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S CHOOL OF B USINESS A DMINISTRATION AND A CCOUNTANCY General Luna Road, Baguio City

SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

General Luna Road, Baguio City Philippines 2600

Telefax No.: (074) 442-3071

Website: www.ubaguio.edu ub@ubaguio.edu

E-mail Address:

REVIEW HANDOUTS AND MATERIALS

SEMESTER

2 ND SEMESTER

SCHOOL YEAR

2018-2019

SUBJECT

ADVANCED FINANCIAL ACCOUNTING AND REPORTING (INTEGA)

HANDOUT #

IMI - 001

 

TOPIC

Installment Sales

Installment Method of Revenue Recognition

Installment method is a method of revenue recognition in which gross profit is deferred until cash from the sale is received. Unlike the cost recovery method, which defers the profit till the cash collections exceeds the costs; installment method recognizes proportionate profit at receipt of each installment.

Installment method is a conservative method of revenue recognition. It is only applied in situations, for example in real estate, when the risks and rewards are not completely transferred at the time of sale. It differs from cost recovery method because in installment method there is less doubt about collectability of the installments.

What are the four steps on calculating installment sale?

Step 1) Find gross profit amount. Step 2) Find Gross profit percentage Step 3) Find earned gross profit amount Step 4) Find deferred gross profit amount

Accounting for installment sales include the following steps:

At the time of sale, recognize the revenue and related cost of goods sold.

Defer the gross profit on the sale.

At the end of each period, make a journal entry to recognize profit equal to the product of the gross profit rate on the installment sale and the actual cash collection.

Discussion:

The installment sales method is a special case of revenue recognition which deviates from the revenue recognition principles of PFRS 15.

The installment method may be used when:

a. The entity uses the “income tax basis” of accounting (The income tax basis of accounting maybe used for external reporting entity is a micro entity)

b. The entity makes a departure from the provisions of the PFRS under circumstances described in

PAS 1 Presentation of Financial Statements.

PAS 1.19 states that “ in the extremely rare circumstances in which management concludes that compliance with a requirement in a PFRS would be so misleading that it would conflict with the objective of financial statements set out in the FRAMEWORK, the entity shall depart from that requirement if the relevant regulatory framework requires, or otherwise does not prohibit such departure”

Brief History

The “installment sales method” has originated from the traditional U.S GAAP and is usually applied by entities providing financing through long-term installment sales of real properties and personal properties having relatively high values when there is uncertainty in the collection of the consideration.

Exercise 1.

At the end of 2018, John the beloved Sells for P1, 000,000 property costing P425, 000. Terms of the sale are P400, 000 down with the balance to be paid in annual instalment of P100, 000.

Accounting for Installment sales:

At the same of sale.

Installment Receivable

1,000,000

 

Installment Sales

 

1,000,000

COGS

425,000

 

Merchandise inventory

 

425,000

Defer the gross profit on the sale.

Installment Sales

1,000,000

 

COGS

 

425,000

Unrealized/ Deferred Gross profit

 

575,000

Upon collection

Cash

400,000

 

Installment Receivable

 

400,000

Unrealized Gross profit

230,000

 

Realized Gross profit

 

230,000

Step 1) Find the gross profit amount.

Installment sales:

 

1,000,000

Cost

:

425,000

Gross Profit

:

575,000

Step 2) Find the Gross Profit Percentage

Gross profit/ Installment sales = GPP

Step 3) Find earned gross profit amount

575,000 / 1,000,000 = 57.5%

Collection x Gross profit rate = 400,000 * 57.5% = 230,000

Step 4) Find deferred gross profit amount

Uncollected Amount x Gross profit rate

Notes:

= 345,000

Under PFRS 15 revenue from contracts with customers is recognized when the entity satisfies a

performance

obligation.

If the performance obligation in the contract is satisfied over time revenue is recognized over time AS the entity progresses towards the complete satisfaction of the obligation. The entity recognizes revenue over time by measuring its progress towards the complete satisfaction of that performance obligation. If the outcome of a performance obligation cannot be reasonably measured the entity recognizes revenue only up to the extent of costs incurred that the entity expects to recover until such time that the outcome of performance obligation can be reasonably measured.

the performance obligation is satisfied at a point in time, revenue is recognized WHEN control over the promised good or service is transferred to the customer.

