Chapter 10 Teacherx27s Manual Afar Part 1 - Compress PDF

Chapter 10
Installment Sales Method
PROBLEM 10-1: TRUE OR FALSE

1. TRUE
2. FALSE ₱0.80 = (₱1 x 8/10)
3. TRUE ₱4 = (₱5 x 8/10)
4. TRUE
5. TRUE
6. TRUE
7. TRUE
8. TRUE
9. TRUE
10. FALSE 40%
11. FALSE (5 / .20) = 25
12. FALSE (100 –
(100 – 25)
25) = 75
13. FALSE 540
(DGP, end. 10 / 100 receivable, end. = 10% GPR)
(100 receivable, end. + 500 collections) = 600 sale x 90% cost ratio =
540 cost of sale
PROBLEM 10-2: THEORY & COMPUTATIONAL

1. D
2. Solutions:
R eq
equir
uirem
emen
entt (a):
(a):
20x1 ₱500,000 x 30% = 150,000

20x2 ₱300,000 x 30% = 90,000
20x3 ₱200,000 x 30% = 60,000
R eq
equir
uirem
emen
entt (b):
20x1 1M - 500,000 = 500,000

500, 000
20x2 1M – 500K
1M – 500K – 300K = 200,000
– 300K 200, 000
20x3 1M – 500K
1M – 500K –
– 300K
300K – 200K = 0
– 200K
Requirement (c):
20x1 500,000, ending A/R x 30% = 150,000

20x2 200,000, ending A/R x 30% = 60,000
1
20x3 0, ending A/R x 30% = 0
3. D
4. B
5. C (200,000 ÷ 25%) = 800,000 ending A/R

1M sale price –
price – 800,000
800,000 ending A/R = 200,000 collections during the year
6. D 1M sale price –
price – 750K
750K cost of sale = 250K total gross profit –
profit – 200K
200K
deferred = 50K realized
7. D 1M sale price –
price – 750K
profit – 220K
220K
realized = 30K deferred
8. A 1M sale price –
price – 750K
profit – 180K
180K
realized = 70K deferred ÷ 25% = 280,000
9. B 1M sale price –
price – 750K
profit – 160K
160K
realized = 90K deferred ÷ 25% = 360,000 ending A/R;
1M sale price –
price – 360,000
360,000 ending A/R = 640,000 collection
10. Solution:
R eq
equir
uirem
ement
ent (a):
The fair value of the repossessed inventory is computed as follows:
Estimated selling price 12,000
Reconditioning costs (2,000)
Normal profit margin (year of repossession) (12K x 30% ) (3,600)
Fair value of repossessed property 6,400
The gain or loss on repossession is computed as follows:
Date Inventory (at fair value) 6,400

Deferred gross profit (25K x 20% ) 5,000
Los s on reposs
reposs ess ion (s que
queeze
ze)) 1,600
Installment account receivable 13,000
R eq
equireme
uirement
ntss (b) and
and (c):
The collections in 20x2 from the 20x1 and 20x2 sales are computed
as follows:
2
Installment Installment
receivable - 20x1 receivable - 20x2
Beg. 90,000 13,000 Write-off Beg. - - Write-off
Collection Collection
47,000 (squeeze) Sale 240,000 60,000 (squeeze)
30,000 End. 180,000 End.
The profit in 20x2 is computed as follows:
Realized gross profit from:

- 20x1 sale (47K x 20%) 9,400
- 20x2 sale (60K x 30%) 18,000
Total realized g ros s profit in 20x2 – R equirement (b) 27,400
Loss on repossession (1,600)
Profit in 20x2 – R equirement (c) 25,800
11. D
12. Solutions:
S cenario 1
The amount of over (under) allowance is determined as follows:

Trade-in value granted to customer 4,000
Fair value of merchandise traded-in (4,000)
Over (Under) allowance -
R equirement (a):
The journal entry to record the sale is as follows:
Date Inventory – traded-in (at fair value) 4,000

Installment account receivable (squeeze) 12,000
Installment sale 16,000
R equirement (b):
The gross profit rate is computed as follows:
Installment sale price 16,000

(Over) Under allowance -
Adjusted installment sale price 16,000
Cost of sale (10,000)
3
Gross profit 6,000
Gross profit rate 37.5%
The realized gross profit is computed as follows:

