Solution Chapter 7
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Chapter 7 Problem I 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 II 1. Entries in 20x4: Cash…………………………………………………………………….……….. Mortgage Notes Receivable ………………………………………………..
3, 500 20,500
Real Estate ……………………………………………………………. Gain on Sale of Real Estate ……………………………………….. Cash ………………………………………………………………………………
9,000 15,000 500
Mortgage Notes Receivable ……………………………………….
500
Entry in 20x5: Real Estate ……………………………………………………………………….
16,500
Loss on Repossession of Real Estate ………………………………………..
3,500
Mortgage Notes Receivable ………………………………………
2. Entries in 20x4 Cash ……………………………………………………………………………… Mortgage Notes Receivable ………………………………………………..
20,000
3, 500 20,500
Real Estate ……………………………………………………………..
9,000
Deferred Gross Profit on Installment Sales ………………............ Cash ……………………………………………………………………………….
15,000 500
Mortgage Notes Receivable …………………………………..…..
500
Receipt P500 cash in 20x4 applicable to principal of note
Deferred Gross Profit on Installment Sales ………………………………...
2,500
Realized Gross Profit on Installment Sales………………………...
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 III 1. a. Installment Contracts Receivable 19X8………………………………… 250,000 Installment Sales ……………………………………………………
b. Cash …………………………………………………………………………..
250,000
120,000
Installment Contracts Receivable 19X8 ………………………
c.
Cost of Installment Sales …………………………………………………..
120,000
200,000
Merchandise Inventory …………………………………………..
d. Merchandise Repossessions ………………………………………………
200,000
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..
P 14,500
Less: Unrecovered cost: Unpaid balance…………………………P 20,000 Less: Deferred Gross Profit 20% x P20,000……………………
4,000
Loss on repossession…………………….
16,000 P 1,500
e. Expenses ………………………………………………………………………
16,000
Cash ………………………………………………………………….
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 ………………………………………………………
c.
250,000
Cost of Installment Sales ………………………………….
200,000
Deferred Gross Profit on Installment Sales-20x4.. ………
50,000
Adjustment to Recognize Gross Profit on Installment Sales: Deferred Gross Profit on Installment Sales – 20x4…………..……. Realized Gross Profit on Installment Sales – 20x4 ………. Realized Gross Profit: 20% of P120,000 (collections), or P24,000
24,000 24,000
d. Closing of nominal accounts. Realized Gross Profit on Installment Sales – 20x4…………………
24,000
Expenses ……………………………………………………….
16,000
Loss on Repossessions ……………………………………….
1,500
Income Summary …………………………………………….
6,500
To close the accounts for 20x4.
Problem IV 1. January to December 31
20x4
20x5
(1) To record regular sales: Accounts receivable Sales (2) To record installment sale: Cash Installment accounts receivable Installment Sales
600,000
1,080,000 600,00
60,000 300,000
1,080,000 144,000 336,000
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 Installment Accounts receivable – 20x2 Installment Accounts receivable – 20x3 Interest income (5) to record payment of operating expenses: Operating expenses Cash
2.
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
72,000
72,000
36,000
60,000 72,000
90,000
102,000 90,000
102,000
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
252,000
Shipment s on installment 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%.
168,000
(9) To record realized gross profit on installment sales: Deferred gross profit – 20x4
25,200
25,200
Deferred gross profit – 20x5
21,000
Realized gross profit
25,200
46,200
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; 20x4
20x5
Collections – principal……………
P 72,000
P 60,000
Multiplies by: Gross profit %..........
