INSTALLMENT SALES

MULTIPLE QUESTIONS

PROB. 1 (AICPA)

Cash collection is a critical event for income recognition in the

Cost recovery Installment

method method
a. No No
b. Yes Yes
c. No Yes
d. Yes No

PROB. 2 (AICPA)

The installment method of recognizing profit for accounting purposes is acceptable if

a. Collection in the year of sale do not exceed 30% of the total sales price
b. An unrealized profits account is credited
c. Collection of the sales price is not reasonably assured
d. The method is consistently used for all sales of similar merchandise

PROB. 3 (AICPA)

Under the installment sales method,

a. Revenue, costs and gross profit are recognized proportionately to the cash received from the sale
of the product.
b. Gross profit is deferred proportionately to cash uncollected from sale of the product, but total
revenue and costs are recognized at the point of sale.
c. Gross profit is not recognized until the amount of cash received exceeds the cost of the item sold.
d. Revenues and costs are recognized proportionately to the cash received from the sale of the
product, but gross profit is deferred until all cash is received.

PROB. 4 (AICPA)

Under the cost recovery method of revenue recognition,

a. Income is recognized on a proportionate basis as cash is received on the sale of the product.
b. Income is recognized when the cash received from the sale of the product is greater than the cost
of the product.
c. Income is recognized immediately.
d. None of these.

PROB. 5 (AICPA)

Chris Co. sells equipment on installment contracts. Which of the following statements best justifies Chris’
use of the cost recovery method of revenue recognition to account for these installment sales?
 a. The sales contract provides that title to the equipment passes to the buyer only when all payments
have been made.
b. No cash payments are due until one year from the date of sale.
c. Sales are subject to a high rate of return.
d. There is no reasonable basis for estimating collectability.

PROB. 6 (AICPA)

Winner Co. is engaged in extensive exploration for water in Utah. If, upon discovery of water, Winner does
not recognize any revenue from water sales until the sales exceed the costs of exploration, the basis of
revenue recognition being employed is the
a. Production basis
b. Cash (or collection) basis
c. Sales (or accrual) basis
d. Cost recovery basis

PROB. 7 (AICPA)

Leopard Co. uses the installment sales method to recognize revenue. Customers pay the installment notes
in 24 equal monthly amounts, which include 12% interest.

What is the balance of an installment note receivable 6 months after the sale?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.

PROB. 8 (AICPA)

On January 2, 2020, Colt Co. sold land that cost P600,000 for P800,000, receiving a note bearing interest
at 10%. The note will be paid in three annual installments of P321,700 starting on December 31, 2020.
Because collection of the note is very uncertain, Colt will use the cost recovery method. How much
revenue from this sale should Colt recognize in 2020?
a. 0
b. 6,000
c. 8,000
d. 20,000

PROB. 9 (AICPA)

Several of Pitt, Inc.’s customers are having cash flow problems. Information pertaining to these customers
for the years ended March 31, 2020 and 2021 follows:
2020 2021
Sales 10,000 15,000
Cost of sales 8,000 9,000
Cash collections:
On 2020 sales 7,000 3,000
On 2021 sales 12,000
If the cost recovery method is used, what amount would Pitt report as gross profit from sales to these
customers for the year ended March 31, 2021?
a. 2,000
b. 3,000
c. 5,000
d. 15,000

PROB. 10 (AICPA)

The following information pertains to a sale of real estate by South Co. to Nord. Co. on December 31,
2020:

Carrying amount 4,000,000

Sales price:
Cash 600,000
Purchase money mortgage 5,400,000 6,000,000

The mortgage is payable in nine annual installments of P600,000 beginning December 31, 2021, plus
interest of 10%. The December 31, 2021 installment was paid as scheduled, together with interest of
P540,000. South uses the cost recovery method to account for the sale. What amount of income should
South recognize in 2021 from the real estate sale and its financing?
a. 1,140,000
b. 740,000
c. 540,000
d. 0

PROB. 11 (AICPA)

Hill Company began operations on January 1, 2020, and appropriately uses the installment method of
accounting. Data available for 2020 are as follows:

Installment accounts receivable, 12/31/20 500,000

Installment sales 900,000
Cost of goods sold, as percentage of sales 60%

Using the installment method, Hill’s realized gross profit for 2020 would be
a. 360,000
b. 240,000
c. 200,000
d. 160,000

PROB. 12 (AICPA)

Luge Co., which began operations on January 2, 2020, appropriately uses the installment method of
accounting. The following information is available for 2020:

Installment accounts receivable

December 31, 2020 800,000
 Deferred gross profit, Dec. 31 (before
recognition of realized gross profit for 2020) 560,000
Gross profit on sales 40%

For the year ended December 31, 2020, cash collections and realized gross profit on sales should be
Cash Realized
Collections Gross Profit
a. 400,000 320,000
b. 400,000 240,000
c. 600,000 320,000
d. 600,000 240,000

PROB. 13 (RPCPA)

The books of Paiyakan Company show the following balances on December 31, 2020:

Accounts receivable 313,750

Deferred gross profit (before adjustment) 38,000

Analysis of the accounts receivable reveal the following:

Regular accounts 207,500

2019 installment accounts 16,250
2020 installment accounts 90,000

Sales on an installment basis in 2019 were made at 30% above cost; in 2020, at 33 1/3% above cost.
Expenses paid was P1,500 relating to installment sales.

How much is the net income on installment sales?

a. 11,000
b. 11,500
c. 16,000
d. 10,250

PROB. 14 (RPCPA)

A company uses the installment method of accounting to recognize income, and pertinent data are as
follows:

2018 2019 2020

Installment sales 300,000 375,000 360,000
Cost of sales 225,000 285,000 252,000
Balance of gross
Profit at year-end:
2018 52,500 15,000 -
2019 54,000 9,000
2020 72,000
The balance of the receivable on December 31, 2020 is:
a. 270,000
b. 277,500
c. 279,000
d. 300,000

PROB. 15

Taft Corp., which began business on January 1, 2019, appropriately uses the installment sales method of
accounting. The following data are available for December 31, 2019 and 2020:

2019 2020
Balance of deferred gross profit on
sales account:
2019 300,000 120,000
2020 - 440,000
Gross profit on sales 30% 40%

The installment accounts receivable balance at December 31, 2020 is

a. P1,000,000
b. 1,100,000
c. 1,400,000
d. 1,500,000

PROB. 16 (AICPA)

Dolce Co., which began operations on January 1, 2019, appropriately uses the installment method of
accounting to record revenues. The following information is available for the years ended December 31,
2019 and 2020:

2019 2020
Sales 1,000,000 2,000,000
Gross profit realized on sales made in:
2019 150,000 90,000
2020 200,000
Gross profit percentage 30% 40%

What amount of installment accounts receivable should Dolce report in its December 31, 2020, balance
sheet?
a. 1,225,000
b. 1,300,000
c. 1,700,000
d. 1,775,000

PROB. 17 (AICPA)

Pacific Corp. uses the installment method of reporting. The following data were gathered for its three
years of operations:
 2018 2019 2020
Installment sales 300,000 405,000 495,000
Cost of installment sales 210,000 243,000 321,750
Gross profit rate 30% 40% 35%
Balance of installment receivable, Dec. 31:
2018 installment sales 180,000 135,000 60,000
2019 installment sales 300,000 195,000
2020 installment sales 390,000

In 2020, a customer defaulted; accordingly, the merchandise with an estimated value of P15,000 was
repossessed. The sale was made in 2018 and the unpaid balance on the date of repossession was P22,500.

a. What is the total realized gross profit in 2020?

a. 412,500
b. 183,750
c. 94,500
d. 36,750

b. What is the amount of gain (loss) on repossession in 2020?

a. (7,500)
b. (750)
c. 6,000
d. 3,000

PROB. 18 (RPCPA)

