Please copy and paste this embed script to where you want to embed

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

View more...
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

Thank you for interesting in our services. We are a non-profit group that run this website to share documents. We need your help to maintenance this website.

To keep our site running, we need your help to cover our server cost (about $400/m), a small donation will help us a lot.