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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.
Problem II
1. Entries in 20x4:
Cash...
3, 500
20,500
Real Estate .
9,000
Gain on Sale of Real Estate ..
15,000
Cash
500
500
Entry in 20x5:
Real Estate .
Loss on Repossession of Real Estate ..
Mortgage Notes Receivable
2. Entries in 20x4
16,500
3,500
20,000
Cash
3, 500
20,500
Real Estate ..
9,000
Deferred Gross Profit on Installment Sales ............
15,000
Cash .
500
500
2,500
Entry in 20x5
Real Estate... 16,500
Deferred Gross Profit on Installment Sales .. 12,500
Mortgage Notes Receivable ..
Gain in Repossession of Real Estate ..
9,000
Problem III
1.
a. Installment Contracts Receivable 19X8 250,000
Installment Sales
250,000
b. Cash ..
120,000
20,000
200,000
Merchandise Inventory ..
200,000
d. Merchandise Repossessions
14,500
P 14,500
4,000
Loss on repossession.
16,000
P 1,500
e. Expenses
Cash .
2. Adjustment to Recognize Gross Profit on Installments Sales:
16,000
16,000
Installment Sales
200,000
50,000
250,000
24,000
24,000
Expenses .
Loss on Repossessions .
Income Summary .
To close the accounts for 20x4.
Problem IV
1.
January to December 31
20x4
20x5
1,080,00
0
600,000
1,080,00
0
600,00
60,000
300,000
144,000
336,000
360,000
480,000
Perpetual Method:
Regular Sales:
Cost of Sales
Merchandise inventory
Installment Sales:
Cost of installment sales
Merchandise inventory
(4) To record collections:
Regular Sales:
Cash
Accounts receivable
Installment Sales:
Cash
480,000
864,000
480,000
252,000
864,000
312,000
252,000
144,000
312,000
360,000
144,000
108,000
360,000
204,000
Installment Accounts
receivable
20x2
72,000
72,000
36,000
60,000
72,000
Installment Accounts
receivable
20x3
Interest income
(5) to record payment of operating expenses:
Operating expenses
Cash
90,000
102,000
90,000
102,000
2.
Adjusting entries (end of the year):
(6) To recognize accrued interest receivable
Interest receivable
1,440
Interest income
2,880
1,440
2,880
480,000
Merchandise inventory
864,000
480,000
864,000
252,000
sales
312,000
252,000
312,000
360,000
480,000
252,000
108,000
312,000
realized
gross
profit
168,000
on
25,200
25,200
21,000
25,200
46,200
20x4
P
72,000
20x5
P
60,000
____30%
P
21,600
____35%
P
21,000
profit
gross
P
42,600
Closing entries:
(10) To close realized gross profit account:
Realized gross profit
21,600
Income summary
42,600
21,600
42,600
600,000
1,080,00
0
37,440
74,880
Cost of sales
480,000
864,000
Operating expenses
90,000
102,000
Income summary
67,440
188,880
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
P 225,000
___450,000
P 675,000
_ 1,125,000
P 1,800,000
Ratio to Total
Sales
675/1,800
1,125/1,800
Allocated Cost
P *146,250
**292,500
P 438,750
__731,250
P 1,170,000
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
1,125,00
0
P 1,500,000
Amount based on
Cash
Sales
(100%)
P 225,000
375,000*
Ratio to Total
Sales
225/1,500
375/1,500
Allocated Cost
P
175,500
292,500
900,000**
P 1,250,000
900/1,500
__ 702,000
P 1,170,000
Cost ratio
70%
64%
Allocated Cost*
P 157,500
288,000
40%
60%
_ _675,000
P 1,170,000
3.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
Amount
225,000
450,000
1,125,00
0
P 1,800,000
P
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
Repossessed merchandise......
Cash, etc (or various credits)................
12,000
12,000
P 108,000
P 12,000
6,000
__21,600
P 68,400
P120,000
__48,000
__72,000
P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise...............
Over-allowance on trade-in merchandise.
Cash..
__39,600
840,000
360,000
2,400,00
0
3,360,00
0
Installment sales.......
6,960,00
0
840,000
2,400,00
0
3,360,00
0
6,600,00
0
P1,200,00
0
P1,680,0
00
420,000
84,000
__336,00
0
Over-allowance
__840,00
0
P
360,000
P6,960,000
___360,000
P6,600,000
__3,920,00
0
P2,680,000
40.60%
420,000
420,000
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
Problem VIII
840,000
2,000,000
___800,000
P3,640,000
___40.60%
P1,477,840
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
15,000
Nov. 30 Cash .
1,150
600
Interest Income .