____30%
____35%
Realized gross profit………………
P 21,600
P 21,000
P 42,600
Closing entries: (10) To close realized gross profit account: Realized gross profit Income summary (11) To close other nominal accounts
21,600
42,600 21,600
42,600
Sales
600,000
Interest income
1,080,000
37,440
Cost of sales
74,880 480,000
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
Amount
Ratio to Total Sales
P 225,000 ___450,000 P 675,000 _ 1,125,000 P 1,800,000
Allocated Cost P *146,250 **292,500 P 438,750 __731,250 P 1,170,000
675/1,800 1,125/1,800
*P225,000/P1,800,000 x P1,170,000 = P146,250 **P450,000/P1,800,000 x P1,170,000 = P292,500
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. 2. Type of Sale Cash sales Credit sales Installment Sales Total Sales
Amount P 225,000 450,000 1,125,000 P 1,500,000
Amount based on Cash Sales (100%) P 225,000 375,000* 900,000** P 1,250,000
Ratio to Total Sales 225/1,500 375/1,500 900/1,500
Gross profit rate 30% 36% 40%
Cost ratio 70% 64% 60%
Allocated Cost P 175,500 292,500 __ 702,000 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 1,125,000 P 1,800,000 P
Allocated Cost* P 157,500 288,000 _ _675,000 P 1,170,000
* 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)…………………………….
P 108,000 P 12,000 6,000 __21,600
__39,600
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 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……………............ Installment sales……………………………………….......
840,000 360,000 2,400,000 3,360,000 6,960,000
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……………............ Installment sales (net of over-allowance)……..............
840,000 2,400,000 3,360,000 6,600,000
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)…………………… Normal profit (20% x P1,680,000)……………....... Over-allowance……………………………………………………
P1,200,000 P1,680,00 0 420,000 84,000 __336,000
__840,000 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 __3,920,000 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 ………………….
Nov. 30 Cash ……………………………………………………………………….
15,000
1,150
Mortgage Notes Receivable …………………………………
600
Interest Income ………………………………………………….
550
Interest Received: P55,00 at 12% for 1 month, or P550
Dec. 31 Cash ………………………………………………………………………… 1,144 Mortgage Notes Receivable …………………………………..
600
Interest Income ……………………………………………………
544
Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
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 ……………………………………………………… Deferred Gross Profit on Installment Sales ………………..
Nov. 30 Cash ……………………………………………………………………… Mortgage Notes Receivable ………………………………..
60,000.00 15,000.00
600 50.00
Interest Income …………………………………………………
550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50, is reduction in principal)
Dec. 31 Cash ……………………………………………………………………….
600.00
Mortgage Notes Receivable …………………………………
50.50
Interest Received ………………………………………………
549.50
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]) …………………… Depreciation Expense (1/2[2% of P90,000]) ……………………………
6,300 900
Land ……………………………………………………………………
10,000
Building ………………………………………………………………..
90,000
Deferred Gross Profit on Sale of Property ………………………
Deferred Gross Profit on Sale of Property …………………………………
57,200
9,553
Realized Gross Profit on Sale of Property ………………………...
9,553
Amount realized: (P25,000/150,000) x 57,200 2. 6/30x5: Cash …………………………………………………………………………… 30,000 Notes Receivable …………………………………………………….. 30,000 Deferred Gross Profit on Sale of Property ………………………………. 11,440 Realized Gross Profit on Sale of Property …………………………
11,440
Amount realized (P30,000/P150,000) x 57,200 6/30/x6 Cash …………………………………………………………………………. Notes Receivable ……………………………………………………
50,000 50,000
Deferred Gross Profit on Sale of Property ……………………………… 19,067 Realized Gross Profit on Sale of Property ………………………… Amount Realized: (P50,000/P150,000) X 57,200 6/30/x7 Cash ………………………………………………………………………….. Notes Receivable …………………………………………………… Deferred Gross Profit on Sale of Property ………………………………. Realized Gross Profit on Sale of Property ………………………… Amount Realized: (P15,000/P150,000) X 57,200
19,067
15,000 15,000 5,720 5,720
Problem X Installment Contracts Receivable …………………………………………. 200,000 Installment Sales ………………………………………………………
Cost of Installment Sales ……………………………………………………..
200,000
120,000
Merchandise Inventory ………………………………………………
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
Cash ………………………………………………………………………………. 124,000 Installment on Contracts Receivable – 20x4……………………...
30,000
Installment on Contracts Receivable – 20x5……………………...
34,000
Installment on Contracts Receivable – 20x6……………………...
60,000
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 ……………………………………………………………… Deferred Gross Profit
20x6 …………………………… P 15,125
P 40,000
20x5 ……………………………
3,600
20x4 ……………………………
960
19,685
Total Liabilities 59,685
P
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 …………………………………….
