Chapter 7 advacc 1 Dayag

Chapter 7

Problem I 1. Entries in 20x4: Cash…………………………………………………………………….……….. Mortgage Notes Receivable ……………………………………………….. Real Estate ……………………………………………………………. 9,000 Gain on Sale of Real Estate ……………………………………….. 15,000 Cash ……………………………………………………………………………… Mortgage Notes Receivable ……………………………………….

3,500 20,500

500 500

Entry in 20x5: Real Estate ………………………………………………………………………. 16,500 Loss on Repossession of Real Estate ……………………………………….. 3,500 Mortgage Notes Receivable ……………………………………… 20,000 2. Entries in 20x4 Cash ……………………………………………………………………………… 3, 500 Mortgage Notes Receivable ……………………………………………….. 20,500 Real Estate …………………………………………………………….. 9,000 Deferred Gross Profit on Installment Sales ………………............ 15,000 Cash ………………………………………………………………………………. 500 Mortgage Notes Receivable …………………………………..….. Receipt P500 cash in 20x4 applicable to principal of note Deferred Gross Profit on Installment Sales ………………………………... Realized Gross Profit on Installment Sales………………………... 2,500

500

2,500

Gross Profit Percentages 15,000/24,000, or 62.5% 6.25% of P4,000 (collections in contract in 20x4) Or P2,500

Entry in 20x5 Real Estate………………………………………………………………………... 16,500 Deferred Gross Profit on Installment Sales ………………………………….. 12,500 Mortgage Notes Receivable ……………………………………….. 20,000 Gain in Repossession of Real Estate ……………………………….. 9,000 Problem II 1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment. 20x5 P750 is profit. P250 is treated as a return of investment. Following years: Each annual installment f P1,000 is profit. 2. 20x4: P4,000 is profit. 20x5: P1,000 is profit. 20x6: P750 is profit, and P250 is treated as return of investment. Following years: Each annual installment is P1,000 is treated as a return of investment. 3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales 20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.

Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit. P425 per year is treated as return of investment. Problem III 1. a. Installment Contracts Receivable 19X8………………………………… 250,000 Installment Sales …………………………………………………… 250,000 b. Cash ………………………………………………………………………….. 120,000 Installment Contracts Receivable 19X8 ……………………… 120,000 c. Cost of Installment Sales ………………………………………………….. Merchandise Inventory ………………………………………….. 200,000

200,000

d. Merchandise Repossessions ……………………………………………… 14,500 Deferred Gross Profit on Installment Sales 19X8 …………….. 4,000 Loss on Repossession ……………………………………………... 1,500 Installment Contracts Receivable, 19X8 ……………. 20,000 Gross Profit Percentages: 50,000/250,000, or 20% Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000 Fair value of repossessed merchandise.. Less: Unrecovered cost: Unpaid balance…………………………P 20,000 Less: Deferred Gross Profit 20% x P20,000…………………… 4,000 Loss on repossession…………………….

P 14,500

16,000 P 1,500

e. Expenses ……………………………………………………………………… Cash ………………………………………………………………….

16,000

16,000

2. Adjustment to Recognize Gross Profit on Installments Sales: a. To set-up Cost of Installment Sales: No entry (since perpetual inventory method is used) b. To set-up Deferred Gross Profit on Installment Sales: Installment Sales ……………………………………………………… 250,000 Cost of Installment Sales …………………………………. 200,000 Deferred Gross Profit on Installment Sales-20x4.. ……… 50,000 c. Adjustment to Recognize Gross Profit on Installment Sales: Deferred Gross Profit on Installment Sales – 20x4…………..……. Realized Gross Profit on Installment Sales – 20x4 ………. 24,000 Realized Gross Profit: 20% of P120,000 (collections),

24,000

or P24,000 d. Closing of nominal accounts. Realized Gross Profit on Installment Sales – 20x4………………… Expenses ………………………………………………………. 16,000 Loss on Repossessions ………………………………………. 1,500 Income Summary ……………………………………………. 6,500 To close the accounts for 20x4.

24,000

Problem IV 1. January to December 31

20x4

20x5

(1) To record regular sales: Accounts receivable

1,080,00 0

600,000

Sales

1,080,00 0

600,00

(2) To record installment sale: Cash Installment accounts receivable Installment Sales

60,000 300,000

144,000 336,000 360,000

480,000

(3) To record cost of sales: Periodic Method: No entry Perpetual Method: Regular Sales: Cost of Sales Merchandise inventory Installment Sales: Cost of installment sales Merchandise inventory (4) To record collections: Regular Sales: Cash Accounts receivable Installment Sales: Cash

480,000

864,000 480,000

252,000

864,000

312,000 252,000

144,000

312,000

360,000 144,000

108,000

360,000

204,000

Installment Accounts receivable – 20x2

72,000

72,000

36,000

60,000 72,000

Installment Accounts receivable – 20x3 Interest income (5) to record payment of operating expenses: Operating expenses

90,000

102,000

Cash

90,000

102,000

2. Adjusting entries (end of the year): (6) To recognize accrued interest receivable Interest receivable

1,440

Interest income

2,880 1,440

2,880

(7) To set-up Cost of Sales: Periodic Method: Cost of installment sales

480,000

Merchandise inventory

864,000 480,000

864,000

Perpetual Method: No entry (7) To set-up Cost of Installment Sales: Periodic Method: Cost of installment sales Shipment s on installment