If

In

both cases , the timing of revenue recognition is not affected by the timing of receipt of the

consideration. i.e. whether the consideration is to be received in lump sum or installment. However, if the timing of the receipt of the consideration provides the entity or the customer with

a

significant benefit of financing, the revenue recognized shall be an amount adjusted for the

effects of the time value of money, but still , the adjusted amount is recognized as revenue when

or

as the performance obligation is satisfied.

If,

at contract inception, the collectability of the consideration is not probable, the entity does not

recognize any revenue from the contract. Any consideration received is recognized as liability.

In

subsequent periods , if the collectability of the consideration (a) becomes uncertain, the entity

assesses its receivable for impairment or (b) becomes significantly uncertain, the entity ceases

from recognizing further revenue from the contract and assesses its receivable for impairment.

Exercise 2

Discussion:

Under the “cost recovery method” the initial collections on the sale are treated as recovery of the costs of the inventory sold. Thus, no gross profit or interest income is recognized until total collections from the sale exceed the cost inventory sold.

This method is different from the “cost-recovery approach” under PFRS 15 Revenue from Contracts with customers. Under the said approach of PFRS 15, when the outcome of a performance obligation that is satisfied over time cannot be reasonably measured. Revenue is recognized only to the extent of costs incurred that the entity expects to recover.

PFRS 15 does not state that revenue recognition should be based on actual collection. Rather, revenue is recognized only up to extent of costs that are expected to be collected . Costs incurred that are not expected to be recovered are recognized immediately as expense. It is also a deviation from PFRS 15

On January 2018, Matthew sells his car for P 2,000,000 costing P1,250,000 to James. Terms of sale are P800,000 Down payment with the balance of P400,000 for the next 3 years.

Required: Compute the profit recognized by Matthew in 2018 and in each of the 3 years that follow, assume the use of the following method.

Solution guide: Gross Profit Recognized

Installment sales:

 

2,000,000

Cost

:

1,250,000

Gross Profit

:

750,000

37.5%

Method

2018

2019

2020

2021

1. Cost recovery

0

0

350,000

400,000

method

2. Installment Method

300,000

150,000

150,000

150,000

Deferred Gross Profit

Method

2018

2019

2020

2021

1. Cost recovery

750,000

750,000

400,000

0

method

2. Installment Method

400,000

300,000

150,000

0

Exercise 3

Ember Appliance Company uses the instalment method of recognizing revenues. Pertinent data are as follows:

 

2018

2019

2020

Installment Sales Cost of installment sales

 

P750,000

P937,500

 

P900,000

525,000

750,000

675,000

Collections during the year

 

2018

270,000

2019

260,000

597,500

 

2020

65,000

160,000

 

210,000

Required:

1.

Compute the following:

 
 

2018

 

2019

2020

Realized gross profit

81,000.00

 

197,500

 

104,000.00

Deferred/

unrealized

144,000

 

106,500

 

255,000

gross profit

   

Solution:

   

GPR

30.00%

20.00%

25.00%

   
   

2018

 

2019

2020

Total

 

Installment

       

Beg IAR

sales

750,000.00

937,500.00

900,000.00

2018

Collection:

270,000.00

     
 

Default:

       
 

Repo:

       
 

RGP

81,000.00

   

81,000.00

2019

Collection:

260,000.00

597,500.00

   
 

Default:

       
 

Repo:

       
 

RGP

78,000.00

119,500.00

-

197,500.00

2020

Collection:

65,000.00

160,000.00

210,000.00

 
 

Default:

       
 

Repo:

       
 

RGP

19,500.00

32,000.00

52,500.00

104,000.00

Ending IAR

 

155,000.00

202,500.00

690,000.00

 

Exercise 4 (regular and Installment Sales)

Luke Corp. reported the following accounts for the year just ended:

Collection from installment sales of 2018

P210,000

Collection from installment sales of 2017

560,000

Collection on regular sale

1,000,000

Deferred gross profit,2017

350,000

Deferred gross profit,2018

840,000

Regular Sales

1,400,000

Cost of Regular Sales

1,050,000

The gross profit rate on instalment sales was 10% higher than regular sales. For 2018, the gross profit on profit on instalment sales was 3% lower than in 2017.

