Quiz 7

1. Paral Company began operations on January 2, 20x4, and appropriately used the installment sales method of
accounting. The following data are available for 20x4 and 20x5:
20x4 20x5
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,000,000 P3,600,000
Gross profit on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30% 40%
Cash collections from:
20x4 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000 P1,200,000
20x5 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- P1,400,000
The realized gross profit for 20x5 is:
2. Daily, Inc. appropriately used the installment method of accounting to recognize income in its financial
statement. Some pertinent data relating to this method of accounting include:
20x4 20x5
Installment sales P750,000 P900,000
Cost of sales 450,000 630,000
Gross profit P300,000 P270,000
Collections during year:
On 20x4 sales 250,000 250,000
On 20x5 sales 300,000
What amount to be realized gross profit should be reported on Daily’s income statement for 20x5?
3. Assume the Randall Corporation sold P30,000 worth of merchandise on the installment basis. The cost of the
merchandise was P24,000, and collectability of the receivable is uncertain. Collection in the current year on the
account is P8,000. How much gross profit should be reported as realized?
Use the following information for questions 4 to 6:
Kamus Medical Center uses the cost recovery method in accounting for recognizing revenue. The following
information is available:
20x5 20x6 20x7
Sales .............................................. P 45,000 P 60,000 P 85,000
Gross profit percentage………. 37% 41% 40%
Cash collections:
   20x5 ............................................ P 24,000 P 19,000 P 2,000
   20x6 ............................................ 40,000 17,000
   20x7 ............................................ 53,000
4. Determine the amount of gross profit to be recognized for 20x5.
5. Determine the amount of gross profit to be recognized for 20x6.
6. Determine the amount of gross profit to be recognized for 20x7.
7. Leno Distribution, which began operating on January 1, appropriately uses the installment method of accounting.
The following information pertains to Leno's operations for the first year:
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000
Cost of installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Collections on installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
The balance in the deferred gross profit account at December 31 should be:
8. Piper Co. began operations on January 1, 20x4 and appropriately uses the installment method of accounting. The
following information pertains to Piper's operations for 20x4:
Installment sales………………………………………………………….. P1,800,000
Cost of installment sales………………………………………………… 1,080,000
General and administrative expenses……………………………….. 180,000
Collections on installment sales…………………………………………. 825,000
The balance in the deferred gross profit account at December 31, 20x4 should be:
9. The Cindy, Inc. began operating at the beginning of the calendar year 20x4 and, using the installment method of
accounting, presented the following data for the first year:
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000

V O L U M E I | Advanced Accounting – (A Comprehensive & Procedural Approach)

 Gross margin based on cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-2/3%
Inventory, Dec. 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 40,000
Accounts receivable, Dec. 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . 320,000
The balance of the deferred gross profit account, end of 20x4 should be:
10. Ft. Myers Co. began business on January 1, 20x3. The company uses the installment method. Additional
information follows:
  20x3 20x4
Installment sales P160,000 P184,000
Cost of installment sales 136,000 158,240
General and administrative expenses 20,000 8,400
Cash receipts on installment method sales    
  20x3 sales 40,000 89,600
  20x4 sales - 36,800
Compute the balance of Deferred Gross Profit at December 31, 20x4.
Use the following information for questions 11 to 14:
On January 1, 20x4, Panama City Realty sold land for P2,000 that had originally cost P1,600. A 5% down payment
was received. Further cash collections were as follows:
20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P   600
20x6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
20x7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
11. Compute the amount of realized profit for the year 20x5 under the full accrual method.
12 . Compute the amount of realized profit for the year 20x6 under the installment sales method.
13. Compute the amount of realized profit for the year 20x7 under the sunk cost method
14. A corporation sold goods for P10 million during 20x4. Of this amount, P6 million were in cash, and P4 million
was on account. However, the company collected P2 million of the sales on account during 20x4. In conformity
\
with the revenue principle, the amount of revenue that should be recognized in 20x4 is:
Use the following information for questions 15 and 16:
A firm uses the installment method of revenue recognition on an item with a cash selling price of P1,000 and cost of
P600. During the year of sale, the firm received P250 from the customer.