The Central Plains Subdivision sells residential subdivision lots in installment. The following information
was taken from the accounting records of Central Plains Subdivision as at December 31, 2020:

Installment accounts receivable, 1/1/20 755,000

Installment accounts receivable, 12/31/20 840,000
Unrealized gross profit, 1/1/20 339,750
Installment sales 950,000

How much is the realized gross profit in 2020?

a. 427,500
b. 339,750
c. 378,000
d. 389,250

PROB. 19 (AICPA)

Rosson Corp. which began business on January 1, 2020, appropriately uses the installment sales method
of accounting for income tax reporting purposes. The following data are available for 2020:

Installment accounts receivable, 12/31/20 200,000

Installment sales for 2020 350,000
Gross profit on sales 40%
Under installment sales method, what would be Rosson’s deferred gross profit at December 31, 2020?
a. 120,000
b. 90,000
c. 80,000
d. 60,000

PROB. 20 (AICPA)

Karr Co. began operations on January 1, 2020 and appropriately uses the installment method of
accounting. The following information pertains to Karr’s operations for 2020:

Installment sales 800,000

Costs of installment sales 480,000
General and administrative expenses 80,000
Collections on installment sales 300,000

The balance in the deferred gross profit account at December 31, 2020 should be
a. 120,000
b. 150,000
c. 200,000
d. 320,000

PROB. 21 (RPCPA)

The Brownout Inc. began operating at the start of the calendar year 2020, uses the installment method of
accounting:

Installment sales 400,000

Gross margin on cost 66 2/3%
Inventory, December 31, 2020 80,000
General & administrative expense 40,000
Accounts receivable, December 31, 2020 320,000

The balance of the deferred gross profit account at December 31, 2020 should be:
a. 192,000
b. 128,000
c. 96,000
d. 80,000

PROB. 22 (RPCPA)

Quincy Enterprises uses the installment method of accounting and has the following data at year-end:

Gross margin on cost 66 2/3%

Unrealized gross profit 192,000
Cash collections including down payments 360,000

What was the total amount of sale on installment basis?

 a. 480,000
b. 552,000
c. 648,000
d. 840,000

PROB. 23 (AICPA)

Lane Co. which began operations on January 1, 2020, appropriately uses the installment method of
accounting. The following information pertains to Lane’s operations for the year 2020:

Installment sales 1,000,000

Regular sales 600,000
Cost of installment sales 500,000
Cost of regular sales 300,000
General and administrative expenses 100,000
Collections on installment sales 200,000

The deferred gross profit account in Lane’s December 31, 2020 balance sheet should be
a. 150,000
b. 320,000
c. 400,000
d. 500,000

PROB. 24 (AICPA)

Since there is no basis for estimating the degree of collectibility, Astor Co. uses the installment method of
revenue recognition for the following sales:

2020 2019
Sales 900,000 600,000
Collections from:
2019 sales 100,000 200,000
2020 sales 300,000 -
Accounts written off:
2019 sales 150,000 50,000
2020 sales 50,000 -
Gross profit percentage 40% 30%

What amount should Astor report as deferred gross profit in its December 31, 2020 balance sheet for the
2019 and 2020 sales?
a. 150,000
b. 160,000
c. 225,000
d. 250,000

PROB. 25 (RPCPA)

These data pertain to installment sales of Mickey’s Store:

 • Down payment, 20%
• Installment sales: P545,000 in Year 1 ; P785,000 in Year 2 ; and P968,000 in Year 3.
• Mark-up on cost, 35%
• Collections after down payment: 40% in the year of sale, 35% in the year after sale, and 25% in
the third year.

a. The realized gross profit in year 1 is:

a. 109,357
b. 73,474
c. 99,190
d. 114,825

b. The unrealized gross profit for installment sales made as of the end of Year 2 is:
a. 97,689
b. 131,880
c. 141,112
d. 114,063

c. The installment accounts receivable at the end of Year 3 is:

a. 652,722
b. 621,640
c. 602,991
d. 685,358

d. The unrealized gross profit at the end of Year 3 is:

a. 211,047
b. 161,166
c. 198,574
d. 217,574

PROB. 26 (Adapted)

When assets that have been sold and accounted for by the installment method are subsequently
repossessed and returned to inventory, they should be recorded on the books at
a. Selling price
b. The amount of the installment receivable less associated deferred gross profit
c. Net realizable value
d. Net realizable value minus normal profit.

PROB. 27

The method most commonly used to report defaults and repossessions is

a. Provide no basis for the repossessed asset thereby recognizing a loss.
b. Record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
c. Record the repossessed merchandise at book value, recording no gain or loss.
d. None of these.

PROB. 28 (RPCPA)
The following selected accounts appeared in the trial balance of Union Sales as of December 31, 2020:

Debit Credit
Installment receivable, 2019 15,000
Installment receivable, 2020 200,000
Inventory, 12/31/19 70,000
Purchases 555,000
Repossession 3,000
Installment sales 425,000
Sales (regular) 385,000
Unrealized gross profit, 2019 54,000

Additional information:

Installment receivable, 2019 sales as of

December 31, 2019 120,000
Inventory of new and repossessed
merchandise as of December 31, 2020 95,000
Gross profit percentage on regular
sales during the year 30% on sales
Repossession was made during the year. It was a
2019 sales and the corresponding uncollected
account at the time of repossession 7,750

a. The gross profit realized on collections for installment sales in 2019 was:
a. 47,250.00
b. 50,737.50
c. 43,762.50
d. Answer not given

b. The gross profit realized on collections for installment sales in 2020 was:
a. 87,075.00
b. 88,672.50
c. 85,500.00
d. Answer not given

c. The loss on repossession made on a 2019 sale was:

a. 1,262.50
b. 487.50
c. 1,805.00
d. Answer not given

PROB. 29 (AICPA)

On December 31, 2020, Mill Co. sold construction equipment to Drew Inc. for P1,800,000. The equipment
had a carrying amount of P1,200,000. Drew paid P300,000 cash on December 31, 2020 and signed a
P1,500,000 note bearing interest at 10% payable in five annual installments of P300,000. Mill
appropriately accounts for the sale under the installment method. On December 31, 2021, Drew paid
P300,000 principal and P150,000 interest. For the year ended December 31, 2021, what total amount of
revenue should Mill recognize from the construction equipment sale and financing?
a. 250,000
b. 150,000
c. 120,000
d. 100,000

PROB. 30 (RPCPA)

Abenson Trading Co. sells household furniture both in cash and in installment basis. For each installment
sale, a sale contract is made whereby the following terms are stated:

a. A down payment of 25% of the installment price is required and the balance payable in 15 equal
monthly installment.
b. Interest of 1% per month is charged on the unpaid cash sale price-equivalent at each installment.
c. The price on installment sales is 110% of the cash sales price.