Regular sales is 25% , 2018 GPR is 35% , 2017 is 38%

1.

In computing the realized gross profit from collections of 2017 installment sales, the applicable

gross profit rate was?

38%

2.

The total realized gross profit in 2018 is?

 

2017

2018

regular

Total

Collections

560,000

210,000

   
 

38%

35%

   
 

212,800.00

73,500.00

350,000.00

636,300.00

Exercise 5 (with notes receivable)

Jacob Corp. Sold a piece of real estate on January 2, 2017 for P5,000,000. It had purchased the property in 2010 for P4,500,000 in cash. At that time the lad was worth P450,000 and the remainder was attributed to the building. at the time of sale, the carrying value of the building was P3,600,000. The terms of the sale were as follows:

Down payment

P250,000

Note Receivable

P4,750,000

Interest rate

10%

Length of mortgage

20 years

Annual Payment

P557,933 due at the end of each year

The sale has been consummated, the seller’s receivable is not subject to future subordination, and the seller has no continuing involvement with the property. However, because the initial investment is inadequate, the seller must use instalment method to account for this sale.

Installment

 

Sales

5,000,000

COS

4,500,000.00

GP

500,000.00

GPR

10.00%

   

Annual

Interest

   

Date

Payment

Income

ammortization

C.A

         

4,750,000.00

1.00

12/31/2017

557,933.00

475,000.00

82,933.00

4,667,067.00

2.00

12/31/2018

557,933.00

466,706.70

91,226.30

4,575,840.70

3.00

12/31/2019

557,933.00

457,584.07

100,348.93

4,475,491.77

4.00

12/31/2020

557,933.00

447,549.18

110,383.82

4,365,107.95

5.00

12/31/2021

557,933.00

436,510.79

121,422.21

4,243,685.74

Required:

1. Compute the following:

A. Deferred gross profit on January 2,2017: 500,000

B. Realized profit for the year 2017: 8,293.3

C. Interest income for the year 2018: 466,706.70

D. Realized gross profit for the year 2018: 9,122.6

E. Deferred gross profit on Dec. 31, 2018: 482,584.1

Exercise 6 (with Trade-in)

Genesis Corp. sells new cars. On January 2, 2017 a new car costing P2, 500,000 was sold for P3, 600,000. An old car was accepted as down payment and an allowance of P1, 500,000 was allowed on the trade in. The company anticipates reconditioning costs on the old car of P150, 000 and a resale price of P1, 400,000.It’s used car sales are expected to produce a 25% gross profit. The balance is payable in five annual payments starting December 31, 2017.

Installment Sales

3,600,000

Allowance

1,500,000

 

Adjustment for T.I

-530,000

FV of T.I

   

True Installment

       

SALes

3,070,000

Resale price

1,400,000

   

Reconditioning

   

cost

150,000

COS

2,500,000

GP

280,000

1120000

GP

570,000

FV of T.I

970,000

 

GPR

18.57%

UA/OA

530,000

 

Required:

1. Compute for the deferred gross profit for 2017: 311,921.82

2. Compute for the realized gross profit for 2017: 356,482.08

3. Compute for the deferred gross profit for 2018: 233,941.37

4. Compute for the realized gross profit for 2018: 77,980.46

Discussion:

Trade-ins:

Sellers often accept merchandise traded-in by buyers as part of downpayment of sales of new merchandise.

The merchandise traded-in is accounted as follows:

1. The merchandise received is debited to an inventory account at “fair value”

For purpose of applying the installment method. “fair value” is either:

1. The appraised value of the traded-in merchandise; or

2.

