Revenue Recognition: Installment Accounting

I. ACE Company accounts for its sales on the installments sales basis. At the beginning of 2016, the
ledger accounts include the following account balances:

Installment Accounts Receivable, 2014 90,000

Installment Accounts Receivable, 2015 288,000
Deferred Gross Profit, 2014 37,800
Deferred Gross Profit, 2015 108,000

At the end of 2016 account balances before adjustments for realized gross profit on installment
sales are:

Installment Accounts Receivable, 2014 0

Installment Accounts Receivable, 2015 72,000
Installment Accounts Receivable, 2016 390,000
Deferred Gross Profit, 2014 37,800
Deferred Gross Profit, 2015 103,050
Deferred Gross Profit, 2016 180,000

Installment sales in 2016 are made at a 20% mark-up; cash sales amounting to P700,000 were
made at a markup of 30% and credit sales of P200,000 at a markup of 32%. During 2016, upon
default in payment by the customer, the company repossessed the merchandise with an
estimated market value of 6,000. The sales was made in 2015 for 32,400 and 19,200 has been
collected prior to repossession.

Determine:
1. Total realized gross profit before gain or loss on repossession in 2016
2. Net income for 2016

II. The following date pertain to installment sales of CAR MOTORS:

- Down payment: 30%

- Installment sales: 600,000 in 2015; 750,000 in 2016; 1,000,000 in 2017
- Mark-up on cost: 25%
- Subsequent collections (based on the sales price) are 40% in the year of sale; 30% in
the year after and the balance in the third year

Determine the balance of installment accounts receivable and the total deferred gross profit as
of December 31, 2017.

III. Presented below are the information taken from the books of LAZADA Company:
2015 2016
Sales:
Regular 875,000 1,312,500
Installment 437,500 700,000
 Cost of goods sold:
Regular 525,000 787,500
Installment 218,750 315,000
Operating Expenses 175,000 218,750
Collections on accounts
from:
Regular sales 700,000 962,500
IS – 2015 262,500 175,000
IS – 2016 437,500

What is the net income for the year ended December 31, 2016?

IV. Magic company began operating at 2014 and using the installment method of accounting,
presenting the following data for its installment sales.

Downpayment is 30%
Installment sales:
600,000 in 2014
762,500 in 2015
981,250 in 2016
Mark-up on cost is 25%
Collections after downpayment:
25% in the year of sales
30% in the year after
45% in the third year.

Determine:
1. IAR at the end of 2014
2. DGP for 2014 sales at the end of 2016
3. RGP from 2014 and 2015 sales at 2016
4. Total Unrealized Gross Profit at the end of 2016

V. Delta Motors began operations in 2015. All sales are on credit, with customers giving notes
receivables. The statements of income for the year 2015 and 2016 included, among others the
following:

2015 2016
Revenue – principal 480,000 750,000
collections
Revenue – interest collections 54,000 82,500
Cost of installment sales 900,000 924,000
Operating expenses 112,500 157,500
 The balance due on the customers’ promissory notes, at the end of 2015 and 2016 were as
follows:

2015 2016
Notes Receivable, 2015 810,000 540,000
Notes Receivable, 2016 - 900,000
Discount on 2015 NR 90,000 66,000
Discount on 2016 NR - 84,000

Determine:
1. The gross profit realized in 2015
2. The gross profit realized in 2016 on 2015 sales
3. The gross profit realized in 2016 on 2016 sales

VI. The Monde Nissin Company makes all sales on installment contracts and accordingly reports
income on the installment basis. Installment contracts receivable are accounted for by years.
Defaulted contract are recorded by debiting Loss on Repossession account and crediting the
appropriate Installment Contract Receivable account for the unpaid balance at the time of
default. All repossessions and trade-ins are recorded at realized values. The following data relate
to the transactions during 2015 and 2016.

2015 2016
Installment sales 150,000 198,500
Installment contract
receivable, Dec 31:
2015 sales 80,000 25,000
2016 sales - 95,000
Purchases 100,000 120,000
New merch inv, Dec 31 at cost 10,000 26,000
Loss on repossessions - 6,000

The company auditor disclosed that the inventory taken on December 31, 2016 did not include
certain merchandise received as a trade-in on December 2, 2016 for which an allowance was
given. The realizable value of the merchandise is 1,500 which was also the allowance on the
trade-in. No entry was made to record this merchandise on the books at the time it was
received. In 2016, a 2015 contract was defaulted and the merchandise was repossessed. At the
time of default, the repossessed merchandise had a realizable value of P2,500. The repossessed
merchandise was neither recorded nor included in the physical inventory on December 31,
2016.

Determine:
1. Gross profit rate in 2016 after adjustment
2. Balance of Deferred Gross Profit – 2015 as of December 31, 2016
3. Total realized gross profit to be reported in 2016
4. Adjusted gain (loss) on repossession