(Over) under allowance -
Subsequent collections 6,000
Total collections on installment sale 10,000
Multiply by: Gross profit rate 37.5%
R ealized g ros s profit - 20x1 3,750
S cenario 2

Over allowance 1,000
R equirement (a):
Over allowance on trade-in 1,000
R equirement (b):
Over allowance (1,000)
Gross profit 5,000
4
(Over) under allowance (1,000)
S cenario 3

Under allowance (2,000)
R equirement (a):
Under allowance on trade-in 2,000
R equirement (b):

Under allowance 2,000
Gross profit 8,000

(Over) under allowance 2,000
5
13. C
14. Solution:
Total collections from 20x1 sales 10,000
Cost of 20x1 sales (8,000)
Gross profit - 20x1 sales 2,000
G ros s profit recog nized in 20x2 5,000
15. A
PROBLEM 10-3: EXERCISES

1. Solutions:
R equirement (a):
Installment sales 1,000,000
Cost of sales (800,000)
Deferred g ros s profit - unadjus ted balance 200,000
R equirement (b):
Installment accounts receivable - Dec. 31, 20x1 (600,000)
C ollections in 20x1 400,000
Requirement (c):
Cost of sales (800,000)
Deferred gross profit - unadjusted balance 200,000
Gross profit rate based on sales (200K / 1M) 20%
R equirement (d):
Collections in 20x1 400,000
Multiply by: Gross profit rate based on sales 20%
R equirement (e):
Deferred gross profit - unadjusted balance 200,000
Realized gross profit - 20x1 (80,000)
Deferred g ros s profit - adjus ted balance 120,000
OR
6
Installment accounts receivable - Dec. 31, 20x1 600,000
Deferred g ros s profit - adjus ted balance 120,000
2. Solutions:
R equirement (a):
Deferred gross profit (before year-end adjustment) 200,000
Divide by: Gross profit based on sales 20%
Ins tallment s ales 1,000,000
R equirement (b):
Collections in 20x1 (400,000)
Ins tallment acc ounts receivable - Dec. 31, 20x1 600,000
Requirement (c):
R equirement (d):
Deferred gross profit (before year-end adjustment) 200,000
Realized gross profit - 20x1 (80,000)
Deferred g ros s profit - Dec. 31, 20x1 120,000
Reconciliations:
Ins tallment s ales 1,000,000

Deferred g ros s profit - Dec. 31, 20x1 120,000
Deferred gross profit - Dec. 31, 20x1 120,000

Divide by: Gross profit based on sales 20%
Ins tallment acc ounts receivable - Dec. 31, 20x1 600,000
3. Solution:
Installment sales 900,000
Installment accounts receivable, Dec. 31, 20x1 500,000
7
Multiply by: (100% - 60%) 40%
4. Solutions:
R equirement (a):
Deferred gross profit, before year-end adjustment 560,000
Divide by: Gross profit on sales 40%
Total sales 1,400,000
Installment accounts receivable, Dec. 31, 20x1 (800,000)
C ollections - 20x1 600,000
R equirement (b):
Collections - 20x1 600,000
Multiply by: Gross profit on sales 40%
5. Solution:
20x1 installment accounts 16,250

Multiply by: Gross profit rate based on sales 30%/130%
Deferred gross profit (after adjustment) - 20x1 sales 3,750
20x2 installment accounts 90,000

Multiply by: Gross profit rate based on sales 33 1/3%/133 1/3%
Deferred gross profit (after adjustment) - 20x2 sales 22,500
Total deferred gross profit (after adjustment) 26,250
Deferred gross profit (before adjustment) 38,000

Deferred gross profit (after adjustment) (26,250)
Expenses relating to installment sales (1,500)
Profi t from ins tallment s ales - 20x2 10,250
6. Solutions:
R equirement (a):
The gross profit rates are computed as follows:
20x 1 20x 2 20x 3
Installment sales 300,000 375,000 360,000
Cost of sales 225,000 285,000 252,000
Gross profit 75,000 90,000 108,000
Gross profit rate based on sales 25% 24% 30%
8
20x1 Deferred gross profit, Dec. 31, 20x3 -
Divide by: Gross profit rate 25%
20x1 Installment accounts receivable, Dec. 31, 20x3 -
20x2 Deferred gross profit, Dec. 31, 20x3 9,000