The estimated selling price of the traded-in merchandise less reconditioning cost and normal profit margin, at date of traded-in

2017

2018

Beg IAR

3,600,000

   

Beg IAR

1,680,000

   

Collection

420,000

   

Collection

420,000

   

T.I

1,500,000

   

T.I

0

   
       

ending

     

ending IAR

1,680,000

RGP

1,920,000

IAR

1,260,000

RGP

420,000

 

18.57%

 

18.57%

 

18.57%

 

18.57%

DGP

311,921.82

 

356,482.08

DGP

233,941.37

 

77,980.46

Exercise 7

On October 1, 2018, Instagram Company sold Article One costing P270,000 for P400,000. Article Two, a used article was accepted as down payment and the balance on monthly installments for two years that include both principal and interest at 15% per year, starting October 31, 2018, as evidenced by a note. P120,000 was allowed on the article traded-in. The company estimates reconditioning cost of P8,000 on this article and a sales price of P110,000 after reconditioning. The company normally expects 20% gross profit on sale of used article.

Questions:

1. How much is the realized gross profit in 2018? (Round of PV factors to 4 decimal places)

2. Assume that there is a very high degree of uncertainty about the collectability of the note, thus, Instagram

opted to use the cost recovery method. How much is the increase in profit or loss related to interest income in 2019? (Round of PV factors to 4 decimal places)

Installment

     

Sales

400,000

Adjustment for

   

T.I

36,333

 

363,667

 

cost

270,000

 

Gp

93,667

 

GPR

0.257562

 

allowance

120,000

 

FV

   
 

110,000

 

recon cost

8,000

 

GP

18,333

91666.67

FV

83,667

 

OA

36,333

 
 

400,000

   
 

120,000

   

Remaining

     

Balance

280,000.00

monthly

     

payment

11,666.67

interest

15%

   
   

12

   

Monthly interest

0.0125

   
 

3,500.00

   
   

PV factor

CA

Principal

11,666.67

20.6242

240615.735

 

Interest

     

payment

3,500.00

20.6242

 

72184.7

     

312800.435

 
     

Interest

 

Carrying

Payment

 

Income

Ammortization

amount

         

312,800.44

Oct-18

1

15,166.67

 

3,910.01

11,256.66

301,543.77

Nov-18

2

15,166.67

 

3,769.30

11,397.37

290,146.40

Dec-18

3

15,166.67

 

3,626.83

11,539.84

278,606.56

Jan-19

4

15,166.67

 

3,482.58

11,684.09

266,922.47

Feb-19

5

15,166.67

 

3,336.53

11,830.14

255,092.33

Mar-19

6

15,166.67

 

3,188.65

11,978.02

243,114.31

Apr-19

7

15,166.67

 

3,038.93

12,127.74

230,986.57

May-19

8

15,166.67

 

2,887.33

12,279.34

218,707.24

Jun-19

9

15,166.67

 

2,733.84

12,432.83

206,274.41

Jul-19

10

15,166.67

 

2,578.43

12,588.24

193,686.17

Aug-19

11

15,166.67

 

2,421.08

12,745.59

180,940.57

Sep-19

12

15,166.67

 

2,261.76

12,904.91

168,035.66

Oct-19

13

15,166.67

 

2,100.45

13,066.22

154,969.44

Nov-19

14

15,166.67

 

1,937.12

13,229.55

141,739.88

Dec-19

15

15,166.67

 

1,771.75

13,394.92

128,344.96

Jan-20

16

15,166.67

 

1,604.31

13,562.36

114,782.61

Feb-20

17

15,166.67

 

1,434.78

13,731.89

101,050.72

Mar-20

18

15,166.67

 

1,263.13

13,903.54

87,147.18

Apr-20

19

15,166.67

 

1,089.34

14,077.33

73,069.85

May-20

20

15,166.67

 

913.37

14,253.30

58,816.55

Jun-20

21

15,166.67

 

735.21

14,431.46

44,385.09

Jul-20

22

15,166.67

 

554.81

14,611.86

29,773.24

Aug-20

23

15,166.67

 

372.17

14,794.50

14,978.73

         

-

Sep-20

24

15,166.67

 

187.23

14,979.44

0.71

2018

 

Realized Gross

 

profit

T.I

83,667

collection

34,193.88

Total

117,861

GPR

25.76%

RGP

30,356.38

2019

 

Principal

184,455.47

Interest income

43,044.58

Total

227,500.05

Cost

270,000

 

-

42,499.95

Exercise 8 (With Repossession)

On January 1, 2016, Exodus Company had an instalment account receivable from Leviticus with a balance of P1, 200,000. During March 2, 2016, P220, 000 was collected from Leviticus. No further collections could be made and the merchandise was repossessed. When reacquired, the merchandise was appraised as being worth P460, 000. To improve its salability, the company expended P60, 000 for reconditioning.