15. The net installment account receivable (net of deferred gross profit) at the end of the year of sale?
16. Thereafter, no more cash is received. The firm repossesses the item, worth P500 at that time. The entry to record
the repossession includes:
Use the following information for questions 17 to 19:
On January 1, 20x4, Walters, Inc. purchased a risky investment for P100. It was decided to use the cost recovery
method of revenue recognition. Cash collections on accounts receivable related to the asset were as follows:
20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P   70
20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
20x6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17. Compute the amount of realized gross profit for the year 20x4.
18. Compute the amount of realized gross profit for the year 20x5.
19. Compute the amount of realized gross profit for the year 20x6.
Use the following information for questions 20 and 21:
A company incurred the following costs and received the following collections from customers:
Costs Collections
20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P120,000 P 0
20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 80,000
20x6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 40,000
20x7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 100,000
20x8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0
20. If the company used the cost recovery method of revenue recognition, the income that should be recognized in
20x6 is ___________________.
21. If the cost recovery method continues to be used through 20x7, the amount of 20x7 income that should be
recognized is ____________________.
Use the following information for questions 22 to 26:
Johnson Enterprises uses the cost recovery method of construction accounting for all installment sales. Complete the
following table:
20x4 20x5 20x6
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 80,000 P 95,000 P ?
Cost of installment sales . . . . . . . . . . . . . . . . . . . .. . . . . . ? 56,050 68,250
Gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . 38% ? 35%
Cash collections:
20x4 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,600 46,400 5,600
20x5 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,800 ?
20x6 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,550
Realized Gross Profit on Installment Sales . . . . . . . . . . . ? ? 16,050
22. The installment sales in 20x6:
23. The cost of installment sales in 20x4:
24. The collections in 20x6 for 20x5 sales:
25. The realized gross profit on installments sales in 20x4:
26. The realized gross profit on installments sales in 20x5:
Use the following information for questions 27 to 30:
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a
jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake
has little information about collectability of these receivables, they use the cost recovery method to recognize
revenue on these installment sales. In 20x4 Lake began operations and sold jet skis with a total price of P900,000
that cost Lake P450,000. Lake collected P300,000 in 20x4, P300,000 in 20x5, and P300,000 in 20x6 associated with
those sales. In 20x5 Lake sold jet skis with a total price of P1,500,000 that cost Lake P900,000. Lake collected
P500,000 in 20x5, P400,000 in 20x6, and P400,000 in 20x7 associated with those sales. In 20x7 Lake also
repossessed P200,000 of jet skis that were sold in 20x5. Those jet skis had a fair value of P75,000 at the time they
were repossessed.
27.  In 20x7, Lake would record a loss on repossession of: 
28.  In 20x4, Lake would recognize realized gross profit of: 
29.  In 20x6, Lake would recognize realized gross profit of: 
30.  In its December 31, 20x5, balance sheet, Lake would report: 
a. Deferred gross profit of P800,000.
b. Deferred gross profit of P650,000.
c. Installment receivables (net of deferred) ofP700,000.
d. Installment receivables (net of deferred) of P400,000.
Use the following information for questions 31 to 34:
Houser Appliances accounts for all sales of its merchandise on the installment basis. Following is the unadjusted
trial balance at 12/31/x6
Cash P 45,000
Installment accounts receivable - 20x4 20,000
Installment accounts receivable - 20x5 50,000
Installment accounts receivable - 20x6 90,000
Inventory 27,400
Repossessed merchandise 4,600
Accounts payable P 37,600
Deferred gross profit - 20x4 12,000
Deferred gross profit - 20x5 26,400
Common stock 125,000
Retained earnings 10,000
Installment sales 120,000
Cost of installment sales 78,000
Loss on repossessions 3,000
Operating expenses 13,000
 P 331,000 P 331,000
Additional information:
 20x4 gross profit rate: 25%
 Total cash receipts during 20x6: P118,000
 Merchandise sold in 20x5 was repossessed in 20x6 and the following entry was prepared:
Deferred Gross Profit—20x5........................................................................ 2,400
Repossessed Merchandise............................................................................ 4,600
Loss on Repossessions.................................................................................. 3,000
Installment Accounts Receivable - 20x5……………….. 10,000
31. What is the gross profit rate for 20x5?
32. What is the gross profit rate for 20x6?
33. Of the total cash receipts in 20x6, how much represents collections from installment sales of:
a. 20x4 b. 20x5 c. 20xx6
34. What is the total realized gross profit in 20x6?
Use the following information for questions 35 to 37:
Homestead Corporation incurred the following activity during its first two years of operations:
  20x4 20x5
Total credit sales P 750,000 P 900,000
Installment sales* 300,000 450,000
Total cost of sales 500,000 540,000
Installment cost of sales** 165,000 270,000
Cash receipts on installment sales:    
  20x4 sales 75,000 105,000
  20x5 sales -0- 120,000
 

  *Included in total credit sales.