252,000

sales

312,000 252,000

312,000

Perpetual Method: No entry (8) To set-up Deferred Gross Profit Installment sales

360,000

480,000

Cost of installment sales

252,000

Deferred gross profit – 20x4

108,000

312,000

Deferred gross profit – 20x5 Gross profit rate – 20x4: P 108,000 / P360,000 = 30%. Gross profit rate – 20x5: P168,000 / P480,000 = 35%. (9) To record installment sales:

realized

gross

profit

168,000

on

Deferred gross profit – 20x4

25,200

25,200

Deferred gross profit – 20x5

21,000

Realized gross profit

25,200

20x4: Realized gross profit on installment sales: Collections applying as to principal..……………………………P 72,000 Multiplied by: Gross profit rate……………………………………. 30% Realized gross profit…………………………………………………P 21,600 20x5: Realized gross profit on installment sales; Collections principal…………… Multiplies by: Gross %.......... Realized profit………………

–

20x4 P 72,000

20x5 P 60,000

____30% P 21,600

____35% P 21,000

profit gross

P 42,600

46,200

Closing entries: (10) To close realized gross profit account: Realized gross profit

21,600

Income summary

42,600 21,600

42,600

(11) To close other nominal accounts Sales Interest income

600,000

1,080,00 0

37,440

74,880

Cost of sales

480,000

864,000

Operating expenses

90,000

102,000

Income summary

67,440

188,880

(12) To close results of operations: Income summary

89,040

Retained earnings

231,480 89,040

231,480

Problem V 1. Type of Sale Regular Sales: Cash sales Credit sales Total regular sales Installment Sales Total Sales

Ratio to Total Sales

Amount P 225,000 ___450,000 P 675,000 _ 1,125,000 P 1,800,000

675/1,800 1,125/1,800

Allocated Cost P *146,250 **292,500 P 438,750 __731,250 P 1,170,000

*P225,000/P1,800,000 x P1,170,000 = P146,250 **P450,000/P1,800,000 x P1,170,000 = P292,500

2.

The allocation above was based on the assumptions that the markup for each type of sale is the same. Normally, the selling prices of the merchandise are not the same for each type of sales.

Type of Sale Cash sales Credit sales Installment Sales Total Sales

Amount P 225,000 450,000 1,125,00 0 P 1,500,000

Amount based on Cash Sales (100%) P 225,000 375,000*

Ratio to Total Sales 225/1,500 375/1,500

Allocated Cost P 175,500 292,500

900,000** P 1,250,000

900/1,500

__ 702,000 P 1,170,000

Gross profit rate 30% 36%

Cost ratio 70% 64%

Allocated Cost* P 157,500 288,000

40%

60%

_ _675,000 P 1,170,000

*P450,000 / 120% = P375,000 **P1,125,000 / 125% = P900,000

3. Type of Sale Cash sales Credit sales Installment Sales Total Sales

Amount 225,000 450,000 1,125,00 0 P 1,800,000 P

* Amount of sale x cost ratio.

Problem VI The entries are required under the periodic method:

Repossessed merchandise……………………………………...... Deferred gross profit – 20x4………………………………............ Loss on repossession………………………………………………... Installment accounts receivable – 20x4…………………….

68,400 48,000 3,600 120,000

To record repossessed merchandise.

Repossessed merchandise……………………………………...... Cash, etc (or various credits)……………………................

12,000 12,000

To record reconditioning costs

The loss on repossession is computed as follows: Estimated selling price after reconditioning costs.............. Less: Reconditioning costs……………………………………… Costs to sell and dispose…………………………………. Normal profit (20% x 108,000) ……………………………. Market value before reconditioning costs………………….. Less: Unrecovered cost Installment accounts receivable – 20x4, unpaid balance……………………………………... Less: Deferred gross profit – 20x4 (P120,000 x 40%)..... Loss on repossession…………………………….

P 108,000 P 12,000 6,000 __21,600

__39,600 P 68,400

P120,000 __48,000

__72,000 P( 3,600)

Problem VII The entry to record the sale of the new vehicle under the periodic method: Trade-in Merchandise…………………………………............... Over-allowance on trade-in merchandise…………………. Cash………………………………………………………………….. Installment accounts receivable – 20x4……………............

840,000 360,000 2,400,00 0 3,360,00 0

Installment sales……………………………………….......

6,960,00 0

To record installment sales with trade-in.

Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales, the entry would be as follows: Trade-in Merchandise…………………………………............... Cash………………………………………………………………….. Installment accounts receivable – 20x4……………............

840,000 2,400,00 0 3,360,00 0

Installment sales (net of over-allowance)……..............

6,600,00 0

To record installment sales with trade-in.

The over-allowance is computed as follows: Trade-in allowance………………………………….................. Less: Market value before reconditioning costs: Estimated resale price after reconditioning costs. Less: Reconditioning costs……………………………….. Costs to sell (5% x P1,680,000)……………………

P1,200,00 0 P1,680,0 00 420,000 84,000

Normal profit (20% x P1,680,000)…………….......

__336,00 0

Over-allowance……………………………………………………

__840,00 0 P 360,000

The gross profit rate on installment sales is computed as follows: Installment sales……………………………………………………………...... Less: Over-allowance………………………………………………………… Adjusted Installment Sales…………………………………………………… Less: Cost of installment sales………………………………………………. Gross profit………………………………………………………………………. Gross profit rate (P2,680,000/P6,600,000)………………………………..