P 214,500
WW EQUIPMENT, Inc. Income Statement For Year Ended December 31, 20x6
Sales ………………………………………………………............ Cost of goods sold: 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 ……………………………………. Operating Expenses …………………………………………... Net Loss …………………………………………………………..
Installment Sales P320,000
Regular Sales P125,000
232,000 P88,000 15,125 P78,875
110,000 P15,000
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
P15,000
Total P445,000
342,000 P103,000 15,125 P87,875 50,040 P137,915 151,500 P 13,585
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 Installment sales gross profit percentage …………………..
27.5%
20x4
P138,000
P27,000
30%
Realized Gross Profit …………………………………………….. P 72,875
Installment Sales ……………………………………………………
20x5
32%
P 41,400
P 8,640
320,000
Cost of Installment Sales …………………………………………. 232,000 Deferred Gross profit ……………………………………………… 88,000
Deferred Gross Profit, 20x6 ……………………………............... 72,875 Deferred Gross Profit, 20x5 ……………………………............... 41,400 Deferred Gross Profit, 20x4 ……………………………...............
8,640
Realized Gross Profit on Installment sales…………… 122,915
Income Summary …………………………………………………
170,000
Shipment on Installment of Sales ………………………………
232,000
Merchandise Inventory, Jan. 1, 20x6 ……………….
52,000
Purchases ………………………………………………
350,000
Merchandise Inventory, Dec. 31, 20x6 ……………………..
60,000
Income Summary ……………………………………
Sales ……………………………………………………………….
60,000
125,000
Income Summary ……………………………………. Realized Gross Profit on Installment Sales………..………...
125,000 122,915
Income Summary …………………………………….
Income Summary ………………………………………………
122,915
151,500
Operating Expenses ………………………………...
151,500
Retained Earnings ……………………………………………..
13,585
Income Summary …………………………………...
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………………………………
1,900
Deferred Gross profit, 20x5………………………………
4,000
Deferred Gross Profit, 20x4………………………………
3,600
Loss on Repossessions…………………………..
9,500
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
GG SALES CORPORATION Income Statement For Year Ended December 31, 20x6
Sales ………………………………………………………............
Installment Sales P500,000
Regular Sales P192,000
Total P692,000
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 ………………. Add: realized gross profit on prior years’ sales on Installment basis (see gross profit schedule) ……………….
310,000 P190,000 32,300 P157,700
150,000 P42,000
460,000 P103,000 32,300 P199,700
P42,000
100,650 P300,350 3,500 P296,850 300,000 P 3,150
Deduct loss on repossession …………………………………. Total Realized Gross Profit ……………………………………. Operating Expenses …………………………………………… Net Loss …………………………………………………………..
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 Collections of Installment contracts receivable.. P415,000 Installment sales gross profit percentage ………..
20x5
P210,000 P 37,000
38%
Realized gross profit …………………………………..P157,700
20x4
40%
45%
P 84,000 P 16,650
GG SALES CORPORATION Balance Sheet December 31, 20x6 Assets Cash …………………………………………………………………………………... Installment Accounts Receivable 20x6 …………………P 80,000 20x5 ………………… 20,000
P 25,000
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 ………………………………………………………….
P100,000
Retained Earnings ………………………………………. P 44,500 Balance, Jan. 1, 20x6 ………………………………
3,150
Balance, Dec. 31, 20x6 ……………………………
41,350
Total Stockholder’s Equity ………………………………………….
141,350
Total Liabilities and Stockholder’s Equity ……………………….. 4. Installment Sales ………………………………………………………………..
P 257,000 500,000
Cost of Installment Sales ………………………………………………..
310,000
Deferred Gross Profit, 20x6 ……………………………………………..
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 …………………………………….
30,000
Purchases ………………………………………………………………….
455,000
Repossessed Merchandise ……………………………………………..
10,000
Merchandise Inv, December 31, 20x6……..……………………………….
35,000
Income Summary ………………………………………………………..
Sales ……………………………………………………………………………....
35,000
192,000
Income Summary …………………………………………………………
Realized Gross Profit on Installment Sales…………………………………..
192,000
258,350
Income Summary ………………………………………………………..
Income Summary ………………………………………………………………
258,350
3,500
Loss on Repossession …………………………………………………….