20x2 Installment accounts receivable, Dec. 31, 20x3 37,500

Total ins tallment acc ounts receivable, Dec. 31, 20x3 277,500
R equirement (b):
20x1 Installment accounts receivable, Dec. 31, 20x3 -
Collection during 20x3 from 20x1 sales 60,000

Installment sales - 20x3 360,000

Total collections duri ng 20x3 367,500
Requirement (c):
Multiply by: Gross profit rate - 20x1 sales 25%
Realized gross profit in 20x3 from 20x1 sales 15,000

9

Total realized g ros s profit in 20x3 96,000
7. Solutions:
R equirement (a):
20x1 installment account receivable, Dec. 31, 20x2 112,500*
20x1 installment account receivable, Dec. 31, 20x3 (60,000)
Collections in 20x3 from 20x1 sales 52,500
Multiply by: Gross profit rate - 20x1 30%
20x2 installment account receivable, Dec. 31, 20x2 300,000

20x3 installment sales 495,000

Total realized g ros s profit - 20x3 94,500
* (135,000 less 22,500 unpaid balance in repossessed merchandise) =

112,500
R equirement (b):
20x3 Inventory (at fair value) 15,000
Deferred gross profit (22.5K x 30%) 6,750
Los s on reposs ess ion (s queeze) 750
10
8. Solution:
Cash down payment 600,000
Collection from installment payment (900K + 540K) 1,440,000
Total collections 2,040,000
Cost of sale (4,000,000)
Excess of collection over cost -
Since total collections do not exceed the cost of sale, no income shall be
recognized by Sound Co.
PROBLEM 10-4: CLASSROOM ACTIVITY

1. Solutions:
R equirement (a):
20x1 ₱400,000 x 25% = 100,000

20x2 ₱150,000 x 25% = 37,500
20x3 ₱ 50,000 x 25% = 12,500
R equirement (b):
20x1 600K – 400K = 200,000

20x2 600K – 400K – 150K = 50,000
20x3 600K – 400K – 150K – 50K = 0
Requirement (c):
20x1 200,000, ending A/R x 25% = 50,000

20x2 500,000, ending A/R x 25% = 12,500
20x3 0, ending A/R x 25% = 0
2. Solutions:
C as e 1: 112,000 ÷ 35% = 320,000
C as e 2: 269,500 ÷ 35% = 770,000 A/R, end

900,000 – 770,000 = 130,000
Case 3: 900K – 585K = 315K total gross profit – 200K deferred = 115,000
realized
C as e 4: 300,000 x 35% = 105,000 realized

900K – 585K = 315K total gross profit – 105K realized = 210,000
deferred
11
Case 5: 900K – 585K = 315K total gross profit – 220K realized = 95,000
deferred
Case 6: 900K – 585K = 315K total gross profit – 180K realized = 135,000
deferred ÷ 35% = 385,714 A/R , end.
C as e 7:
If the realized gross profit is ₱147,000, how much is the total collections
during the year?
147K ÷ 35% = 420,000 total collections
3. Solution:
R equirement (a):
The fair value of the repossessed inventory is computed as follows:
Estimated selling price 24,000
Reconditioning costs (4,000)
Normal profit margin (year of repossession) (24K x 30% ) (7,200)
Fair value of repos s es s ed property 12,800
The gain or loss on repossession is computed as follows:
Date Inventory (at fair value) 12,800

Deferred gross profit (25K x 20% ) 10,000
Los s on reposs es s ion (s queeze) 3,200
R equirements (b) and (c):

The collections in 20x2 from the 20x1 and 20x2 sales are computed
as follows:
Installment Installment
receivable - 20x1 receivable - 20x2
Beg. 180,000 26,000 Write-off Beg. - - Write-off
Collection Collection
94,000 (squeeze) Sale 480,000 120,000 (squeeze)
60,000 End. 360,000 End.
The profit in 20x2 is computed as follows:
Realized gross profit from:
12
- 20x1 sale (94K x 20%) 18,800
- 20x2 sale (120K x 30%) 36,000
Total realized g ros s profit in 20x2 – R equirement (b) 54,800
Loss on repossession (3,200)
Profit in 20x2 – R equirement (c) 51,600
4. Solution:
S cenari o 1