For accounting purposes, installment sales are recorded at contract price. Any unpaid balances on
defaulted contracts are being charged to uncollectible accounts expense. Sales of defaulted merchandise
were credited to uncollectible accounts expense. Interest are recognized in the period earned. For its first
year of operations ending December 31, 2020, the books of the company show the following:

Cash sales 378,000

Installment sales 794,970
Merchandise inventory, January 1 174,180
Purchases 627,891
Merchandise inventory, December 31 108,630
Cash collections on installment contracts:
Down payment 198,750
Installment payments (include interest of
P27,758.52). Average 6 monthly installments
on all contracts except on defaulted contracts. 238,023

A contract amounting to P3,300 was defaulted after paying three (3) monthly installments.

a. The gross profit rate based on total sales at cash price equivalent is:
a. 33.75%
b. 36.34%
c. 40.88%
d. 37%
e. Answer not given

b. The total interest earned for the first four month in the defaulted contracts is:
a. 80.85
b. 72.07
c. 60.94
d. 69.30
 e. Answer not given

c. The realized gross profit for the year 2020 is:

a. 291,355.95
b. 151,335.35
c. 249,674.52
d. 161,789.16
e. Answer not given

PROB. 31 (Adapted)

Joker Corp. had been using the cash method to account for income since its first year of operation in 2019.
All sales are made on a credit with note receivable given by the customer. The following information were
made available for the first two years of operations:

2019 2020
Notes receivable 2019 216,000 144,000
Notes receivable 2020 240,000
Discount on notes receivable 2019 28,668 22,316
Discount on notes receivable 2020 32,172
Income – collection on principal 128,000 200,000
Income – interest 14,400 22,000
Cost of goods purchased 200,560 208,080

Cost of goods purchased includes increase in inventory of goods on hand of P20,000 in 2019 and P32,000
in 2020.

a. How much is the realized gross profit for the year ended 2019 (rounded to the nearest peso)?
a. 21,000
b. 46,588
c. 54,707
d. 60,814

b. How much is the realized gross profit for the year ended 2020 (rounded to the nearest peso)?
a. 93,272
b. 97,080
c. 104,397
d. 113,650

PROB. 32 (AICPA)

On January 1, 2019, Rex Co. sold a used machine to Lake, Inc. for P525,000. On this date, the machine had
a depreciated cost of P367,500. Lake paid P75,000 cash on January 1, 2019 and signed a P450,000 note
bearing interest at 10%. The note was payable in three annual installments of P150,000 beginning January
1, 2020. Rex appropriately accounted for the sale under the installment method. Lake made a timely
payment of first installment on January 1, 2020 of P195,000 which included interest of P45,000 to date of
payment. At December 31, 2020, Rex had deferred gross profit of
a. 105,000
 b. 99,000
c. 90,000
d. 76,500

PROB. 33 (AICPA)

On January 2, 2020, Blake Co. sold a used machine to Cooper Inc. for P900,000 resulting to a gain of
P270,000. On that date, Cooper paid P150,000 cash and signed a P750,000 note bearing interest at 10%.
The note was payable in three annual installment of P250,000 beginning January 2, 2021. Blake
appropriately accounted for the sale under the installment method. Cooper made a timely payment of
the first installment on January 2, 2021, of P325,000, which included accrued interest of P75,000. What
amount of deferred gross profit should Blake report at December 31, 2021?
a. 150,000
b. 172,500
c. 180,000
d. 225,000

PROB. 34 (AICPA)

On January 2, 2020, Easy Pay Co. sold a plant to Menchie CO. for P1,500,000. On that date, the plant’s
carrying amount was P1,000,000. Menchie gave Easy Pay P300,000 cash and a P1,200,000 note, payable
in four annual installments of P300,000 plus 12% interest. Menchie made the first principal and interest
payment of P444,000 on December 31, 2020. Easy Pay uses the installment method of revenue
recognition. In its 2020 income statement, what amount of realized gross profit should Easy Pay report?
a. 344,000
b. 200,000
c. 148,000
d. 100,000

PROB. 35 (AICPA)

Watson Co. sold some machinery to the Finney Co. on January 2, 2020. The cash selling price would have
been P473,850. Finney entered into an installment sales contract which required annual payments of
P125,000, including interest at 10% over five years. The first payment was due on December 31, 2020.
What amount of interest income should be included in Watsons’s 2021 income statement (the second
year of the contract)?
a. 12,500
b. 39,624
c. 25,000
d. 34,885

PROB. 36 (AICPA)

Baker Co. is a real estate developer that began operations on January 2, 2019. Baker appropriately uses
the installment method of revenue recognition. Baker’s sales are made on the basis of a 10% down
payment, with the balance payable over 30 years. Baker’s gross profit percentage is 40%. Relevant
information for Baker’s first two years of operations is as follows:
 2020 2019
Sales 16,000,000 14,000,000
Cash collections 2,020,000 1,400,000

a. At December 31, 2019, Baker’s deferred gross profit was

a. 5,040,000
b. 5,600,000
c. 8,400,000
d. 12,600,000

b. Baker’s realized gross profit for 2020 was

a. 6,400,000
b. 2,020,000
c. 1,212,000
d. 808,000

PROB. 37 (RPCPA)

Romer Realty bought two adjoining lots (Lot A and B) with total area of 1,600 sq. m.. Lot A was bought for
P160,000 in 2015 and Lot B was bought for P240,000 in 2016. Romer Realty re-subdivided the two lots
and made a 400 sq. m. lot out of the original two lots by taking 200 sq. m. from each to make Lot C. The
cost of Lot C was by allocating a portion of the cost of the original two lots. Romer Realty build a house on
Lot C at a cost of P152,000. It was completed on June 30, 2020 and had an estimated useful life of 20
years.

The three lots and house were sold during 2020 on the following terms:

Date of Sales Down

Lot Sale Price Payment Balance
A Mar. 31 171,428 51,428 120,000
B Oct. 31 240,000 80,000 160,000
C & house June 30 420,000 180,000 240,000

Balance payable in equal installment

Lot A 12,000 every 3 months
Lot B 20,000 every 2 months
Lot C & house 40,000 every 6 months

Installment payment is to be applied first to accrued interest and the balance to a reduction of principal.
The rate of interest is 10% per annum on the carrying balance of the principal. After repeated demand
from the buyer of Lot C and house, he failed to meet the installment due on June 30, 2021, and the
property was repossessed.

a. The realized gross profit from the sale of the lots and house on December 31, 2020 are:
Lot A Lot B Lot C & house Total
a. 23,733.33 25,333.33 78,300 127,366.66
b. 24,333.33 24,533.33 86,700 135,566.66
c. 23,732.58 24,333.33 83,200 131,265.91
 d. 24,733.33 25,333.33 86,500 136,566.66
e. None of these.

b. The gain (loss) on repossession of Lot C and house on June 30, 2020 is:
a. 119,650
b. 117,200
c. (17,200)
d. (21,611)
e. None of these

PROB. 38 (RPCPA)

The Zonyo Company on October 1, 2019, sold article “A” for P4,000, costing P2,700. Article “B” is used
article was accepted as down payment and the balance on a monthly installment payment of P200 starting
November 1, 2019. P1,200 was allowed on the article trade-in. The company estimates reconditioning
cost of P80 on this article and a sales price of P1,100 after such reconditioning. The company normally
expect 20% gross profit on sale of used articles. The company employs the perpetual method of inventory.

On April 1, 2020, the customer defaulted in the payment of installment. Article “A” which was sold was
repossessed, its value to the seller is P1,350 allowing for reconditioning cost and a normal gross profit on
resale.

a. The amount of realize gross profit in 2019 is:

a. 300
b. 400
c. 315
d. 415
e. 350

b. The amount of loss on repossession is:

a. 415
b. 315
c. 300
d. 450
e. 350

PROB. 39 (AICPA)

Wood Corp. has a normal gross profit on installment sales of 30%. A 2018 sale resulted in a default early
in 2020. At the date of default, the balance of the installment receivable was P8,000, and the repossessed
merchandise had a fair value of P4,500. Assuming the repossessed merchandise is to be recorded at fair
value, the gain or loss on repossession should be
a. 0
b. 1,100 loss
c. 1,100 gain
d. 2,500 loss

PROB. 40 (AICPA)
Gentry Co. uses the installment sales method. When an account had a balance of P3,500, no further
collections could be made, and the dining room set was repossessed. At that time, it was estimated that
the dining room set could be sold for P1,000 as repossessed, or for P1,300 if the company spent P125
reconditioning it. The gross profit rate on this sale was 70%. What is the gain or loss on repossession?
a. 2,450 loss
b. 2,500 loss
c. 300 gain
d. 125 gain

PROB. 41 (Adapted)

The Samsing Music Corp. sells musical instruments on installment. On October 1, 2019, Samsing sold a
karaoke costing P15,000 for P24,000. It has been the policy of Samsing to require its customers a down
payment of P2,400 for this kind of instrument and the balance to be paid on installment with an annual
interest of 12% starting October 31, 2019. Periodic payments are equal in amount and represent interest
on the balance of the principal owed between installment periods, the remainder a reduction in the
principal balance.