550
Interest Received: P55,00 at 12% for 1 month, or P550
600
Interest Income
544
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance
of the contract:
Dec. 31 Cash 20,000.00
Mortgage Notes Receivable 55,000.00
Real Estate
60,000.00
Deferred Gross Profit on Installment Sales ..
15,000.00
Nov. 30 Cash
600
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600P550, or P50, is reduction in principal)
Dec. 31 Cash .
600.00
50.50
Interest Received
549.50
4,020.10
6,300
900
Land
10,000
Building ..
90,000
57,200
9,553
30,000
6/30/x6 Cash .
Notes Receivable
Deferred Gross Profit on Sale of Property
Realized Gross Profit on Sale of Property
19,067
50,000
50,000
19,067
6/30/x7 Cash ..
Notes Receivable
Deferred Gross Profit on Sale of Property .
Realized Gross Profit on Sale of Property
5,720
15,000
15,000
5,720
Problem X
Installment Contracts Receivable . 200,000
Installment Sales
200,000
120,000
Merchandise Inventory
120,000
200,000
Cash . 124,000
52,080
14,280
24,000
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
70,000
20x5 ..
12,000
20x4 ..
3,000
Accounts receivable .
17,000
Inventory ....
60,000
Other Assets ...
40,000
Total Assets P
214,500
Liabilities
Accounts payable
Deferred Gross Profit
P 40,000
20x6 P 15,125
20x5
3,600
20x4
960
19,685
Total Liabilities
59,685
Stockholders Equity
Capital Stock .. P 100,000
Retained Earnings .. P 68,400
Balance, Jan. 1, 20x6 .
13,585
54,185
Income Statement
For Year Ended December 31, 20x6
Sales ............
Installment
Sales
P320,000
Regular
Sales
P125,000
232,000
110,000
342,000
P88,000
P15,000
P103,00
0
15,125
P15,000
P87,875
15,125
P78,875
Total
P445,00
0
50,040
P137,91
5
151,50
0
P
13,585
Net Loss ..
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
For Year Ended December 31, 20x6
Deferred Gross profit on installment sales, 20x6
Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% P
15,125
20x5
20x4
P138,000
27.5%
30%
32%
Realized Gross Profit .. P 72,875
P 8,640
P 41,400
Installment Sales
320,000
232,000
88,000
72,875
41,400
8,640
122,915
Income Summary
170,000
232,000
350,000
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
Retained Earnings ..
Income Summary ...
151,500
13,585
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
4,000
3,600
Loss on Repossessions..
9,500
GG SALES CORPORATION
Income Statement
For Year Ended December 31, 20x6
Sales ............
Cost of goods sold:
Merchandise Inventory, Jan. 1 P
30,000
Purchases ..................
445,000
Repossessed Merchandise ..
Installment
Sales
P500,000
Regular
Sales
P192,000
Total
P692,000
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 years sales
.
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule)
.
310,000
150,000
460,000
P190,000
32,300
P42,000
P103,000
32,300
P157,700
P42,000
P199,700
100,650
P300,350
3,500
P296,850
300,000
P 3,150
P 32,300
20x5
38%
20x4
P210,000 P 37,000
40%
45%
P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash ...
25,000
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
8,000
2,250
40,650
Total Liabilities
115,650
Stockholders Equity
Capital Stock .
P100,000
3,150
41,350
310,000
190,000
84,000
16,650
Income Summary
258,350
185,000
30,000
Purchases .
455,000
Repossessed Merchandise ..
10,000
35,000
Income Summary ..
Sales ....
35,000
192,000
Income Summary
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
Income Summary .
Problem XIII
300,000
3,150
3,150
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%
P 24,020
274,820
191,910
8,407.00
P172,852.50
748.00
748.00
Loss on repossession..
381.00
381.00
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 companys 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.
2.
1,600.00
Cash ..........................
Installment Contracts Receivable
160.00
Cash ........................
Interest Income
Installment Contracts Receivable .
160.00
Cash ......................
Interest Income .
Installment Contracts Receivable
160.00
1,000.00
160.00
14.40
145.60
11.47
148.53
3.
4.