The merchandise was originally cost P924, 000 and was originally sold for P1,650,000 in 2015. Required:

1. How much is the repossession gain or loss:

2. Compute for the realized gross profit for 2016:

 

Installment

   

Remaining

 

Sales

1,650,000

balance

980,000

COS

924,000

GP

431200

   

adjusted

GP

726,000

Balance

548,800

   

FV of

 

GPR

44.00%

repossessed

460,000

 

difference

-88,800

collection

220,000

GP

96,800.00

Exercise 9

Expedition Motors sells automobiles on installment basis. On May 30, 2018, Mr. Montenegro bought a car for P1,125,000, terms: 25% down payment and the balance is payable in 48 months starting June 30, 2018. The cost of the car is P800,625. In lieu of the down payment, Expedition Motors accepted the buyers slightly used pick up which has a resale value of P300,000 after reconditioning at a cost of P127,500. After paying the October 2018 installment, Mr. Montenegro met an accident which incapacitates him to meet his liabilities. After 3 notices, Expedition Motors repossessed the car. The repossessed car has a resale value of P496,875 after incurring reconditioning costs of P180,000. What is the cancelled profit due to repossession?

a.

P 160,393

b.

P 193,143

c.

P 200,958

d.

P 226,758

   

Trade in

 

selling price

1,125,000.00

allowance

281,250.00

 

-

   

allowance

108,750.00

true selling

     

price

1,016,250.00

FV

300,000.00

cost

800,625.00

RCC

127,500.00

GP

215,625.00

FV

172,500.00

GPR

0.21

   
     

-

allowance

108,750.00

Balance

843,750.00

   

monthly

17,578.13

Paid

87,890.63

Remaining

755,859.38

GPR

0.21

GPR

160,376.07

net of GPR

595,483.31

FV of repo

496,875.00

rcc

180,000.00

Fv

316,875.00

 

-

278,608.31

Exercise 10 ( With interest and selling the repossessed Item)

Numbers Company sold computer equipment by giving a trade discount of 10% to all its customers. On May 1, 2017, Five units of computer with a total list price of P100,000 and total cost of P59,800 were sold to Deuteronomy, Numbers Company accepted computer as trade in and granted an allowance of P10,000, the current market value of the computers is P12,000. The balance was payable as follows: 20% of the balance paid at the time of sale; the rest is payable in 10 months starting on June 1, 2017. After 6 months of paying Deuteronomy defaulted in the payment if December 1, 2017. The five units of computer equipment were repossessed and it would require P2, 000 reconditioning cost for each computer before it could be resold for P6,000 each. A 15% gross profit rate was normal from the sale of used equipment. Operating expenses amounted for P5, 380.

Required:

1. Compute for the realized gross profit for 2017:

2. Compute for the net income for 2017:

Sales price

100,000

trade discount

   

10000

Trade in

 

adjustment

 

2,000

True Sales price

   

92,000

Cost

 

59800

GP

 

32,200

GPR

 

0.35

allowance

10,000

Fv

12,000

 

2,000

Trade in

12,000

DP

16000

Collection

38400

Total

66,400

Remaining

 

balance

 

41,600

GPR

 

0.35

GP

 

14560

adjusted

 

balance

 

27,040

FV of repo

   

SP

30,000

 

RC

10,000

 

GP

3,913

26086.96

FV of repo

16,087

 

Difference

-10,953

 

RGP

23240

 

loss on

 

repo

-10,953

opex

-5380

net

 

income

6906.957

Exercise 11 (Consignment Sales)

Joshua Company consigned to Judges Company twelve Sony color TV sets which cost P9, 000 each. Judges sold eight sets, and rendered an account sale, and remitted the amount of P82, 600 after deducting the following from the selling price:

Commission on selling price

12%

Selling Expenses

P1,200

Cost of antennae tapes given free

P1,400

Delivery and Installation

P2,800

Questions:

a. The total selling price of the eight sales sold by: Joshua

b. The net profit of Joshua on the eight sales sold by Judges

SP

100000

   

commission on selling price

12,000

 
 