Income Summary ………………………………………………………………
3,500
300,000
Operating Expenses ……………………………………………………..
Retained Earnings ………………………………………………………………
300,000
3,150
Income Summary ………………………………………………………….
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
P
8,407.00
20x5: 34% x P274,820
93,438.80
20x6; 37% x P191,910
71,006.70
Total
2. Deferred gross profit 20x5………………………………………………………
P172,852.50
748.00
Inventory of Repossessed Merchandise……………………………….
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 …………………
2.
3.
4.
1,600.00 1,000.00 600.00
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 ………………… Gross Profit Percentage: 37.5% (P600/P1,600) Realized Gross Profit for 20x4: 37.5% of 601.19 (sum of payments on installment contract)
160.00 14.40 145.60 11.47 148.53 225.45 225.45
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 XIV – Big Bear 20x4: Installment receivables Inventory Deferred gross profit Cash
250,000 150,000 100,000 80,000
Installment receivables 20x5: Cash
80,000 120,000
Installment receivables Deferred gross profit Realized gross profit 20x6: Cash
120,000 50,000 50,000 50,000
Installment receivables Installment receivables Inventory Deferred gross profit
50,000 300,000 210,000 90,000
Cash
135,000 Installment receivables
135,000
Deferred gross profit Realized gross profit
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 XV – 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 Cost of sales Gross profit Interest revenue--4 months: P816,619 x 10% x 4/12 = Total income for 20x5 = P179,119 + P27,221 =
P816,619 637,500 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. c 20x4: P1,200,000 x 30% = P 360,000 20x5: P1,400,000 x 40% = 560,000
22% rounded
P 27,221
P920,000
2. d – [P225,000 + (P120,000/40%)] 3. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000. 4. 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 5. b – [(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000 6. b
[(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000.
7. c
P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate) P480,000 – (P288,000 ×.4) = P364,800.
8. 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.
9. c
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate) P720,000 – (P825,000 x 40%) = P390,000.
10. a – 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. P8,000 x (P30,000 – P24,000)/P30,000 = P1,600 11. b – 20x4: P500,000 x 30% = P 150,000 20x5: P600,000 x 40% = 240,000
P390,000
12. d – same with No. 4 13. b Installment Accounts Receivable, end of 20x4 x: Gross profit rate (66 2/3 / 166 2/3) Deferred Gross Profit, end of 20x4 14. b 20x4: P150,000 – (P568,620 x 10%) = P93,138. 20x5: (P568,620 – P93,138) x 10% = P47,548.
P 320,000 _____40% P 128,000
15. d Realized Gross Profit on Installment Sales in 20x6: 20x4 sales: P10,000 x 22%P 20x5 sales: P50,000 x 25% 20x6 sales: P45,000 x P28,200 / (P28,200+P91,800) Realized Gross Profit on Sales in 20x5 Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%) Realized Gross Profit in 20x5 for 20x4 sales Divided by: Collections in 20x5 for 20x4 sales Gross Profit % for 20x4 sales
2,200 12,500 10,575 P 25,275 P 10,500 5,000 P 5,500 P 25,000 22%
16. 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. 17. 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
(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
1,452 P( 381)
P
8,407.0 93,438.8 71,006.7 P 172,852.5
18. 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%) 19. a – refer to No. 16 for discussion. Cost, January 1, 20x4 Less: Collections including interest – 20x4 Unrecovered Cost, December 31, 20x4
22,929.6 151,733.3 P174,662.9 P P
20. b
(P300,000 ÷ P750,000) x P250,000 = P100,000 [(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000.
21. d
[P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400.
22. d
P8,400 – P5,880 = P2,520 (P3,000 – P300) – P2,520 = P180 gain.
23. b
P24,000 – P7,200 = P16,800 P16,800 – P13,500 = P3,300 loss.
24. d
(P2,000,000 – P1,500,000) ÷ P2,000,000 = 25%
25. a
(P800,000 x .25) – P90,000 = P110,000,
26. d
P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
27. a
(P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.
28. d
(P1,200,000 × .30) – P120,000 = P240,000.
29. a
P1,050,000 × .30 = P315,000 P900,000 – [(P1,200,000 + P1,050,000) × .30] = P225,000.
