 from 20x2 sale

66,000 47.50% 31,350

From 20x1 sale: Collections of principal from 20x1 sale (see amortization table above) Gross profit rate – 20x1 (see solution in previous problem) Realized gross profit in 20x2 from 20x1 sale

34,000 42.50% 14,450

Total realized gross profit in 20x2: (31,350 + 14,450) = 45,800 6. D Solution: Cash sales Installment sales at cash price (794,970 / 110%) Total sales at cash price equivalent Cost of goods sold (see T-account below) Gross profit

378,000 722,700 1,100,700 (693,441) 407,259

G ros s profit rate

37.00% Inventory

beg. Purchases

174,180 693,441 108,630

627,891

COGS (squeeze) end.

7. A Solution:

Date Date of sale Down payment 1st installment 2nd installment 3rd installment Total interest

C ollection 825(b) 165(c)  165 165

Interes t 21.75(d) 20.32 18.87

A mortization

Pri nci pal

825.00 143.25 144.68 146.13

3,000(a) 2,175 2,032 1,887 1,741

60.94

(a)

 3,300 installment price ÷ 100% = 3,000 cash price equivalent 3,300 x 25% = 825 down payment (c)  (3,300 – 825 down payment) ÷ 15 = 165 monthly installment (d) 2,175 unpaid cash price equivalent x 1% monthly interest = 21.75 (b)

19

8. D Solution: Cash sale Down payment Installment payments, net of interest (238,023 – 27,758.52) Collections of principal on defaulted contract (143.25 + 144.68 + 146.13) Total collections Gross profit rate

378,000.00 198,750.00

R ealized g ros s profit

291,355.96

20

210,264.48 434.06 787,448.54 37.00%