P6,960,000 ___360,000 P6,600,000 __3,920,00 0 P2,680,000 40.60%

Further, the entry to record the reconditioning costs is as follows: Trade-in Merchandise…………………………………............... Cash, etc (or various credits)……………………..............

420,000 420,000

To record reconditioning costs.

Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4 is computed as follows: Trade-in merchandise (market value before reconditioning costs)……… Down payment…………………………………………………………………… Installment collection (March 31 – December 31: P80,000 x 10 months) Total collections………………………………………………………………….. Multiplied by: Gross profit rate in 20x4……………………………………….. Realized gross profit on installment sales of new merchandise…………

P

840,000 2,000,000 ___800,000 P3,640,000 ___40.60% P1,477,840

Problem VIII 1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance: Oct. 31 Cash ……………………………………………………………………… 20,000 Mortgage Notes Receivable …………………………………………. 55,000 Real Estate ………………………………………………………. 60,000 Deferred Gross Profit on Installment Sales …………………. 15,000 Nov. 30 Cash ………………………………………………………………………. Mortgage Notes Receivable ………………………………… Interest Income …………………………………………………. 550 Interest Received: P55,00 at 12% for 1 month, or P550

1,150

Dec. 31 Cash ………………………………………………………………………… 1,144 Mortgage Notes Receivable ………………………………….. Interest Income …………………………………………………… Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544

600

600 544

31 Deferred Gross Profit on Installment Sales …………………………….. 4,240 Realized Gross Profit on Installment Sales …………………… 4,240 Gross Profit Percentage: 15,000/75,000, or 20% Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240

2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the contract: Dec. 31 Cash ……………………………………………………………………… 20,000.00 Mortgage Notes Receivable ………………………………………… 55,000.00 Real Estate ……………………………………………………… 60,000.00 Deferred Gross Profit on Installment Sales ……………….. 15,000.00 Nov. 30 Cash ……………………………………………………………………… Mortgage Notes Receivable ……………………………….. 50.00 Interest Income ………………………………………………… 550.00

600

Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600P550, or P50, is reduction in principal) Dec. 31 Cash ………………………………………………………………………. Mortgage Notes Receivable ………………………………… 50.50 Interest Received ……………………………………………… 549.50

600.00

Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in principal. 31 Deferred Gross Profit on Installment Sales ………………………… 4,020.10 Realized Gross Profit on Installment Sales ………………… 4,020.10 Gross Profit Percentage: 15,000/75,000, or 20% Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or P4,020.10 Problem IX 1. 6/30x4: Cash……………………………………………………………………………. 25,000 Notes Receivable …………………………………………………………… 125,000 Accumulated Depreciation (3.1/2[2% of P90,000]) …………………… 6,300 Depreciation Expense (1/2[2% of P90,000]) …………………………… 900 Land …………………………………………………………………… 10,000 Building ……………………………………………………………….. 90,000 Deferred Gross Profit on Sale of Property ……………………… 57,200 Deferred Gross Profit on Sale of Property ………………………………… 9,553 Realized Gross Profit on Sale of Property ………………………... Amount realized: (P25,000/150,000) x 57,200 2. 6/30x5: Cash …………………………………………………………………………… 30,000 Notes Receivable ……………………………………………………..

11,440

Deferred Gross Profit on Sale of Property ………………………………. 11,440 Realized Gross Profit on Sale of Property ………………………… Amount realized (P30,000/P150,000) x 57,200

9,553

30,000

6/30/x6 Cash …………………………………………………………………………. Notes Receivable ……………………………………………………

19,067

Deferred Gross Profit on Sale of Property ……………………………… Realized Gross Profit on Sale of Property …………………………

50,000

50,000

19,067

Amount Realized: (P50,000/P150,000) X 57,200 6/30/x7 Cash ………………………………………………………………………….. Notes Receivable ……………………………………………………

5,720

Deferred Gross Profit on Sale of Property ………………………………. Realized Gross Profit on Sale of Property …………………………

15,000

15,000

5,720

Amount Realized: (P15,000/P150,000) X 57,200 Problem X Installment Contracts Receivable …………………………………………. 200,000 Installment Sales ……………………………………………………… 200,000 Cost of Installment Sales …………………………………………………….. Merchandise Inventory ………………………………………………

120,000 120,000

Cost of Sales: 60% of P200,000 Installment Sales ……………………………………………………………….. 200,000 Cost of Installment Sales …………………………………………… 120,000 Deferred Gross Profit on Installment Sales ……………………… 60,000

30,000 34,000 60,000

Cash ………………………………………………………………………………. 124,000 Installment on Contracts Receivable – 20x4……………………... Installment on Contracts Receivable – 20x5……………………... Installment on Contracts Receivable – 20x6……………………...

Deferred Gross Profit on Installment Sales -20x4 …………………………… 13,800 Deferred Gross Profit on Installment Sales-20x5 …………………………... 14,280 Deferred Gross Profit on Installment Sales -20x6 …………………………... 24,000 Realized Gross Profit on Installment Sales ……………………….………….. 52,080

Realized Gross Profit 20x4: 46% of P30,000 or P13,800 20x5: 42% of P34,000 or P14,280 20x6: 40% of P60,000 or P24,000

Problem XI 1. Calculation of gross profit percentage on installment sales 20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment

sales 20x6 …………………………………………………………………………………. 27.5% 20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts receivable 20x5 ………………………………………………………………………….. 30% 20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts receivable 20x4 ………………………………………………………………………….. 32% 2.