88,000

 

88%

Selling expense

1,200

 

cost of antennae given free

1,400

 

Delivery and installation

2,800

 

Remitted

82,600

 

SP

100000

 

9,000 * 8

 

Cost

72,000.00

commission on selling price

12,000.00

Selling expense

1,200.00

cost of antennae given free

1,400.00

Delivery and installation

2,800.00

Total expense

89,400.00

Net income

10,600.00

Exercise 10

On January 1, 2018, Liberty Realty Corporation sold property carried in inventory at a cost of P840,000 for P1,400,000. A 10% down payment was made and the balance is payable in 4 equal installments of P363,625, inclusive of 12% interest, payable every June 30 and December 31.

Questions:

1.

How much is the realized gross profit in 2018 assuming the installment method is used?

a.

P 237,332.60

b.

P 293,332.60

c.

P 308,000

d.

P 346,900

2.

How much is the total collection in 2018 applied to interest?

 

a.

P 0

b.

P 133,918.50

c.

P 151,200

d.

P 168,000

Sales

1,400,000

     

Cost

840,000

     

DGP

560,000

0.4

   
 

Annual

Interest

   

Payment

Income

ammortization

Cv

       

1,260,000

18-Jun

363,625

75,600.00

288,025.00

971,975.00

18-Dec

363,625

58,318.50

305,306.50

666,668.50

19-Jun

363,625

40,000.11

323,624.89

343,043.61

19-Dec

363,625

20,582.62

343,042.38

1.23

 

593,331.50

     
 

140,000

     

Total

       

Payment

733,331.50

GPR

293,332.60

     

Exercise 11

Genesis Corp. sells new cars. On January 2, 2019 a new car costing P2, 500,000 was sold for P3, 600,000. An old car was accepted as down payment and an allowance of P1, 500,000 was allowed on the trade in. The company anticipates reconditioning costs on the old car of P150, 000 and a resale price of P1, 400,000.It’s used car sales are expected to produce a 25% gross profit. The balance is payable in five annual payments starting December 31, 2019. How much is the Net Income for December 31, 2019?

Selling

   

Trade in

 

Price

3,600,000.00

value

 

-

     

OA

600,000.00

Allowance

1,500,000.00

TSP

3,000,000.00

     
     

Fair Value

 
     

Selling

 

Cost

2,500,000.00

Price

1,400,000.00

     

Recon

 

Gain

500,000.00

0.166667

cost

150,000.00

     

GP

350,000.00

     

FV

900,000.00

FV of TI

900,000.00

     

1st

       

payment

420,000.00

OA/UA

600,000.00

Total

1,320,000.00

     

RGP

220,000.00

 

3600000

 
     

1500000

 
     

2100000

 
     

420000

 

Exercise 12

On January 1, 2019, Exodus Company had an instalment account receivable from Leviticus with a balance of P1, 200,000. During March 2, 2019, P220, 000 was collected from Leviticus. No further collections could be made and the merchandise was repossessed. When reacquired, the merchandise was appraised as being worth P460, 000. To improve its salability, the company expended P60, 000 for reconditioning.

The merchandise was originally cost P924, 000 and was originally sold for P1,650,000 in 2018.

Required:

1. How much is the repossession gain or loss: P88,800 2. Compute for the realized gross profit for 2019: P96,800 3. How much is the net income ? P8,000

SP

1,650,000.00

 

Cost

924,000.00

 

GP

726,000.00

0.44

Remaining IAR

980,000.00

 

GP

431,200.00

 

IAR

548,800.00

 

FV of

   

Repossessed

Appraised Value

460,000.00

 

Loss on recon

88,800.00

 

Collection

220,000.00

96,800.00

Net Income

 

8,000.00

Exercise 13

Expedition Motors sells automobiles on installment basis. On May 30, 2018, Mr. Montenegro bought a car for P1,125,000, terms: 25% down payment and the balance is payable in 48 months starting June 30, 2018. The cost of the car is P800,625. In lieu of the down payment, Expedition Motors accepted the buyers slightly used pick up which has a resale value of P300,000 after reconditioning at a cost of P127,500. After paying the October 2018 installment, Mr. Montenegro met an accident which incapacitates him to meet his liabilities. After 3 notices, Expedition Motors repossessed the car. The repossessed car has a resale value of P496,875 after incurring reconditioning costs of P180,000. What is the cancelled profit due to repossession?

a.