The karaoke was repossessed in February 2020, when the customer defaulted after paying a total of
P9,600. It was estimated that the karaoke had a depreciated cost of P8,400 when repossessed. The
Samsing Music Corp. uses perpetual inventory account and enters the total deferred gross profit at the
time of sale. How much is the total realized gross profit from this sale (rounded to the nearest peso)?
a. 2,411
b. 3,312
c. 4,356
d. 4,500

PROB. 42 (AICPA)

Lang Co. uses the installment method of revenue recognition. The following data pertain to Lang’s
installment sales for the year ended December 31, 2019 and 2020:

2019 2020
Installment receivables at year end on 2019 sales 60,000 30,000
Installment receivables at year end on 2020 sales 69,000
Installment sales 80,000 90,000
Cost of sales 40,000 60,000

What amount should Lang report as deferred gross profit in its December 31, 2020 balance sheet?
a. 23,000
b. 33,000
c. 38,000
d. 43,000

PROB. 43 (Adapted)

On October 1, 2021, Surplus Co. sold equipment on installment basis. The equipment costs the company
an amount of P600,000, but the installment selling price was set at P850,000. The terms of payment
included the acceptance of a used equipment with the balance to be paid in ten (10) monthly installment
due at the end of each month commencing the month of sale. It would require P12,500 to recondition the
used equipment so that it could be sold for P250,000. A 15% gross profit was usual from sale of used
equipment.

What is the realized gross profit from the 2021 collections?

a. 70,588
b. 80,000
c. 100,000
d. 340,000

PROB. 44 (Adapted)

In its first year of operations, Giant Corp. reported cost of goods sold in the amount of P900,000 and sales
were as follows:

Mark-up on cost Sales

Cash basis 25% 250,000
Charge basis 33 1/3% 400,000
Installment basis 50% 600,000

If collections on installment sales during the year amounted to P240,000, how much was the total gross
profit realized at the end of the year?
a. 50,000
b. 60,000
c. 80,000
d. 230,000
SOLUTIONS AND EXPLANATIONS

PROB. 1 Suggested answer (b)

The installment method is used when collection of the sales price is not reasonably assured. However,
when the uncertainty of collection is so great that even the use of the installment method is precluded,
then the cost recovery method may be used. Having no reasonable basis for estimating collectibility would
provide a great enough uncertainty to use the cost recovery method.

PROB. 2 Suggested answer (c)

Generally, the profit on sale in the ordinary course of business is considered to be realized at the time of
sale unless it is uncertain whether the sale price will be collected. Thus, if collection of the sales price is
not reasonably assured, the installment method shall be used.

PROB. 3 Suggested answer (b)

The installment method of accounting is used when there is a high degree of uncertainty regarding the
collectibility of the sales price. Under this method, sales revenues and the related cost of goods are
recognized in the period of the sale. However, the gross profit is deferred to the periods in which cash is
collected.

PROB. 4 Suggested answer (b)

Under the cost recovery method, gross profit is deferred and recognized only when the cumulative
receipts exceed the cost of the asset sold/

PROB. 5 Suggested answer (d)

Ordinarily, revenues should be accounted for when a transaction is completed, with appropriate provision
for uncollectible accounts. However, when there is no reasonable basis for estimating the degree of
collectibility, either the installment method or the cost recovery method may be used. The cost recovery
method recognizes profit only after collections exceeded the cost of the item sold.

PROB. 6 Suggested answer (d)

Under the cost recovery method, no profit of any type is recognized until the cumulative receipts (principal
and interest) exceed the cost of the asset sold.

PROB. 7 Suggested answer (c)

The balance of an installment note receivable equals the unpaid balance of principal. The difference
between the gross receivable and the unpaid principal is the interest. Therefore, the balance of the note
is equal to the present value of the remaining payments discounted at the contract interest rate.

PROB. 8 Suggested answer (a) 0

Under the cost recovery method, no profit of any type is recognized until the cumulative receipts (principal
and interest) exceed the cost of the asset sold. The cost of P60,000 is not yet recovered 2020, thus no
amount of revenue will be recognized.

PROB. 9 Suggested answer (c) P5,000

Collections on 2020 sales (7,000 + 3,000) 10,000

Less: cost of sales 2020 8,000 2,000
Collections on 2021 sales 12,000
Less: cost of sales 2021 9,000 3,000
Total gross profit 5,000

The cost recovery method recognizes profit only after collections exceed the cost of sales, that is, when
the full cost has been recovered. Subsequent amounts collected are treated entirely as realized gross
profit.

PROB. 10 Suggested answer (d) P 0

Again, the cost recovery method recognizes profit only after collections exceed the cost of item sold, that
is, when the full cost has been recovered. As of December 31, only P1,200,000 of the P4,000,000 cost has
been recovered, thus, no income should be recognized.

PROB. 11 Suggested answer (d) P160,000

Installment sales 900,000

Less: installment receivable, 12/31 500,000
2020 collections 400,000
Multiply by gross profit on sales (100%-60%) 40%
Realized gross profit, 2020 160,000

Under the installment method of accounting, income is recognized when collections are made. The
realized gross income is equal to the collections multiplied by the gross profit rate on sales. Each collection
on a contract is regarded as representing both a return of cost and a realization of gross profit in the ratio
in which these two factors are found in the original sales price. This method serves to spread the gross
profit on installment sales over the full life of the installment contract. Continuing expenses on an
installment contract are matched against the gross profit that is recognized in successive periods; the
possible failure to realize the full amount of the gross profit in the event of the default by the buyer is
anticipated.

PROB. 12 Suggested answer (d) P600,000 P240,000

Installment sales (560,000/40%) 900,000

Less: Installment accounts receivable 12/31/20 500,000
Cash collections in 2020 400,000
Multiply by gross profit rate on sales 40%
Realized gross profit, 2020 160,000
Installment sales may be regarded as calling for special treatment whereby gross profit is related to the
periods in which the installment receivable are collected rather than to the periods in which the
receivables are created. The inflow of cash rather than the time of sale becomes the criterion for revenue
recognition. This is in line with realization principle that in a long-term installment sales, revenue is
recognized at the point of collection, because there is possibility of cancellation of the contract, and
substantial collection costs may be incurred. When gross profit is regarded as contingent upon collection
of cash, there is stronger support for its recognition over the entire collection period.

Therefore, periodic collection, which is regarded as representing both a recovery of cost and a realization
of gross profit, must be multiplied by gross profit rate on sale to determine the realized gross profit for
the period.

Due to year-end entry to adjust the deferred gross profit for purposes of recognizing the realized profit
by debiting Unrealized Gross Profit account and crediting Realized Gross Profit account, the gross profit
rate on sales of prior years installment sales may be computed by determining the rate of unrealized gross
profit with the installment accounts receivable at the same period.

PROB. 13 Suggested answer (d) P10,250

Deferred gross profit (before adjustment) 38,000

Less: deferred gross profit (after adjustment)
2019 sales (16,250 x 30/130) 3,750
2020 sales
(90,000 x 33 1/3/133 1/3) 22,500 26,250
Realized gross profit 11,750
Less: expenses relating to installment sales 1,500
Net income on installment sales 10,250

The computation of realized gross profit for a given period is not confined on the traditional computation
by applying the gross profit percentage for the year in which the contract originated to the amounts
collected on such contracts. An alternative procedure for calculating realized gross profit is by calculating
the amount of deferred gross as of the end of the period and reducing the deferred gross profit account
to this balance. Therefore, the difference between deferred gross profit before adjustment and deferred
gross profit after adjustment is the realized gross profit.