**Included in total cost of sales.
Determine the following items for both 20x4 and 20x5:
35. Gross profit realized on installment sales.
36. Total gross profit.
37. The installment accounts receivable (net of deferred gross profit)

Solutions
1. P920,000

20x4: P1,200,000 x 30% = P 360,000

20x5: P1,400,000 x 40% = 560,000 P920,000

2. P190,000
(P300,000 ÷ P750,000) x P250,000 = P100,000
[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000

3. P1,600– assume the use of installment sales method. It should be noted that if the collectability is highly
uncertain or extremely uncertain, the use of cost recovery method is preferable.

4. Zero/Nil
When the cost recovery method is used, gross profit is recognized only after all costs have been recovered.
20x5
P45,000 x 63% = P28,350 Cost of sale
P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5.
Costs still to be recovered.
5. P19,250
20x6
Relating to 20x5 sales:
P19,000 - P4,350 = P14,650 Gross profit recognized
Relating to 20x6 sales:
P60,000 x 59% = P35,400 Cost of sale
P40,000 - P35,400 = 4,600 Gross profit recognized
P19,250 Recognized in 20x6
6. P21,000
20x7
Relating to 20x5 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... P 2,000
Relating to 20x6 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... 17,000
Relating to 20x7 sales:
P85,000 x 60% = P51,000 Cost of sale
    P53,000 - P51,000 = .......... 2,000 Gross profit
recognized
P21,000 Recognized in 20x7
7. P320,000
[(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000

8. P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (P825,000 x 40%) = P390,000.
9. P 128,000
Installment Accounts Receivable, end of 20x4 P 320,000
x: Gross profit rate (66 2/3 / 166 2/3) _____40%
Deferred Gross Profit, end of 20x4 P 128,000

10. P25,168, determined as follows:

Gross profit percentages:

20x3: P136,000/P160,000 = 85%; 100% x 85% = 15%
20x4: P158,240/P184,000 = 86%; 100% x 86% = 14%
 
To deferred gross profit:  
20x3: P160,000 x P136,000 = P24,000
20x4: P184,000 x P158,240 =   25,760
  P49,760
   
Gross profit realized:  
0.15 x P40,000 = P  6,000
0.15 x P89,600 = 13,440
0.14 x P36,800 =     5,152
  P24,592
Balance of Gross Profit Deferred:
P49,760 - P24,592 = P25,168

11. P    0 – all profit recognized in 20x5

12. P240 – (P1,200/P2,000) x P400
13. P100 - (100% of costs were fully recovered prior to 20x7
14. P10 million, the amount of sale
15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450

16. P50 gain

Repossessed merchandise……………………………………… 500
Deferred gross profit……………………………………………… 300
Installment Accounts receivable…………………….. 750
Gain on repossession…………………………………… 50

17. 0
Unrecovered costs,1/1/20x4 100
Less: Collections 70
Unrecovered costs,1/1/20x5 30
Less: Collections 40
Profit – 20x5 10
Profit – 20x5 30

18. P10 – refer to No. 17

19. P30 –refer to No. 17

20. Zero
Unrecovered costs – 20x4 120,000
Less: Collections – 20x4 ______0
Unrecovered costs, 12/31/20x4 120,000
Additional costs – 20x5 _20,000
Total costs 140,000
Less: Collections – 20x5 80,000
Unrecovered costs, 12/31/20x5 60,000
Additional costs – 20x6 20,000
Total costs 80,000
Less: Collections – 20x6 40,000
Unrecovered costs, 12/31/20x6 40,000
Additional costs – 20x7 10,000
Total costs 50,000
Less: Collections – 20x7 100,000
Profit – 20x7 50,000