WW EQUIPMENT, Inc. Balance Sheet December 31, 20x6 Assets Cash ………………………………………………………………………………….................... P27,500 Installment Accounts Receivable 20x6 ………………………….. P 55,000 20x5 ………………………….. 12,000 20x4 ………………………….. 3,000 70,000 Accounts receivable …………………………………………………………………………. 17,000 Inventory ……………………………………………………………………………………….... 60,000 Other Assets ……………………………………………………………………………………... 40,000 Total Assets ……………………………………………………………………………………… P 214,500 Liabilities Accounts payable ……………………………………………………………… P 40,000 Deferred Gross Profit 20x6 …………………………… P 15,125 20x5 …………………………… 3,600 20x4 …………………………… 960 19,685 Total Liabilities P 59,685 Stockholders’ Equity Capital Stock …………………………………………………………………….. P 100,000 Retained Earnings ……………………………………………….. P 68,400 Balance, Jan. 1, 20x6 ………………………………………. 13,585 Balance, Dec. 31, 20x6 ……………………………………………………. 54,185 Total Stockholder’s Equity ……………………………………………………… P154,815 Total Liabilities and Stockholder’s Equity ……………………………………. 214,500 WW EQUIPMENT, Inc. Income Statement For Year Ended December 31, 20x6

Sales ………………………………………………………............ Cost of goods sold:

Installment Sales P320,000

Regular Sales P125,000

P

Total P445,00 0

Merchandise Inventory, Jan. 1 ………………P 52,000 Purchases ………………………….................. 350,000 Merchandise Available for sale ................. 402,000 Less: Merchandise Inv. Dec. 31 ………… 60,000 Gross Profit ……………………………………………………….. Less: Deferred Gross Profit on 19X34 ………………………… Realized Gross Profit on current year’s sales ………………. Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ………………. Total Realized Gross Profit …………………………………….

232,000

110,000

342,000

P88,000

P15,000

P103,00 0 15,125

P15,000

P87,875

15,125 P78,875

50,040 P137,91 5 151,50 0 P 13,585

Operating Expenses …………………………………………... Net Loss …………………………………………………………..

WW EQUIPMENT, Inc. Analysis of Gross Profit on Installment Sales Schedule to Accompany Income Statement For Year Ended December 31, 20x6 Deferred Gross profit on installment sales, 20x6 Installment contracts receivable, P320,000 less collections P265,000 Or P55,000; P55,000 x 27.5% ………………………………………………………… P 15,125 Realized Gross Profit: 20x6 Collections on Installment Contracts Receivable ………... P265,000 P27,000 Installment sales gross profit percentage ………………….. 27.5%

20x5

20x4 P138,000

30%

32% Realized Gross Profit …………………………………………….. P 72,875 P 8,640

P 41,400

Installment Sales …………………………………………………… 320,000 Cost of Installment Sales …………………………………………. 232,000 Deferred Gross profit -20x6……………………………………………… 88,000 Deferred Gross Profit, 20x6 ……………………………............... Deferred Gross Profit, 20x5 ……………………………............... Deferred Gross Profit, 20x4 ……………………………............... Realized Gross Profit on Installment sales…………… Income Summary ………………………………………………… Shipment on Installment of Sales ……………………………… Merchandise Inventory, Jan. 1, 20x6 ……………….

72,875 41,400 8,640 122,915 170,000 232,000

52,000 Purchases ……………………………………………… Merchandise Inventory, Dec. 31, 20x6 …………………….. Income Summary ……………………………………

350,000 60,000 60,000

Sales ………………………………………………………………. Income Summary ……………………………………. Realized Gross Profit on Installment Sales………..………... Income Summary …………………………………….

125,000

Income Summary ……………………………………………… Operating Expenses ………………………………...

151,500

Retained Earnings …………………………………………….. Income Summary …………………………………...

13,585

125,000 122,915 122,915 151,500 13,585

Problem XII 1. Calculation of gross profit percentage on installment sales 20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment sales 20x6 …………………………………………………………………………………… 38% 20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment accounts receivable 20x5 ………………………………………………………………. 40% 20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment accounts receivable 20x4 ………………………………………………………………. 45% 2.

Deferred Gross Profit, 20x6……………………………… Deferred Gross profit, 20x5……………………………… Deferred Gross Profit, 20x4……………………………… Loss on Repossessions………………………….. Cancellation of deferred gross profit, balances upon repossessions: 20x6: 38% of P5,000, or P1,900 20x5: 40% of P10,000, or P4,000 20x4: 45% of P8,000, or P3,600

1,900 4,000 3,600 9,500

GG SALES CORPORATION Income Statement For Year Ended December 31, 20x6

Sales ………………………………………………………............ Cost of goods sold: Merchandise Inventory, Jan. 1 …………… P 30,000 Purchases ………………………….................. 445,000 Repossessed Merchandise ……………….. 10,000 Merchandise Available for sale ................. 495,000 Less: Merchandise Inv. Dec. 31 ………… 35,000 Gross Profit ……………………………………………………….. Less: Deferred Gross Profit on 20x6 sales (see schedule) Realized Gross Profit on current year’s sales ……………….

Installment Sales P500,000

Regular Sales P192,000

Total P692,000

310,000

150,000

460,000

P190,000 32,300

P42,000

P103,000 32,300

P157,700

P42,000

P199,700

Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ……………….