PROB. 14 Suggested answer (b) P277,500

2019 2020
Installment sales 375,000 (100%) 360,000 (100%)
Cost of sales 285,000(76%) 252,000 (70%)
Gross profit 90,000 (24%) 108,000 (30%)

Installment rec. from 2019 sales (9,000/24%) 37,500

Installment rec. from 2020 sales (72,000/30%) 240,000
Total installment rec. 12/31/20 277,500

In applying the installment method in the accounts, the difference between the sales price and the cost
of sales is recorded initially as deferred gross profit. This balance is recognized as revenue periodically in
the proportion that the cash collections of the period bear to the sales price. Stated differently, the
original gross profit percentage on the sale is applied to periodic collections in arriving at the amount to
be recognized as revenue. At the end of each period, a deferred gross profit balance remains on the books
and is equal to the gross percentage applied to the balance of installment receivable as of this date.

PROB. 15 Suggested answer (d) P1,500,000

Installment accounts receivable:

2019 sales (120,000/30%) 400,000
2020 sales (440,000/40%) 1,100,000
Installment accounts receivable, 12/31/20 1,500,000

Again, at the end of each period, a deferred gross profit balance is equal to the gross percentage applied
to the balance of installment receivable as of this date. It should be pointed out that gross profit
percentage on sales may differ from period to period. In addition, the installment accounts receivable
balance, a permanent account, as of a given period relates to uncollected balances of installment sales
from different periods of sales.

PROB. 16 Suggested answer (c) P1,700,000

2019 2020
Sales 1,000,000 2,000,000
Less collections from:
2019 sales
[(150,000 + 90,000)/30%] 800,000
2020 sales
(200,000/40%) 500,000
Total installment accounts receivable, 12/31/20 200,000 1,500,000

Again, in cognizant with the revenue realization principle (point of collections), the gross profit realized in
installment sales is normally computed by applying the gross profit percentage on sales with the amount
of collections during a period. Thus, to determine the amount collected from specific installment sales,
the realized gross profit at a given period should be divided by the respective gross profit percentage on
sale. And as a permanent account, installment accounts receivable, as of a given date relates to
uncollected balances of installment sales from different periods of sales. Therefore, the total installment
accounts receivable at December 31, 2020 should be P1,700,000 (200,000 + 1,500,000).

PROB. 17
a. Suggested answer (c) P94,500

2018 2019 2020

Installment receivable, 12/31/19 135,000 300,000 495,000
Installment receivable, 12/31/20 60,000 195,000 390,000
Total credits 75,000 105,000 105,000
Less unpaid balance 22,500
Collections 52,500 105,000 105,000
Gross profit percentage 30% 40% 35%
Realized gross profit 15,750 42,000 36,750
The installment method of accounting is revenue recognition based at the point of collections. In other
words, a proportional amount of installment gross profit is realized as the installment receivable collected.
This amount is equal to the gross profit margin associated with the receivable multiplied by the amount
of the receivable collected. Thus, the total gross profit collected in 2020, regardless of the year of sale, in
the amount of P94,500 (15,750 + 42,000 + 36,750) was reported as realized.

b. Suggested answer (b) P750

Fair value of repossessed merchandise 15,000

Less unrecovered cost (22,500 x 70%) 15,750
Loss on repossession (750)

If the customer defaults on an installment contract and no further collections can be made, the seller may
repossess the merchandise sold to satisfy the remaining indebtedness.

If the repossessed merchandise is recorded at a value less than the unrecovered cost (the difference
between the balance in installment contracts receivable account and the deferred gross profit account),
a loss on repossession will be reported. Conversely, if the value assigned to the repossessed merchandise
is more than the unrecovered cost, there is a gain. Any gain or loss on defaults and repossession is
normally recognized on the income statement as an addition to or subtraction from the realized gross
profit on installment sales.

PROB. 18 Suggested answer (d) P389,250

Installment accounts receivable, 1/1/20 755,000

Add installment sales 950,000
Total 1,705,000
Less installment accts. receivable, 12/31/20 840,000
Collections 2020 865,000
Multiply by gross profit rate on sale
(339,750/755,000) 45%
Realized gross profit in 2020 389,250

Again, since at the end of each period, deferred gross profit balance is equal to the gross profit rate applied
to the balance of installment receivables as of that date; an alternative procedure of calculating the gross
profit rate on sales is by determining the ratio of unrealized gross profit at a certain period with the
installment accounts receivable of the same period.

PROB. 19 Suggested answer (c) P80,000

Installment accounts receivable, 12/31/20 200,000

Multiply by gross profit rate on sales 40%
Deferred gross profit, 12/31/20 80,000

Again, under the installment method of accounting, a deferred gross profit balance that remains on the
books at the end of a period is equal to the gross profit percentage applied to the balance of installment
receivable as of this date.
PROB. 20 Suggested answer (c) P200,000

Installment sales, 2020 800,000

Less collections on installment sales 300,000
Installment accounts receivable, 12/31/20 500,000
Multiply by gross profit rate on sales
[(800,000 – 480,000)/800,000] 40%
Deferred gross profit, 12/31/20 200,000

Normally, the gross profit rate on sales may be determined by dividing the gross profit by sales. And since,
deferred gross profit is the unrealized portion, the same should be applied to the uncollected portion of
the total sales. This is in conformity with the point of collection revenue recognition principle.

PROB. 21 Suggested answer (b) P128,000

Accounts receivable, 12/31/20 320,000

Multiply by gross profit rate on sales
(66 2/3%/166 2/3%) 40%
Deferred gross profit, 12/31/20 128,000

If under the point of collection revenue recognition principle, realized gross profit relates to collections
during the period, the deferred gross profit relates to the amount to be collected in the future, and of
course, with application of the related gross profit rate on sales.

PROB. 22 Suggested answer (d) P840,000

Unrealized gross profit 192,000

Divide by gross profit rate on sales
(66 2/3%/ 166 2/3%) 40%
Uncollected portion of installment sales 480,000
Add collections including down payment 360,000
Total amount of installment sales 840,000

In installment sales, the total amount of sales on installment basis is composed of uncollected portion
(installment accounts receivable account) and the amount collected, and for purposes of computing the
realized gross profit and unrealized gross profit, the related gross profit percentage to be applied should
be based on sales.

PROB. 23 Suggested answer (c) P400,000

Installment sales 1,000,000

Less collections on installment sales 200,000
Installment accounts receivable, 12/31/20 800,000
Multiply by gross profit rate on sales
[(1,000,000 – 500,000)/1,000,000] 50%
Deferred gross profit, 12/31/20 400,000
Realization principle means that revenue should be recognized when it is already earned regardless when
it is received. Accordingly, the point of sale is the point of revenue realization. The point of collection
revenue recognition principle, which is an exception to the rule of point of sale, is applicable to the
installment method of accounting, where profit may be realized only when collected, and therefore, any
amount uncollected during the period, the related profit will be deferred.

In view of the foregoing, the deferred gross profit in question relates to installment sales only and not to
regular sales, where revenue should be recognized when it is already earned regardless when received.
Thus, transactions that pertain to regular sales were ignored for purposes of computing the deferred gross
profit at a given period.

PROB. 24 Suggested answer (d) P250,000

2019 2020
Sales 900,000 600,000
Collections (300,000) (200,000)
(100,000)
Write offs (50,000) (50,000)
(150,000)
Installment accounts receivable, 12/31/20 550,000 100,000
Multiply by gross profit rate 40% 30%
Deferred gross profit, 12/31/20 220,000 30,000

If realized gross profit relates to collections applied to gross profit rate, deferred gross profit relates to
installment accounts receivable applied to gross profit rate. To arrive at the correct balance of installment
accounts receivable, it should be pointed out that any items which will affect the receivable account
balance should be considered in the computations before the same will be applied to gross profit rate.
Thus, the deferred gross profit should be P250,000 (220,000 + 30,000).