21. P50,000 profit – refer to No. 20

22. P105,000 = P68,250 / (100% - 35%)
23. P31,000 = P50,000 x (100% - 38%)

24. P43,700
Unrecovered costs – Cost of installment sales for 20x5 installment sales 56,050
Less: Collections in 20x5 for 20x5 installment sales _22,800
Unrecovered costs, 12/31/20x5 33,250
Less: Collections in 20x6 for 20x5 installment sales (balancing figure) _43,700
Realized GP on I/S in 20x6 for 20x5 sales *10,450
*
Realized GP on I/S in 20x6 16,050
Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23) is
already recovered in 20x5 equivalent to collection __5,600
Realized GP on I/S in 20x6 for 20x5 installment sales *10,450
25. Zero – costs is not yet fully recovered, the profit should be recognized
Unrecovered costs – Cost of installment sales for 20x4 (No. 23) 31,000
Less: Collections in 20x4 for 20x4 installment sales _22,800
Unrecovered costs, 12/31/20x4 8,200

26. P41,000
Unrecovered costs – Cost of installment sales for 20x4 installment sales 31,000
Less: Collections in 20x4 for 20x4 installment sales _25,600
Unrecovered costs, 12/31/20x4 5,400
Less: Collections in 20x5 for 20x4 installment sales 46,400
Realized GP on I/S in 20x5 for 20x4 installment sales 41,000
Realized GP on I/S in 20x5 for 20x5 installment sales:
Unrecovered costs – Cost of installment sales for 20x5 installment
Sales 56,050
Less: Collections in 20x5 for 20x5 installment sales 22,800
Unrecovered costs, 12/31/20x4 33,250 ____-0-
Realized GP on I/S in 20x5 41,000
27. P 45,000
Installment receivable = P200,000
Deferred gross profit = P80,000 (P200,000 x 40%)
Fair value = P75,000

Repossessed inventory P 75,000

Deferred gross profit P 80,000
Loss on repossession (plug) P 45,000
Installment receivable P 200,000

28. Zero
P450,000 cost P300,000 collections = P150,000 unrecovered costs

29. P300,000
20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost recovered in
20x4, the other P150,000 of cost recovered in 20x5, so P150,000 of gross profit
recognized in 20x5, leaving P300,000 recognized in 20x6.
20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000 of cost
recovered in 20x5, the other P400,000 of cost recovered in 20x5, so P0 of gross profit
recognized in 20x6.
Total: P300,000 + P0 = P300,000

30. d
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P 300,000
Deferred gross profit = P450,000 – P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) = 300,000
Net installment receivable for 20x4 sales = 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

31. 24%.
Determined from the repossession entry:
 Deferred gross profit P2,400
———— = 24%
Installment accounts receivable P10,000

32. 35%
Installment sales P120,000
Cost of sales 78,000
Gross profit P 42,000

Gross profit P42,000

————- = 35% gross profit rate
Installment sales P120,000

33.
a. 20x4 Deferred gross profit balance P 12,000
Gross profit rate ÷ 25%
Beginning accounts receivable P 48,000
Beginning accounts receivable P 48,000
Ending accounts receivable (20,000)
Cash collected P 28,000

b. 20x5 Deferred gross profit balance P 26,400

Gross profit rate ÷ 24%
Beginning accounts receivable* P110,000
Beginning accounts receivable* P110,000
Ending accounts receivable* (50,000)
Cash collected P 60,000

c. 20x6 Installment sales—20x6 P120,000

Accounts receivable—20x6 (90,000)
Cash collected P 30,000

34. P31,900
Total realized gross profit in 20x6
From 20x4 P28,000 × 25% = P 7,000
20x5 P60,000 × 24% = 14,400
20x6 P30,000 × 35% = 10,500
P31,900
*Excluding accounts receivable for repossessed merchandise.

35. 20x4 , P33,750; 20x5), P95,250

Gross profit realized in 20x4  
  Installment sales = [(P300,000  P165,000)/P300,000] x P75,000 = P33,750
       
  Gross profit realized in 20x5 (:  
  From 20x4 sales = [(P300,000  P165,000)/P300,000] x P105,000 = P47,250
       
  From 20x5 sales = [(P450,000  P270,000)/P450,000] x P120,000 =   48,000
      P95,250

36. 20x4, P148,750; 20x5 =, P275,250

  20x4 20x5
Sales P450,000 P450,000
  Cost of sales   335,000   270,000
  Gross profit P115,000 P180,000
  Gross profit realized on installment sales     33,750     95,250
  Total gross profit P148,750 P275,250
 

37. 20x4 =, P148,750; 20x5 =, P275,250

.   20x4 20x5
    Installment accounts receivable P225,000 P450,000
    Less: Deferred gross profit   101,250   186,000
    Net of deferred gross profit P123,750 P264,000