100,650 P300,350 3,500

Deduct loss on repossession …………………………………. Total Realized Gross Profit ……………………………………. Operating Expenses …………………………………………… Net Loss …………………………………………………………..

P296,850 300,000 P 3,150

Analysis of Gross Profit on Installment Sales Schedule to Accompany Income Statement For Year Ended December 31, 20x6

Deferred gross profit on Installment sales – before defaults, 19X8: Installment contracts receivable, P500,00, less collections, P415,000, or P85,000; P85,000 x 38% ……………………………………………………….

P 32,300

Realized Gross Profit: 20x6 20x5 20x4 Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000 Installment sales gross profit percentage ……….. 38% 40% 45% Realized gross profit …………………………………..P157,700 P 84,000 P 16,650 GG SALES CORPORATION Balance Sheet December 31, 20x6 Assets Cash …………………………………………………………………………………... P 25,000 Installment Accounts Receivable 20x6 …………………P 80,000 20x5 ………………… 20,000 20x4 ………………… 5,000 105,000 Accounts receivable ………………………………………………………………….. 40,000 Inventory …………………………………………………………………………………. 35,000 Other Assets ……………………………………………………………………………… 52,000 Total Assets ……………………………………………………………………………….P 257,000 Liabilities Accounts payable ……………………………………………………. P 75,000 Deferred Gross Profit 20x6 ………………………………. P 30,400 20x5 ………………………………. 8,000 20x4 ………………………………. 2,250 40,650 Total Liabilities P 115,650 Stockholders’ Equity Capital Stock …………………………………………………………. Retained Earnings ………………………………………. P 44,500 Balance, Jan. 1, 20x6 ……………………………… 3,150 Balance, Dec. 31, 20x6 ……………………………

P100,000 41,350

Total Stockholder’s Equity …………………………………………. 141,350 Total Liabilities and Stockholder’s Equity ……………………….. 257,000

P

4. Installment Sales ……………………………………………………………….. 500,000 Cost of Installment Sales ……………………………………………….. Deferred Gross Profit, 20x6 ……………………………………………..

310,000 190,000

Deferred Gross Profit, 20x6 …………………………………………………… 157,500 Deferred Gross Profit, 20x5 …………………………………………………… 84,000 Deferred Gross Profit, 20x4 …………………………………………………… 16,650 Realized Gross Profit on Installment Sales… …………………………

258,350

Income Summary ……………………………………………………………… 185,000 Shipment on Installment Sales ……………………………………………… 310,000 Merchandise Inv, January 1, 20x6 ……………………………………. Purchases …………………………………………………………………. Repossessed Merchandise ……………………………………………..

30,000 455,000 10,000

Merchandise Inv, December 31, 20x6……..………………………………. Income Summary ……………………………………………………….. Sales …………………………………………………………………………….... Income Summary …………………………………………………………

35,000 192,000

192,000

Realized Gross Profit on Installment Sales…………………………………..258,350 Income Summary ……………………………………………………….. Income Summary ……………………………………………………………… Loss on Repossession …………………………………………………….

3,500

Income Summary ……………………………………………………………… Operating Expenses ……………………………………………………..

300,000

Retained Earnings ……………………………………………………………… Income Summary ………………………………………………………….

35,000

258,350 3,500 300,000

3,150 3,150

Problem XIII 1. Deferred gross profit – 20x4……….……………………………………. 8,407.00 Deferred gross profit – 20x5……….……………………………………. 93,438.80 Deferred gross profit – 20x6……….……………………………………. 71,006.70 Realized Gross Profit on Installment Sales (20x4 – 20x6)….. 172,852.50 Computation of GP rates: 20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35% 20x5: P285,120/P432,000 = 66%, cost rate; GP rate = 100% - 66% = 34% 20x6: P379,260/P602,000 = 63%, cost rate; GP rate = 100% - 63% = 37% Calculation of collections in 20x6: 20x4: Beginning balance P 24,020 20x5: P344,460 (beginning balance) – P67,440 (ending balance) –

P2,200 (write-offs on default) 274,820

20x6: P602,000 (sales) – P410,090 (ending balance)

191,910 Calculation of realized gross profit: 20x4: 35% x P24,020 20x5: 34% x P274,820 93,438.80 20x6; 37% x P191,910 71,006.70 Total

P

8,407.00

P172,852.50

2. Deferred gross profit 20x5……………………………………………………… Inventory of Repossessed Merchandise……………………………….

748.00 748.00

To reduce by 20x5 deferred gross profit related to defaulted contract and requiring cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date); inventory now reported at P2,200 (balance of installment contract), less P748 or P1,452.

Loss on repossession…………………………………………………………….. Inventory of repossessed merchandise………………………………..

381.00 381.00

To reduce inventory to “market” as follows: to realize a gross profit of 37% on a resale estimated at P1,700, the repossessed merchandise should be reported at a value of 63% of P1,700, or P1,071; the inventory then requires a further write-down of P381 (P1,452 – P1,071)

Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248 (P1,700 – P1,452), the later period would actually have to absorb a loss as a result of such valuation. Recording the goods at resale value reduced by the company’s usual profit margin on sales is recommended, for such practice will charge the next period with no more than the utility of the goods carried forward. Problem XIV – HH Instruments 1. Installment Contracts Receivable ……………………………………. Merchandise Inventory (Piano) ……………………………… Deferred Gross Profit on Installment Sales ………………… 600.00

2.