225.45
250,000
150,000
100,000
Cash
20x5:
Cash
Installment receivables
Installment receivables
80,000
80,000
120,000
120,000
50,000
50,000
50,000
Installment receivables
Installment receivables
Inventory
Deferred gross profit
Cash
Installment receivables
50,000
300,000
135,000
210,000
90,000
135,000
40,500
40,500
P816,61
9
637,500
P179,119
_ 27,221
P206,340
22% rounded
P
27,221
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
12,500
P 320,000
P 128,000
P 25,275
P
P
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
1,700
Less: Normal profit (37% x P1,700)
Market value of repossessed merchandise
Less: Unrecovered Cost:
Unpaid balance 20x3
Less: DGP x3 (P2,200 x34%)
1,452
Loss on repossession
18. c
P
629
P 1,071
P 2,200
748
P( 381)
8,407.0
71,006.7
P 172,852.5
P174,662.9
P
60,000
32,170
P 27,830
27. a
28. d
29. a
30. c
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%
P 30,000
(20,000)
P 10,000
15,000
P 5,000
Cost
20x4 cost recovery
20x5 cost recovery
Remaining cost
P 30,000
( 20,000)
( 10,000)
0
Sale:
Installment receivables
Inventory
Deferred gross profit
Payment: Cash
Installment receivables
55,000
30,000
25,000
20,000
20,000
Balance Sheet:
Installment receivables P55,000 20,000
Deferred gross profit
Installment receivables (net)
P 35,000
( 25,000)
P 10,000
41. a
Sale:
Installment receivables
Inventory
Deferred gross profit
2008: Cash
Installment receivables
Cash
Installment receivables
2009: Deferred gross profit
Realized gross profit
55,000
20,000
15,000
Balance Sheet:
Installment receivables
Deferred gross profit
Installment receivables (net)
30,000
25,000
20,000
15,000
5,000
5,000
P 20,000
( 20,000)
P
45. c
20x4 Sales:
300,000
150,000
20x5 Sales:
Installment receivables = P1,500,000 P500,000 (x5 collections)=
P1,000,000
Deferred gross profit
= P600,000 P200,000 (x5 collections) =
400,000
Net installment receivable for 20x5
= P 600,000
Total
= P 750,000
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
300,000
P
20x5 Sales:
Installment receivables = P1,500,000 P500,000 (x5 collections)=
P1,000,000
Deferred gross profit
= P600,000 P0 (all x5 collections to
cost recovery)
= P 600,000
Net installment receivable for 20x5
= P 400,000
Total
= P 400,000
P179,119
_ 27,221
P206,340
53. b
Total Income for 20x5:
Gross profit (realized) already recognized in 20x4
0
Interest revenue 8 months in Year 1 (P81,662* x 8/12)
4 months in Year 2 (P71,078* x 4/12)
78,134
Total Income for 20x5
78,134
P
P 54,441
23,693
P
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
27,221
P 27,221
56. d
Collections in 20x5 (August 31, 20x5)
P 187,500
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
81,662
Collection as to principal
P 105,838
x: Gross Profit % (refer to No. 54)
22%
Gross profit realized in 20x5
P
23,284
Add: Interest revenue/income for 20x5 (refer to No. 53)
78,134
Total Income for 20x5
P 101,418
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
Correct Entry (Should be):
Inventory of RM (at MV)
DGP-20x5
Loss on repossession
IAR-20x5
Correcting Entry:
DGP-20x5
Loss on repossession
Inventory of RM
58. d
20x4: P24,000 P0 = P24,000 collections x 39%P
9,360
20x5: P300,000 P60,000 P10,000 defaults = P230,000 x 42%
96,600
20x6: P480,000 P320,000 P5,000 defaults = P155,000 x 40%
62,000
Realized gross profit on installment sales in 20x6
P167,960
59. b
__7,260
P( 1,905)
11,000
11,000
5,355
3,740
1,905
11,000
3,740
1,905
5,645**
20x5 Sales
Net
Market Values
Less: Unrecovered Cost:
IAR, unpaid balances
x: Cost Ratio
Gain (loss)
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
600,000
Adjusted Installment Sales
3,000,000
Less: Cost of I/S
2,500,000
Gross Profit
Gross profit rate: P500,000/ P3,000,000
2/3%
x: Collections Trade-in merchandise (at MV)
900,000
RGP on I/S in 20x4
150,000
Theories
1 True
.
2 True
.
3
.
4
.
5
.
6.
3,000
500
P( 800)
P 3,600,000
P1,500,000
P 1,400,000
350,000
150,000
900,000
P
500,000
16
P
P
False
16.
True
21
.
26.
31
.
7. True
12
.
13
.
14
.
15
,
True
17
.
18
.
19
.
20
.
True
22
.
23
.
24
.
25
.
27
.
28
.
29
.
30
.
32
.
33
.
34
.
35
.
False
9. True
True
10 False
,
36.
41.
37
.
38
.
39
.
40
.
42 c
.
43 c
.
44 c
.
45
.
P 5,000
60%
P
11.
8. True
P 3,500
True
False
20x6 Sales
True
True
True
b
c
c
d
c
b
d
b
d
c
b
b