Over (Under) allowance -
R equirement (a):

R equirement (b):

(Over) Under allowance -
Gross profit 12,000
13
(Over) under allowance -
S cenario 2
Solution:
Over allowance 2,000
R equirement (a):
Over allowance on trade-in 2,000
R equirement (b):
Over allowance (2,000)
Gross profit 10,000

(Over) under allowance (2,000)
14
S cenario 3
Solution:

Under allowance (4,000)
R equirement (a):
Under allowance on trade-in 4,000
R equirement (b):

Under allowance 4,000
Gross profit 16,000

(Over) under allowance 4,000
5. Solution:

15
G ros s profit recog nized in 20x2 10,000
PROBLEM 10-5: THEORY

1. C 6. C 11. C
2. C 7. B 12. A
3. C 8. A 13. B
4. A 9. B 14. C
5. B 10. B 15. D
PROBLEM 10-6: THEORY

1. A 6. A
2. A 7. A
3. A 8. A
4. C 9. B
5. D 10. A
PROBLEM 10-7: MULTIPLE CHOICE (COMPUTATIONAL)
Solutions:
1. A 200K – 60K = 140K realized ÷ 25% = 560,000
2. C
Date C ollection Interes t A mortization P ri nci pal

9/30/x1 48,000
9/30/x1 4,800 - 4,800 43,200
10/31/x1 4,800 432 4,368 38,832
11/30/x1 4,800 388 4,412 34,420
12/31/x1 4,800 344 4,456 29,965
Totals 19,200 1,165 18,035
18,035 x 37.5% = 6,763
16
3. A
Inventory 16,800
Deferred gross profit (29,965 x 37.5%) 11,237
Los s on reposs es s ion 1,928
Receivable 29,965
4. C
The 20x1 sale is computed as follows:
Date C ollection Interes t A mortizatio Princ ipal

Date of sale 158,000 (squeeze)
20x1 71,000 7,000 64,000 94,000(a)
(squeeze) (given) (given) (start)
(a) 108,000 N/R – 14,000 discount on N/R = 94,000 carrying amount 12/31/x1
The cost of goods sold is computed as follows:
Inventory
beg. -
COGS
Purchases 100,850 90,850 (squeeze)
10,000 end.
The gross profit rate in 20x1 is computed as follows:
Sales 158,000
COGS (90,850)
Gross profit 67,150
The realized gross profit rate is computed as follows:

Collections of principal 64,000
Realized gross profit 27,200
17
5. B
The collection on principal of 20x1 receivable in 20x2 is computed as follows:
Date C ollection Interes t A mortization Pri nci pal

Date of sale 158,000
20x1 71,000 7,000 64,000 94,000
20x2 34,000 60,000 (b)
(squeeze) (start)
(b) 72,000 N/R – 12,000 discount on N/R = 60,000 carrying amount 12/31/x2
The collection on principal of 20x2 receivable in 20x2 is computed as follows:
Total collection on principal in 20x2 100,000

Less: Collection from 20x1 receivable (34,000)
Collection from 20x2 receivable 66,000
The 20x2 sale is computed as follows:
Date C ollection Interes t A mortizatio Princ ipal

Date of sale 170,000 (squeeze)
20x2 66,000 104,000(c)
(see above) (start)
(c )
120,000 N/R – 16,000 discount on N/R = 104,000 carrying amount
12/31/x1
The cost of goods sold is computed as follows:
Inventory
beg. -
COGS
16,000 end.
The gross profit rate in 20x1 is computed as follows:
Sales 170,000
COGS (89,250)
Gross profit 80,750
The realized gross profit rate is computed as follows:
18
From 20x2 sale:
Collections of principal from 20x2 sale 66,000

Gross profit rate – 20x2 47.50%
Realized gross profit in 20x2 from 20x2 sale 31,350
From 20x1 sale:
Collections of principal from 20x1 sale

34,000
(see amortization table above)
Gross profit rate – 20x1
42.50%
(see solution in previous problem)
Realized gross profit in 20x2 from 20x1 sale 14,450
Total realized gross profit in 20x2: (31,350 + 14,450) = 45,800
6. D
Solution:
Cash sales 378,000