PROB. 25
a. Suggested answer (b) P73,474

Down payment (20% x 545,000) 109,000

Installments (545,000 x 80% x 40%) 174,400
Total collections in Year 1 283,400
Multiply by gross profit rate 35/135
Realized gross profit in Year 1 73,474

Normally, realized gross profit is determined by multiplying the gross profit rate on sale by the total
collection during the period. The gross profit rate provided by the problem in Year 1 is 35% on cost,
however, the gross profit rate to be used in the installment method of accounting should be on sales, thus
the above computations.

b. Suggested answer (a) P97,689

Installment sales – Year 2 785,000

Less down payment (20%) 157,000
Balance 628,000
 Less collections year of sale (40% x 628,000) 251,200
Receivable bal. – Year 2 sales at the end of Year 2 376,800
Multiply by gross profit rate 35/135
Unrealized gross profit at the end of Year 2 97,689

The unrealized gross profit in question refers to installment sales made in Year 2. Therefore, to compute
for the unrealized portion of sales, gross profit rate on sales should be applied to the uncollected portion
at the end of Year 2, known as installment accounts receivable balance at Year 2.

c. Suggested answer (b) P621,640

Year 2 Year 3
Installment sales 785,000 968,000
Down payment (20%) (157,000) (193,600)
Balance 628,000 774,400
Collections:
Year of sale (40%) (251,200) (309,760)
Year after sale (35%) (219,800)
Installment accounts receivable, end of Year 3 157,000 464,640

Again, as a permanent account, installment accounts receivable, as of a given date relates to uncollected
balances of installment sales from different periods of sales. Since the question being asked is the
installment accounts receivable at the end of Year 3, the uncollected portion of installment sales from
different year of sales at the end of Year 3 should be considered in the computations. It should be pointed
out that the installment sales in Year 1 was fully collected, thus no longer considered. In view of the
foregoing, total installment account receivable at the end of Year 3 should be P621,640 (157,000 +
464,640).

d. Suggested answer (b) P161,166

Installment accounts receivable, end of Year 3 (c) 621,640

Multiply by gross profit rate on sales 35/135
Unrealized gross profit, end of Year 3 161,166

Again, the unrealized gross profit at the end of Year 3 pertains to the uncollected portion of installment
sales from different year of sales at the end of Year 3 and could be determined by applying the gross profit
rate on sales.

PROB. 26 Suggested answer (d)

Repossessed merchandise returned to inventory should usually be recorded at their net realizable value
minus normal profit. Net realizable value is the selling price minus costs of completion, reconditioning,
and disposal. Sales profit was deducted because it will be recognized upon resale.

PROB. 27 Suggested answer (b)

Default on installment contract and subsequent repossession of the goods sold calls for an entry on the
books of the seller that reports the merchandise reacquired at its fair value at the date of repossession,
cancels the installment receivable together with the related deferred gross profit balance, and records
the gain or loss on repossession if appropriate.

PROB. 28
a. Suggested answer (c) P43,762.50

Installment receivable, 2019 sales, 12/31/19 120,000

Less installment receivable, 2019 sales, 12/31/20 15,000
Total credits 105,000
Less defaulted contract 7,750
Collections, 2020 97,250
Multiply by gross profit on sales (54,000/120,000) 45%
Gross profit realized on collections, 2019 sales 43,762.50

Default on an installment contract and repossession of the item sold calls for an entry on the books of the
seller that reports the merchandise reacquired, cancels the installment accounts receivable together with
the related deferred gross profit balance, and records the gain or loss on the repossession. Normally, the
difference between the installment receivable balance at December 31, 2019 and December 31, 2020
represents the collections for the period; however, due to the defaulted contract identified in 2019 sales,
it simply represents the total credits. Therefore, to properly compute for the total collections for the
period, the defaulted contract should be deducted therefrom.

b. Suggested answer (c) P85,500

Installment sales, 2020 425,000

Less cost of installment sales:
Inventory, 12/31/19 70,000
Purchases 555,000
Repossessed merchandise 3,000
Total goods for sale 628,000
Less inventory of new and
repossessed merchandise, 12/31/20 95,000
Total cost of goods sold 533,000
Less cost of goods sold,
regular sales (385,000 x 70%) 269,500 263,500
Gross profit on installment sales 161,500

Installment sales, 2020 425,000

Less installment receivable, 2020 200,000
Collections, 2020 sales in 2020 225,000
Multiply by gross profit rate, installment sales
(161,500/425,000) 38%
Gross profit realized on collections from 2020 sales
in 2020 85,500

The total cost of goods sold in the amount of P533,000 consists of both regular and installment sales.
Since the revenue recognition principle applicable for regular sales is point of sales; while that for
installment sales is point of collection, it is proper to eliminate first the cost of goods sold for regular sales
from the total cost of goods sold for purposes of computing the gross profit rate on installment sales.

c. Suggested answer (a) P1,262.50

Value of repossessed merchandise 3,000.00

Less unrecovered cost (7,750 x 55%) 4,262.50
Loss on repossession 1,262.50

As in the case of goods acquired by trade-in , a repossessed article should be recorded at an amount that
will permit for reconditioning cost and a normal gross profit on its resale. Cancellation of the installment
accounts receivable, accompanied by cancellation of deferred gross profit, should be recorded on the
books of the seller that reports the merchandise reacquired. When perpetual inventories are maintained,
repossessed goods are debited to the inventory balance; when periodic inventories are employed,
repossessions are recorded in a separate nominal account and this balance is added to purchases in
calculating cost of goods sold. Based on previous computations, the gross profit rate on sales of 2019
installment sales is 45%, therefore, the ratio of cost to be recovered to sales should be 55%; thus, the
unrecovered cost is P4,262.50.

PROB. 29 Suggested answer (a) P250,000

Collection applying to principal 300,000

Multiply by gross profit on sales
[(1,800,000 – 1,200,000)/1,800,000] 33 1/3%
Realized gross profit, 2021 100,000
Interest income, 2021 150,000
Total amount of revenue, 2021 250,000

Again, under the installment method of accounting, any amount collected represents a combination of
cost recovery and profit realization. Realized profit may be determined using the gross profit rate on sales
applied to amount of collections during the period.

Installment contracts frequently provide for a change for interest on the balance due. The interest charge
is ordinarily payable with the installment payment that reduces the principal. Although interest is included
in the payment, use of the installment method requires that only portion of payments applying to principal
should be considered in computing the gross profit realized.

The arrangement for periodic payment of interest generally takes one of the following forms:
1. Interest is computed on the balance of the principal owed between installment periods, known
as long-end interest.
2. Interest is computed on the amount of the installment due, from the date the contract was
entered into until the date of the installment payment, known as short-end interest.
3. Periodic payments are equal in amount and represent interest on the balance of the principal
owed between installment periods, the remainder a reduction in the principal balance.
4. Interest throughout the payment period is computed on the original principal.