3.

1,600.00 1,000.00

Cash ……………………………………………………….......................... Installment Contracts Receivable ……………………………

160.00

Cash …………………………………………………………........................ Interest Income …………………………………………………… Installment Contracts Receivable …………………………….

160.00

Cash ……………………………………………………………...................... Interest Income ……………………………………………………. Installment Contracts Receivable ………………………………

160.00

Deferred Gross Profit on Installment of Sales ………………………….. Realized Gross Profit on Installment of Sales ………………… 225.45 Gross Profit Percentage: 37.5% (P600/P1,600)

160.00 14.40 145.60 11.47 148.53

225.45

Realized Gross Profit for 20x4: 37.5% of 601.19 (sum of payments on installment contract) 4.

Merchandise Inventory (piano) …………………………………………... 560.00 Deferred Gross Profit on Installment of Sales ……………………........... 374.55 Loss on Repossessions ………………………………………………………. 64.36 Installment Contracts Receivable ……………………………… 998.81 Deferred Gross profit cancelled upon repossession: 37.5% of P998.81 (balance in installment contracts receivable account) or P 374.55

Problem XV – Big Bear 20x4: Installment receivables Inventory Deferred gross profit Cash 20x5: Cash

Installment receivables

Installment receivables

Deferred gross profit Realized gross profit 20x6: Cash

250,000

80,000

120,000

80,000

120,000

50,000 50,000 50,000

Installment receivables Installment receivables Inventory Deferred gross profit Cash

150,000 100,000

Installment receivables

Deferred gross profit Realized gross profit

50,000 300,000

135,000

210,000 90,000 135,000

40,500 40,500

Gross profit deferred at sale = 30% x P300,000 = P90,000. Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500 (Or cash collected x GP% =P135,000 x 30% = P40,500) Problem XVI – Tappan Industrial (1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale. Determination of selling price: PVn = R(PVAFn/i) Table IV PVn = P187,500 x 4.3553 n = 6, i = 10% PVn = P816,619 (rounded) Gross profit on sale: Sales

P816,61

Cost of sales Gross profit Interest revenue--4 months: P816,619 x 10% x 4/12 = Total income for 20x5 = P179,119 + P27,221 =

9 637,500 P179,119 _ 27,221 P206,340

(2) No reasonable assurance – assume the use of installment sales method Installment sale: Gross profit (P179,119/P816,619) = Gross profit earned in 20x5 (P0 x 22%)

P

Interest revenue

0

27,221

Total income for 20x5 Multiple Choice Problems 1. b – 20x4: P500,000 x 30% = P 150,000 20x5: P600,000 x 40% = 240,000

22% rounded

P 27,221

P390,000

2. d Realized Gross Profit on Installment Sales in 20x6: 20x4 sales: P10,000 x 22%P 2,200

20x5 sales: P50,000 x 25%

12,500

20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)

10,575 Realized Gross Profit on Sales in 20x5 10,500 Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%) 5,000 Realized Gross Profit in 20x5 for 20x4 sales 5,500 Divided by: Collections in 20x5 for 20x4 sales 25,000 Gross Profit % for 20x4 sales

P 25,275 P

P P 22%

3. a Installment Sales Method: 20x3 Sales: P240,000 x 25/125P 48,000 20x4 Sales: P180,000 x 28/128 39,375 Realized Gross Profit on Installment SalesP 87,375 Cost Recovery Method: 20x3 Cost: P480,000 / 1.25 Less: Collections in 20x3 Collections in 20x4 Unrecovered Cost, 12/31/20x4

P384,000 140,000 240,000 P 4,000

Under the cost recovery method, no income is recognized on a sale until the cost of the item sold is recovered through cash receipts. All cash receipts, both interest and

principal portions, are applied first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all costs have been recovered, the recognized revenue after the cost recovery represents income (interest and realized gross profit). This method is used only when the circumstances surrounding a sale are so uncertain that earlier recognition is impossible. 4. a

P0.

5. c 6. e, 20x6 – 0; 20x7 - 0

Unrecovered costs,1/1/20x4 Less: Collections 1/1//20x4 Add: Sales on account Total Less: 1/1/20x5 Collections in 20x4 Unrecovered costs,1/1/20x5 1/1//20x5 Add: Sales on account Total Less: 1/1/20x6 Collections in 20x5 Unrecovered costs,1/1/20x6 1/1//20x6 Add: Sales on account Total Less: 1/1/20x7 Collections in 20x6 Unrecovered costs,1/1/20x7 1/1//20x7 Add: Sales on account Total Less: 1/1/20x8 Collections in 20x7 Unrecovered costs,1/1/20x8

110,000 0 15,000 15,000 10,500 __4,500 105,500 10,500 30,000 40,500 25,500 15,000 90,500 25,500 60,000 85,500 40,500 45,000 45,500 40,500 24,000 64,500 70,000 ____-045,500

7. b 20x4: P150,000 – (P568,620 x 10%) = P93,138. 20x5: (P568,620 – P93,138) x 10% = P47,548. 8. a – refer to No. 3 for discussion. Cost, January 1, 20x4 Less: Collections including interest – 20x4 Unrecovered Cost, December 31, 20x4 9. c

P

60,000 32,170 P 27,830

(P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3% (P3,600,000  .20) + [(3,600,000  .80)  4/12)] = P1,680,000 P1,680,000  33 1/3% = P560,000.