Installment sales at cash price (794,970 / 110%) 722,700
Total sales at cash price equivalent 1,100,700
Cost of goods sold (see T-account below) (693,441)
Gross profit 407,259
G ros s profit rate 37.00%
Inventory
beg. 174,180
COGS
108,630 end.
7. A
Solution:
Date C ollection Interes t A mortization Pri nci pal
Date of sale 3,000(a)
Down payment 825(b) - 825.00 2,175
1st installment 165(c) 21.75(d) 143.25 2,032
2nd installment 165 20.32 144.68 1,887
3rd installment 165 18.87 146.13 1,741
Total interest 60.94
(a)
3,300 installment price ÷ 100% = 3,000 cash price equivalent
(b)
3,300 x 25% = 825 down payment
(c)
(3,300 – 825 down payment) ÷ 15 = 165 monthly installment
(d)
2,175 unpaid cash price equivalent x 1% monthly interest = 21.75
19
8. D
Solution:
Cash sale 378,000.00

Down payment 198,750.00
Installment payments, net of interest
(238,023 – 27,758.52) 210,264.48
Collections of principal on defaulted contract
(143.25 + 144.68 + 146.13) 434.06
Total collections 787,448.54
R ealized g ros s profit 291,355.96
20

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Chapter 10

Installment Sales Method

PROBLEM 10-1: TRUE OR FALSE

PROBLEM 10-2: THEORY & COMPUTATIONAL

20x1 ₱500,000 x 30% = 150,000

20x1 1M - 500,000 = 500,000

20x1 500,000, ending A/R x 30% = 150,000

5. C (200,000 ÷ 25%) = 800,000 ending A/R

The gain or loss on repossession is computed as follows:

Date Inventory (at fair value) 6,400

The profit in 20x2 is computed as follows:

Realized gross profit from:

The amount of over (under) allowance is determined as follows:

Date Inventory – traded-in (at fair value) 4,000

The gross profit rate is computed as follows:

Installment sale price 16,000

Gross profit rate 37.5%

The realized gross profit is computed as follows:

Trade-in value granted to customer 4,000

The amount of over (under) allowance is determined as follows:

Gross profit rate 33.33%

The amount of over (under) allowance is determined as follows:

Installment sale price 16,000

The realized gross profit is computed as follows:

PROBLEM 10-3: EXERCISES

Installment accounts receivable - Dec. 31, 20x1 600,000

Deferred gross profit - Dec. 31, 20x1 120,000

20x1 installment accounts 16,250

20x2 installment accounts 90,000

Total deferred gross profit (after adjustment) 26,250

Deferred gross profit (before adjustment) 38,000

20x2 Deferred gross profit, Dec. 31, 20x3 9,000

20x3 Deferred gross profit, Dec. 31, 20x3 72,000

20x2 Deferred gross profit, Dec. 31, 20x2 54,000

Installment sales - 20x3 360,000

Total collections duri ng 20x3 367,500

Collection during 20x3 from 20x2 sales 187,500

Collection during 20x3 from 20x3 sales 120,000

Total realized g ros s profit in 20x3 96,000

20x2 installment account receivable, Dec. 31, 20x2 300,000

20x3 installment sales 495,000

Total realized g ros s profit - 20x3 94,500

* (135,000 less 22,500 unpaid balance in repossessed merchandise) =

PROBLEM 10-4: CLASSROOM ACTIVITY

20x1 ₱400,000 x 25% = 100,000

20x1 600K – 400K = 200,000

20x1 200,000, ending A/R x 25% = 50,000

C as e 2: 269,500 ÷ 35% = 770,000 A/R, end

C as e 4: 300,000 x 35% = 105,000 realized

147K ÷ 35% = 420,000 total collections

The gain or loss on repossession is computed as follows:

Date Inventory (at fair value) 12,800

R equirements (b) and (c):

The profit in 20x2 is computed as follows:

Realized gross profit from:

The amount of over (under) allowance is determined as follows:

Date Inventory – traded-in (at fair value) 8,000

The gross profit rate is computed as follows:

Installment sale price 32,000

Gross profit rate 37.5%

The realized gross profit is computed as follows:

Gross profit rate 33.33%