PROB. 30
 a. Suggested answer (d) 37%

Cash sales 387,000

Cash sales price of installment
sales (794,970/110%) 722,700
Total sales at cash price equivalent 1,100,700
Less cost of sales
Mdse. inventory, 1/1 174,180
Purchases 627,891
Goods available for sale 802,071
Less Mdse. inventory, 12/31 108,630 693,441
Gross profit 407,259

Gross profit rate on sales = 407,259/1,100,700 = 37%

Based on the foregoing information, the price on installment is 100% of the cash sales price, thus to
compute the cash sales price equivalent of installment sales 794,970/110% = 722,700, and the total sales
at cash price equivalent should be composed of both cash sales price equivalent of installment sales and
cash sale.

b. Suggested answer (c) P60.94

Installment sales price 3,300.00

Less down payment (25%) 825.00
Balance payable in equal installments 2,475.00
Divide by number of payments 15
Monthly equal installment payment 165.00

Collections Interest Principal Balance

Cash price
Equivalent
(3,300/110%) 3,000.00
1st month:
D/P, 25% 825.00 2,175.00
2nd month 165.00 21.75 143.25 2,031.75
3rd month 165.00 20.32 144.68 1,887.07
4th month 165.00 18.87 146.13 1,740.94
Total 60.94 434.06

Again, installment contracts frequently provide for a charge for interest on the balance due. The interest
charge is ordinarily payable with the installment payment that reduces the principal. However, it should
be pointed out that based on the foregoing, the interest of 1% per month is charge on the unpaid cash
sales price equivalent at each installment, thus the total interest earned on defaulted contract is P60.94.

c. Suggested answer (a) P291,355.95

Cash sales 378,000.00

Down payment – installment sales 198,750.00
 Installment payments applying to principal on
non-defaulted contracts (238,023.00-27,758.52) 210,264.48
Installment payments applying to principal on
defaulted contract (b) 434.06
Total collections applying to principal at cash price
equivalent 787,448.54
Multiply by gross profit rate (a) 37%
Realized gross profit, 2020 291,355.95

Since the underlying revenue recognition principle for installment sales is the point of collection and the
inclusion of interest in the amount collected is just a normal case, realized gross profit is equal to total
collections applying to principal applied to related gross profit rate on sales.

PROB. 31
a. Suggested answer (c) P54,707

Notes receivable 2020, 12/31/20 216,000

Less discount on notes receivable
2020, 12/31/20 28,668
Net 187,332
Add collection on principal 2020 128,000
Total sales 2020 315,332
Less cost of sales:
Cost of goods purchased 2020 200,560
Less increase in inventory 2020 20,000 180,560
Gross profit 134,772

Gross profit rate on 2020 sales (134,772/315,332) 42.74%

Collections on principal 128,000

Multiply by gross profit rate 42.74%
Realized gross profit, 2020 54,707

Generally, notes receivable are initially recorded at their present value, which may be defined as the sum
of future receipts discounted to the present date at an appropriate rate of interest. When a note is
exchanged for property, goods, or services, the present value equals the current cash selling price of the
items exchanged. The difference between the present value and the amount to be collected at the due
date or maturity date is charged for interest.

In recording receipt of a note, Note Receivable is debited for the face amount of the note. When the face
amount differs from the present value, as in the case of non-interest-bearing notes, the difference is
recorded as a premium or discount and amortized over the life of the note. And at the end of the year,
any unamortized discount on non-interest-bearing note would be deducted from note receivable on the
balance sheet.

In computing revenues and expenses when records are incomplete (showing a list of increases and
decreases in assets and liabilities), the basic rule provides that all increases are added and all decreases
are deducted except the changes in some items like merchandise inventory in the computation of cost of
sales, thus increase in inventory was deducted for purposes of determining the cost of sales as shown
above.

b. Suggested answer (a) P93,272

Notes receivable (net), 2019. 12/31/19

(216,000 - 28,668) 187,332
Less notes receivable (net), 2019, 12/31/20
(144,000 – 22,316) 121,684
Collections of notes receivable, 2019 during 2020 65,648

Notes receivable 2020, 12/31/20 240,000

Less discount on notes receivable 2020, 12/31/20 32,172
Net 207,828
Add collection on principal 2020
(200,000 – 65,648) 134,352
Total sales 2019 342,180
Less cost of sales:
Cost of goods purchased 2020 208,080
Less increase in inventory 2020 32,000 176,080
Gross profit 166,100

Gross profit rate on 2020 sales (166,100/342,180) 48.54%

Realized gross profit, 2019 sales

(65,648 x 42.74%) 28,058
Realized gross profit, 2020 sales
[(200,000 – 65,648) x 48.54%] 65,214
Total realized gross profit 93,272

It should be pointed out that the total amount of P200,000 collected in 2020 is composed of collections
from 2019 sales and 2020 sales. Thus, realized gross profit for each year of sale is equal to collections from
specific year of sale applied to gross profit rate on respective sale.

PROB. 32 Suggested answer (c) P90,000

Installment sales 525,000

Less collections:
Down payment 75,000
Payment applying to principal
(195,000 – 45,000) 150,000 225,000
Installment accts. receivable 300,000
Multiply by gross profit rate on sales
[(525,000 – 367,500)/525,000] 30%
Deferred gross profit, 12/31/20 90,000

Again, for purposes of computing the deferred gross profit which relates to installment accounts
receivable balance at the end of the period, where periodic payments are equal in amount and represent
interest on the balance of the principal owed between installment periods, the remainder a reduction in
the principal balance, the amount applying to interest should be deducted from the total amount
collected to determine the appropriate amount to be applied to principal, and the same will reduced the
installment sales/installment accounts receivable.

PROB. 33 Suggested answer (a) P150,000

Gross profit 270,000

Divide by selling price 900,000
Gross profit rate 30%

Total gross profit 270,000

Less realized gross profit from down payment
(150,000 x 30%) 45,000
Balance 225,000
Less realized gross profit from 1st installment
(250,000 x 30%) 75,000
Deferred gross profit, December 31, 2021 150,000

Again, installment method of accounting is a method of recognizing revenue at the point of collection;
thus, realization of which is based on the amount collected. Accordingly, any amount not yet collected is
the basis in determining the deferred gross profit.

PROB. 34 Suggested answer (b) 200,000

Gross profit (1,500,000 – 1,000,000) 500,000

Divide by selling price 1,500,000
Gross profit rate 33 1/3%

Amount paid at the date of sale 300,000

Add amount applying to principal at Dec. 31, 2020 300,000
Total collections applying to principal 600,000
Multiply by gross profit rate 33 1/3%
Realized gross profit 200,000

The installment method recognizes income on sales as the related receivable is collected. In case,
collections include interest, it is the amount applying to principal which is the basis in determining the
realized profit.

PROB. 35 Suggested answer (b) 39,624

Collections 10% Int. Principal Balance

Selling price 473,850
1st installment 125,000 47,385 77,615 396,235
2nd installment 125,000 39,624

In case of long-term installment sales, collections shall be applied first to interest and the balance to
principal.
PROB. 36
a. Suggested answer (a) P5,040,000

Installment sales, 2019 14,000,000

Less cash collections 1,400,000
Installment account receivable, 12/31/19 12,600,000
Multiply by gross profit percentage 40%
Deferred gross profit 5,040,000

As mentioned earlier, the deferred gross profit at the end of the given period is equal to the installment
accounts receivable in the same period applied to gross profit rate on sales. Without any qualification,
gross profit percentage is based on sales.

b. Suggested answer (d) P808,000

Cash collections in 2020 2,020,000

Multiply by gross profit rate on sales 40%
Realized gross profit, 2020 808,000

Normally, realized gross profit is equal to cash collections at a given period applied to gross profit rate on
sales.