30. c
(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.
31. b
[(P3,600,000 × .20) + (P3,600,000 × .80 x 8/12] – P2,400,000 = P240,000.
27,830
60,000 32,170
32. a P0. 33. c Sale: Installment receivables Inventory Deferred gross profit Payment: Cash Installment receivables Deferred gross profit Realized gross profit Balance Sheet: Installment receivables (4,500,000 – 500,000) Deferred gross profit (900,000 – 100,000) Installment receivables (net)
4,500,000 3,600,000 900,000 500,000 500,000 100,000 100,000 P 4,000,000 800,000 P 3,200,000
34. 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. 35. b – refer to No. 16 discussion. Cost, January 1, 20x4…………………………………………………………….P 500,000 Less: Collections including interest – 20x4……………………….P241,269 Collections including interest – 20x5……………………… 241,269 482,538 Unrecovered Cost, December 31, 20x5……………………………………….P 17,462 36. 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 Installment sales Less: Over-allowance Adjusted Installment Sales Less: Cost of Installment Sales Gross profit Gross profit rate: P21,600/P108,000
P43,200 P36,000 1,800 5,400 28,800 P 14,400 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
37. a - Costs not yet recovered. 38. 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
39. 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. 40. d Sale:
Installment receivables Inventory Deferred gross profit
55,000 30,000 25,000
Payment: Cash
20,000 Installment receivables
20,000
Balance Sheet: Installment receivables P55,000 – 20,000 Deferred gross profit Installment receivables (net)
P 35,000 ( 25,000) P 10,000
41. a Sale:
2008:
Installment receivables Inventory Deferred gross profit
55,000 30,000 25,000
Cash
20,000 20,000 15,000 15,000 5,000
Installment receivables Cash 2009:
Installment receivables Deferred gross profit Realized gross profit
5,000
Balance Sheet: Installment receivables Deferred gross profit Installment receivables (net)
P 20,000 ( 20,000) P 0
42. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000 43. a Gross profit % = (P900,000 P450,000)/P900,000 = 50% 20x4: 50% x P300,000 = P150,000 44. c 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 45. c 20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections) - P300,000 (x5 collections) = Deferred gross profit = P450,000 – P150,000 (x4 collections) - P150,000 (x5 collections) = Net installment receivable for 20x4 sales =
P 300,000 150,000 P 150,000
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= Deferred gross profit = P600,000 – P200,000 (x5 collections) = Net installment receivable for 20x5 = Total =
P1,000,000 400,000 P 600,000 P 750,000
46. a 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
P 200,000
47. b - P450,000 cost P300,000 collections = P150,000 unrecovered costs 48. b 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 49. 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 =
P 300,000 300,000 P
0
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 50. b – same with No. 59. 51. 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
52. 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
53. 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. 54. 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.
P
55. a Total Income for 20x4: Gross profit earned in 20x4 (P0* x 22%) Interest revenue (refer to No. 52 Total income for 20x4. 56. d Collections in 20x5 (August 31, 20x5) Less: Interest revenue/income from September 1, 20x4 to 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
0
P
0 27,221 P 27,221 P 187,500
P
81,662 P 105,838 22% 23,284 78,134 P 101,418
57. 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
P 8,500 3,145 P 5,355 P 11,000 ___3,740
Entry made: Inventory of RM* IAR-20x5
__7,260 P( 1,905)
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 11,000
Correcting Entry: DGP-20x5 Loss on repossession Inventory of RM
3,740 1,905 5,645**
58. 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
59. 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)
60. 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 Theories
20x6 Sales P 3,500
P 5,000 60% P
3,000 500
Net
P( 800) 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
1.
2 . 3 . 4 . 5 .
True True
7. True
6.
True
12. True
17. True
22. d
27. b
32. c
False
8. True
13. True
18. b
23. d
28. d
33. c
False
9. True
14. True
19. c
24. c
29. b
34. b
True
10 False ,
15, True
20. c
25. b
30. d
35. b
36.
c
41.
37. 38. 39. 40.
d b b d
42. c 43. c 44. c 45.
d
11.
False
16.
True
21.
c
26.
a
31.
c
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