P 160,393

b.

P 193,143

c.

P 200,958

d.

P 226,758

Selling Price

1,125,000.00

Trade in

 
 

-

   

OA

108,750.00

TSP

1,016,250.00

allowance

281,250.00

Cost

800,625.00

   

GP

215,625.00

SP

300,000.00

 

0.21

Rc

127,500.00

     

172,500.00

Installment per

     

month

 

1,125,000.00

OA

108,750.00

25%

281,250.00

   
 

843,750.00

   
 

17,578.13

   

paid

87,890.63

   

remaining

755,859.38

   
 

160,376.07

   

Exercise 14

Abensons Company sells home theater set both on installment and cash basis. Mr. Aquino purchased a set from Abensons Company on March 30, 2018 for P367,500 which has a cost of P289,800. A used set is accepted as down payment, P89,600 being allowed on the trade in and the balance is payable 10 months starting May 1, 2018. The used set can be resold for P112,140 after reconditioning cost of P5,362. The company expects to make 20% gross profit on the sale of used sets. Mr. Aquino defaulted payment starting Nov. 1, 2018 and the set was repossessed. Abensons Company had to incur additional cost of repairs amounting to P6,475 before the car was subsequently sold for P90,125 on December 1, 2018. What is the net income to be recognized for the year 2018 in relation to the above transactions?

a.

P 44,940

b.

P 51,415

c.

P 68,243

d.

P 69,293

SP

367,500.00

 

Ti

 

OA

5,250.00

 

allowance

89,600.00

TSP

362,250.00

     

cost

289,800.00

 

FVTI

 

GP

72,450.00

 

SP

112,140.00

 

0.20

 

RC

5,362.00

     

GP

22,428.00

     

FVTI

84,350.00

DP

84,350.00

     

Collection

166,740.00

 

OA

5,250.00

Total

       

Collection

251,090.00

RGP

50,218.00

Installment

367500

89600

     

277900

 
     

27790

 

Repo

       

FVRepo

90,125.00

Rc

6,475.00

FVRepo

83,650.00

IAR

111,160.00

GP

22,232.00

IAR

88,928.00

Loss on repo

5,278.00

Net income

44,940.00

Exercise 15

Confidence Corporation sells goods on the installment basis. For the year just ended, the following were reported: Cost of installment sales – P8,400,000; Loss on repossession – P202,500; Wholesale value of the repossessed merchandise – P1,687,500; Repossessed account – P2,700,000; Deferred gross profit after adjustment – P1,620,000. How much was the collections for the year?

FV of TI

   

IAR

 

1,687,500.00

   

2,700,000.00

 
     

810,000.00

0.30

     

1,890,000.00

 
 

202,500.00

     
 

12,000,000.00

     

Cost

8,400,000.00

     
 

3,600,000.00

0.3

   

IAR Beg

12,000,000.00

     

Default

2,700,000.00

     

Ending

5,400,000.00

1620000

   

Collection

3,900,000.00

     

Exercise 16

THE IMMORTALS Store accounts for its sales on the installment basis. At the beginning of 2020, ledger accounts include the following balances: Installment contracts receivable, 2018 - P 30,000; Installment contracts receivable, 2019 - P 96,000; Deferred gross profit, 2018 - P 12,600; Deferred gross profit, 2019 - P 36,000. At the end of 2020, account balances before adjustment for realized gross profit on installment sales are:

Installment contracts receivable, 2018 - P 0; Installment contracts receivable, 2019 - P 24,000; Installment contracts receivable, 2020 - P 130,000; Deferred gross profit, 2018 - P 12,600; Deferred gross profit, 2019 - P 34,350; Deferred gross profit, 2020 - P 60,000.

Installment sales in 2020 are made at 25% above cost of merchandise sold. During 2020 upon default in payment by the customer, the company repossessed the merchandise with an estimated market value of P 2,000. The sales was in 2019 for P 10,800, and P 6,400 had been collected prior to repossession.