PROB. 37
a. Suggested answer (c) P23,732.58 P24,333.33 P83,200.00

Lot A Lot B Lot C & house

Sales price 171,428 240,000 420,000
Acquisition cost 160,000 240,000
Allocated cost (40,000) (60,000) 100,000
Cost of house 152,000
Total 120,000 180,000 252,000
Gross profit 51,428 60,000 168,000
Gross profit rate 30% 25% 40%

Lot A:
Collections Interest Principal Balance
S/price 171,428.00
D/P 51,428.00 - 51,428.00 120,000.00
June 30 12,000.00 3,000.00 9,000.00 111,000.00
Sept. 30 12,000.00 2,775.00 9,225.00 101,775.00
Dec. 31 12,000.00 2,544.38 9,455.62 92,319.38
Total 8,319.38 79,108.62

Lot B:
Collections Interest Principal Balance
S/price 240,000.00
D/P 80,000.00 - 80,000.00 160,000.00
Dec. 31 20,000.00 2,666.67 17,333.33 142,666.67
 Total 2,667.67 97,333.33

Lot C & house:

Collections Interest Principal Balance
S/price 420,000
D/P 180,000 - 180,000 240,000
Dec. 31 40,000 12,000 28,000 212,000
Total 12,000 208,000

Lot A (79,108.62 x 30%) 23.732.58

Lot B (97,333.33 x 25%) 24,333.33
Lot C & house (208,000 x 40%) 83,200.00
Total realized gross profit, 12/31/20 131,265.91

Again, in some instances where the interest is included in the total amount collected, it is proper to
determine first the related interest at that date to be deducted from the total collections to determine
the amount applying to principal, which is composed of cost recovered and profit realized. But it should
be pointed out that in the information given above, the 10% interest is per annum, therefore, the related
interest for the period should be appropriately determined. And in cases like this, realized gross profit is
equal to collections applying to principal applied to gross profit rate on sales.

b. Suggested answer (b) P117,200

Cost of Lot C and house 252,000

Less accumulated depreciation – house
(152,000/20 years) 7,600
Book value, date of repossession 244,400
Less unrecovered cost:
Total cost (152,000 + 100,000) 252,000
Less Cost recovered (208,000 x 60%) 124,800 127,200
Gain on repossession 117,200

Similar with the case of goods acquired by trade-in, a repossessed article should be recorded at an amount
that will permit for reconditioning and a normal gross profit on its resale. However, based on the limited
information in the problem that no value for this kind was provided, it was assumed that the book value
may be used instead.

Ordinarily, conservatism would suggest that no more than the unrecovered cost be assigned to the
repossessed merchandise. Because of that, no gain would be reported at the time of the repossession.;
recognition of any gain would await the sale of the repossessed merchandise. Any gain or loss on defaults
and repossession is normally recognized on the income statement as an addition to or a subtraction from
the realized gross profit on installment sales. In view of these, although the question did not specify
whether the resulting gain is to be recognized or not, the gain on repossession is P117,200.

PROB. 38

a. Suggested answer (a) P300

 Trade-in value (Article “B”) 1,200
Less actual value:
Resale price 1,100
Less: reconditioning cost 80
normal gross profit
(20% x 1,100) 220 300 800
Overallowance 400

Sales price (Article “A”) 4,000

Less overallowance 400
Adjusted sales price 3,600 (100%)
Less cost of goods sold 2,700 (75%)
Gross profit 900 (25%)

Down payment (actual value of Art. “B”)

[1,100 – (80 – 220)] 800
Installment payments (Nov. & Dec.) (200 x 2) 400
Total collections, 2019 1,200
Multiply by gross profit rate 25%
Realized gross profit, 2019 300

The trade-in is recorded at the value allowed. The difference between the trade-in value and actual value
(the value of the old merchandise traded-in after the provisions of expected reconditioning cost and a
normal gross profit upon its resale) of the article traded-in may result to under or over allowance. Under
allowance is an addition to sales price of the merchandise accepted as trade-in; while overallowance is
either a charge to overallowance account or a reduction from installment sales account. When the
periodic inventory system is used, trade-ins are recorded in a separate nominal account, Trade-in
Merchandise, and this balance is added to purchases in determining cost of goods sold at the end of the
period.

b. Suggested answer € P350

Adjusted sales price (a) 3,600

Less collections until 4/1/20:
Down payment (value of Art. B) 800
Installment payments (Nov.-Mar.) (200 x 5) 1,000 1,800
Unpaid balance, 4/1/20 1,800

Value of repossessed merchandise

[80 + (1,350 x 20%)] – 1,350] 1,000
Less unrecovered cost:
Unpaid balance 1,800
Less normal profit (1,800 x 25%) 450 1,350
Loss on repossession (350)

If the customer defaults on an installment contract and no further collections can be made, the seller may
repossess the merchandise sold to satisfy the remaining indebtedness. The normal problem in the
determination of value to be assigned to the repossessed merchandise is the determination of its fair
value at the time of repossession. To do so, the objective is to choose an amount that will allow for any
reconditioning costs and a normal gross profit on its resale. The resale should be recorded in a usual
manner similar with regular or installment sale transactions. Any gain or loss on defaults and repossession
is normally recognized on the income statement as an addition to or subtraction from the realized gross
profit on installment sales.

PROB. 39 Suggested answer (b) 1,100 loss

Value of repossessed merchandise 4,500

Less unrecovered cost:
Unpaid balance 8,000
Less normal profit (8,000 x 30%) 2,400 5,600
Loss on repossession (1,100)

PROB. 40 Suggested answer (d) 125 gain

Value of repossessed merchandise

(1,300 – 125) 1,175
Less unrecovered cost:
Unpaid balance 3,500
Less normal profit (3,500 x 70%) 2,450 1,050
Loss on repossession (125)

PROB. 41 Suggested answer (b) P3,312

Collections Interest Principal Balance

S/price 24,000.00
D/down 2,400.00 2,400.00 21,600.00
Oct. 1,800.00 216.00 1,584.00 20,016.00
Nov. 1,800.00 200.16 1,599.84 18,416.16
Dec. 1,800.00 184.16 1,615.84 16,800.32
Jan. 1,800.00 168.00 1,632.00 15,618.32
Total 9,600.00 768.32 8,831.68

Collections applying to principal 8,831.68

Multiply by gross profit rate on sales
[(24,000 – 15,000)/24,000] 37.5%
Realized gross profit 3,312.00

Again, the realized gross profit in this case is equal to the collections applying to principal applied to the
gross profit rate o sales. The down payment of P2,400 was assumed to have been included in P9,600 total
payment at the date of repossession, because if this amount (down payment) will be assumed not to have
been included in the total amount paid, the realized gross profit would be P4,225.47 (11,267.92 x 37.5%)
which is none of the choices given.

PROB. 42 Suggested answer (c) P38,000

 2019 2020
Gross profit rate:
2019 sales (P40,000/80,000) 50%
2020 sales (P30,000/90,000) 33 1/3%

Deferred gross profit, 12/31/20:

2019 sales (P30,000 x 50%) 15,000
2020 sales (P69,000 x 33 1/3%) 23,000
38,000

As mentioned earlier, the deferred gross profit at the end of the given period is equal to the installment
accounts receivable in the same period applied to gross profit rate on sales.

PROB. 43 Suggested answer (b) 80,000

Trade-in value 300,000

Less: actual value:
Resale price 250,000
Less: reconditioning cost 12,500
Normal gross profit
(15% x 250,000) 37,500 50,000 200,000
Overallowance 100,000

Installment sales (850,000 – 100,000) 750,000

Less: cost of installment sales 600,000
Gross profit (20%) 150,000

Down payments:
Cash 50,000
Actual value of traded in equipment 200,000 250,000
Add: Installment collected
(750,000 – 250,000 / 10 x 3) 150,000
Total collections 400,000
Multiply by adjusted GPR 20%
Realized gross profit 80,000

The excess of trade in value over the actual value of merchandise traded in (overallowance) is usually
treated as deduction from the installment sales account, thereby changing the gross profit rate.

PROB. 44 Suggested answer (d) 230,000

Cash basis (250,000 x 25/125) 50,000

Charge basis (400,000 x 33 1/3 / 133 1/3) 100,000
Installment basis (240,000 x 50/150) 80,000
Total realized gross profit 230,000

Note that the installment method of accounting recognizes profit at the point of collections, therefore,
the realized gross profit is based on the amount collected.