10. b [(P3,600,000  .20) + (P3,600,000  .80 x 8/12] – P2,400,000 = P240,000. 11. b – refer to No. 3 discussion. Cost, January 1, 20x4…………………………………………………………….P 500,000 Less: Collections including interest – 20x4……………………….P241,269

Collections including interest – 20x5……………………… 241,269 Unrecovered Cost, December 31, 20x5……………………………………….P

482,538 17,462

12. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000. 13. c P300,000 + P50,000 = P350,000 P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate) (P300,000 – P100,000) x 30% = P60,000. 14. c P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate) P480,000 – (P288,000 ×.4) = P364,800. 15. d – [P225,000 + (P120,000/40%)] 16. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000. 17. d Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP% 20x4 Sales: P120,000/ 30% P 400,000 20x5 Sales: P440,000/ 40% 1,100,000 P 1,500,000 18. c Sale: Installment receivables Inventory 3,600,000 Deferred gross profit 900,000 Payment: Cash Installment receivables 500,000 Deferred gross profit Realized gross profit 100,000 Balance Sheet: Installment receivables (4,500,000 – 500,000) 4,000,000 Deferred gross profit (900,000 – 100,000) 800,000 Installment receivables (net)

4,500,000

500,000 100,000

P

P 3,200,000

19. b 12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000] 2,000,000 Installment receivables 2,000,000 Deferred gross profit [P2,000,000 x (900/4,500)] 400,000 Realized gross profit 400,000 Balance sheet: Deferred gross profit: P800,000 400,000 = P400,000 Realized gross profit of P400,000 would be reported in the income statement. 20. No requirement 21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000

22. a 23. c

Gross profit % = (P900,000 P450,000)/P900,000 = 50% 20x4: 50% x P300,000 = P150,000

20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50% 50% x P300,000 received in 2010 = P150,000 20x5 sales: Gross profit % = (P1,500,000 P900,000)/P1,500,000 = 40% 40% x P400,000 received in 2010 = P160,000 Total: P150,000 + P160,000 = P310,000

24. c 20x4 Sales: 300,000

Installment receivables = P900,000 – P300,000 (x4 collections) - P300,000 (x5 collections) = P

Deferred gross profit = P450,000 – P150,000 (x4 collections) - P150,000 (x5 collections) = 150,000

Net installment receivable for 20x4 sales

=

P

150,000 20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000 Deferred gross profit = P600,000 – P200,000 (x5 collections) = 400,000 Net installment receivable for 20x5 = P 600,000 Total = P 750,000 25. a - Costs not yet recovered. 26. c Cost, 20x4 20x4 cost recovery Remaining cost, 12/31/x4 20x5 collection Gross profit – 20x5 27. d Cost 20x4 cost recovery 20x5 cost recovery Remaining cost

P 30,000 (20,000) P 10,000 15,000 P 5,000 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

55,000

20,000 15,000

Balance Sheet: Installment receivables Deferred gross profit Installment receivables (net)

30,000 25,000 20,000 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) P816,619 Cost of sales 637,500 Gross profit (realized) 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 32. b Total Income for 20x5: Gross profit (realized) – already recognized in 20x4 0 Interest revenue – 8 months in Year 1 (P81,662* x 8/12) 4 months in Year 2 (P71,078* x 4/12) 78,134 Total Income for 20x5 78,134

P179,119 _ 27,221 P206,340

P P 54,441

23,693 P

*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.

P

0

0

P

27,221 P 27,221

35. d Collections in 20x5 (August 31, 20x5) P 187,500 Less: Interest revenue/income from September 1, 20x4 to August 31, 20x5 (refer to schedule of amortization in No. 53) 81,662 Collection as to principal P 105,838 x: Gross Profit % (refer to No. 54) 22% Gross profit realized in 20x5 P 23,284 Add: Interest revenue/income for 20x5 (refer to No. 53) 78,134 Total Income for 20x5 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 9,360 20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42% 96,600 20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40% 62,000 Realized gross profit on installment sales in 20x6 P167,960 46. b 20x5 Sales

Net Market Values Less: Unrecovered Cost: IAR, unpaid balances x: Cost Ratio Gain (loss)

20x6 Sales

P 4,500 P10,000 50%

5,800 P (1,300)

P 3,500

P 5,000 60% P

3,000 500

P( 800)

47. a (1) Gain or Loss on repossession: Estimated selling price 1,700 Less: Normal profit (37% x P1,700) Market value of repossessed merchandise Less: Unrecovered Cost: Unpaid balance – 20x3 Less: DGP – x3 (P2,200 x34%) 1,452 Loss on repossession

48. c

P 629 P 1,071 P 2,200

(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% 93,438.8 20x4 Sales: (P602,000 – P410,090) x 37% Realized gross profit on installment sales Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %) 20x2 Sales: P 0 20x3 Sales: (P67,440 x 34%. 22,929.6 20x4 Sales: (P410,090 x 37%) 151,733.3

748 P( 381)

P

8,407.0

71,006.7 P 172,852.5

P174,662.9 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 Entry made: Inventory of RM* IAR-20x5 Correct Entry (Should be): Inventory of RM (at MV) DGP-20x5 Loss on repossession IAR-20x5 Correcting Entry: DGP-20x5 Loss on repossession Inventory of RM 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 600,000 Adjusted Installment Sales 3,000,000 Less: Cost of I/S 2,500,000 Gross Profit Gross profit rate: P500,000/ P3,000,000 x: Collections –Trade-in merchandise (at MV) 900,000 RGP on I/S in 20x4 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)