Questions:

1. Compute the gain or (loss) on repossession assuming that Profit is recognized when sale is made:

a.

(P 2,400)

b.

P -0-

c.

(P 750) d.

(P 750)

2. Compute the gain or (loss) on repossession assuming that Profit is in proportion to periodic

collection (IS method):

a.

(P 2,400)

b.

P -0-

c.

(P 750) d.

(P 750)

3.

The net realized gross profit on December 31, 2020 is:

a.

P 73,600

b.

P 71,950

c.

P 71,200

d.

P 34,000

 

2,018.00

2019

IAR

30,000.00

96000

     

DGP

12,600.00

36000

   

0.42

0.38

   

IAR

2,018.00

2019

2020

 

Ending IAR

-

24000

130000

 

DGP

 

34350

60000

0.25

300,000.00

       

1.25

       

0.20

   

72000

   
   

4400

   
   

67600

170,000.00

 
 

12,600.00

25,350.00

34000

71,950.00

       

71,200.00

SP

2,000.00

10,800.00

6,400.00

4,400.00

1,650.00

2,750.00

-

750.00

Exercise 17

Numbers Company sold computer equipment by giving a trade discount of 10% to all its customers. On May 1, 2019, Five units of computer with a total list price of P100,000 and total cost of P59,800 were sold to Deuteronomy, Numbers Company accepted computer as trade in and granted an allowance of P10,000, the current market value of the computers is P12,000. The balance was payable as follows: 20% of the balance paid at the time of sale; the rest is payable in 10 months starting on June 1, 2019. After 6 months of paying Deuteronomy defaulted in the payment if December 1, 2019. The five units of computer equipment were repossessed and it would require P2, 000 reconditioning cost for each computer before it could be resold for P6,000 each. A 15% gross profit rate was normal from the sale of used equipment. Operating expenses amounted for P5, 380.

Required:

1. Compute for the realized gross profit for 2019: P19,040

2. Compute for the net income for 2019: P17,620

List price

100,000.00

     

TD

10,000.00

90,000.00

 

Invoice price

90,000.00

 

10,000.00

OA

2,000.00

 

80,000.00

TSP

92,000.00

 

16,000.00

DP

Cost price

59,800.00

 

64,000.00

GP

32,200.00

 

6,400.00

per month

 

0.35

 

38,400.00

 
   

Total

54,400.00

 
   

RGP

19,040.00

 

FV of TI

       

6 x 6000

36,000.00

     

RCC

10,000.00

     

GP

5,400.00

Sale

80000

20,600.00

Dp

16000

 

collection

38,400.00

Balance

25,600.00

Remaining

25,600.00

GP

8,960.00

16,640.00

RGP gain on repo

19040

 

3960

 

3,960.00

opex

-5380

 

Net income

17620

Theories

1. The installment method of recognizing revenue

a . should be used only in cases in which no reasonable basis exists for estimating the collectability of receivables.

b. is not a generally accepted accounting principle under any circumstances.

c. should be used for book purposes only if it is used for tax purposes.

d. is an acceptable alternative accounting principle for a firm that makes installment sales.

2. Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

A. Installment sales method.

B. Point of sales method.

C. Cost recovery method.

D. Completed contract method.

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

a.

collections in the year of sale do not exceed 30% of the total sales price.

b.

an unrealized profit 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.

4. An acceptable method for recognizing profit when the collection of cash is in doubt is the

a.

Percentage-of-completion method.

b.

Completed-contract method.

c.

Installment method.

d.

Consignment method.

5. When using the installment sales method,

a. gross profit is deferred until all cash is received, but revenues and costs are recognized in

proportion to the cash collected from the sale.

b. gross profit is recognized only after the amount of cash collected exceeds the cost of the item

sold.

c. revenue, costs, and gross profit are recognized proportionally as the cash is received from the

sale of product.

d. total revenues and costs are recognized at the point of sale, but gross profit is deferred in

proportion to the cash that is uncollected from the sale.

“yun pala kulang pa ang kaalaman kong labis, ngayon alam ko na kung ba’t may pambura ang lapis” -Loonie