P 8,500 3,145 P 5,355 P 11,000 ___3,740

11,000

5,355 3,740 1,905

3,740

__7,260 P( 1,905)

11,000

11,000

1,905 5,645** P 3,600,000

P1,500,000 P 1,400,000 350,000 150,000

900,000 P

P

500,000 16 2/3% P P

P43,200 P36,000 1,800 5,400 28,800

Over-allowance

P 14,400

Installment sales Less: Over-allowance Adjusted Installment Sales Less: Cost of Installment Sales Gross profit Gross profit rate: P21,600/P108,000

P122,400 14,400 P108,000 86,400 P 21,600 20%

Realized gross profit: Down payment P 7,200 Trade-in (at market value) 28,800 Installment collections: (P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos. 21,600 Total collections in 2008 P 57,600 x: Gross profit rate 20% Realized gross profit 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 Cost of Sales Gross Profit Interest Revenue (Schedule I) Income before Income Taxes

P4,584,000 3,825,000 759,000 328,320 P1,087,320

Schedule I Computation of Interest Revenue on Installment Sale Contract Cash selling price (sales) Payment made on January 1, 20x3 Balance outstanding at 12/31/x3 Interest rate Interest Revenue

P4,584,000 936,000 3,648,000 9% 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.

P390,000 P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate) P720,000 – (P825,000 x 40%) = P390,000. 9. P 128,000 Installment Accounts Receivable, end of 20x4 x: Gross profit rate (66 2/3 / 166 2/3) _____40% Deferred Gross Profit, end of 20x4 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 =

P24,000 25,760

P 320,000 P 128,000

P49,760 Gross profit realized: 0.15 x P40,000 = 0.15 x P89,600 = 0.14 x P36,800 =

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 Total costs Less: Collections – 20x6 Unrecovered costs, 12/31/20x6 Additional costs – 20x7 Total costs Less: Collections – 20x7 Profit – 20x7

21. 22. 23. 24.

120,000 ______0 120,000 _20,000 140,000 80,000 60,000 20,000 80,000 40,000 40,000 10,000 50,000 100,000 50,000

P50,000 profit – refer to No. 20 P105,000 = P68,250 / (100% - 35%) P31,000 = P50,000 x (100% - 38%) 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

16,050

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

__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

31,000 _25,600 5,400 46,400 41,000

56,050 22,800 33,250

____-041,000

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

P 200,000

P300,000 collections = P150,000 unrecovered costs

29. P300,000 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: 300,000

0

Installment receivables = P900,000 – P300,000 (x4 collections) - P300,000 (x5 collections) = P

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 =

300,000 P

20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000 Deferred gross profit = P600,000 – P0 (all x5 collections to cost recovery) = P 600,000 Net installment receivable for 20x5 = P 400,000 Total = P 400,000 31. 24%. Determined from the repossession entry: Deferred gross profit Installment accounts receivable 32. 35% Installment sales Cost of sales Gross profit

P2,400 ———— = 24% P10,000

P120,000 78,000 P 42,000

Gross profit Installment sales

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% = P 7,000 20x5 P60,000 × 24% = 14,400 20x6 P30,000 × 35% = 10,500 P31,900 *Excluding accounts receivable for repossessed merchandise. 35. 20x4 (2010), P33,750; 20x5 (2011), P95,250 Gross profit realized in 20x4 (2010): Installment sales =

[(P300,000  P165,000)/P300,000] x P75,000 =

Gross profit realized in 20x5 (2011): From 20x4 sales = [(P300,000  P165,000)/P300,000] x P105,000 = From 20x5 sales =

P33,750

P47,250

[(P450,000  P270,000)/P450,000] x P120,000 =

48,000 P95,250

36. 20x4 (2010), P148,750; 20x5 (2011), P275,250

Sales Cost of sales Gross profit Gross profit realized on installment sales Total gross profit 37. 20x4 (2010), P148,750; 20x5 (2011), P275,250 . Installment accounts receivable Less: Deferred gross profit Net of deferred gross profit Theories 1. False

6.

True

2.

True

7. False

3.

False

8. True

4.

True

9. False

5.

True

10 True .

30 .

c

35 .

31

b

36 d

b

20x4 (2010) P450,000 335,000 P115,000 33,750

20x5 (2011 P450,000 270,000 P180,000 95,250

P148,750

P275,250

20x4 (2010) P225,000 101,250 P123,750

20x5 (2011 P450,000 186,000 P264,000

11.

True

16.

True

21 .

True

26.

True

12 . 13 . 14 . 15 .

False

17 . 18 . 19 . 20 .

True

22 . 23 . 24 . 25 .

True

27.

True

True

28.

False

True

29.

True

a

45.

b

50 .

d

55.

d

41 e

46.

c

51 c

56.

b

40.

False True True

False False True

True

. 32 . 33 . 34 . 60.

61 . 62 . 63 . 64 .

b b c

C B b c

d

. 37 d . 38 e . 39 c . 65.

66 . 67 . 68 . 69 .

b b d d

c

. 42 b . 43 b . 44 d .

47.

c

48.

c

49.

d

. 52 b . 53 a . 54 b .

57.

d

58.

c

59.

c