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A. Instalment Sales:
Learning objectives: The student should be able to
a. Explain the applicability of the “instalment sales method” of recognizing revenue.
b. Apply the method of instalment
B. Consignment Sales
Learning objectives; The student should be able to
a. Define the consignment arrangement.
b. Apply the PFRS 15 in recognizing revenue from a consignment arrangement.
SAQ # 1
1. Paral Company began operations on January 2, 20x4, and appropriately used the
installment sales method of accounting. The following data are available for 20x4
and 20x5:
20x4 20x5
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . P P3,600,000
... 3,000,000
Gross profit on sales . . . . . . . . . . . . . . . . . . . . . . . . 30% 40%
....
Cash collections from:
20x4 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,200,000
.... P1,000,000
20x5 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- P1,400,000
....
The realized gross profit for 20x5 is:
2. Daily, Inc. appropriately used the installment method of accounting to recognize
income in its financial statement. Some pertinent data relating to this method of
accounting include:
20x4 20x5
Installment sales P750,000 P900,000
Cost of sales 450,000 630,000
Gross profit P300,000 P270,000
Collections during year:
On 20x4 sales 250,000 250,000
On 20x5 sales 300,000
What amount to be realized gross profit should be reported on Daily’s income
statement for 20x5?
The balance in the deferred gross profit account at December 31, 20x4 should
be:
9. The Cindy, Inc. began operating at the beginning of the calendar year 20x4 and,
using the installment method of accounting, presented the following data for the
first year:
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000
Gross margin based on cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-2/3%
..
Inventory, Dec. 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
.
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 40,000
Accounts receivable, Dec. 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . .320,000 .
The balance of the deferred gross profit account, end of 20x4 should be:
10. Ft. Myers Co. began business on January 1, 20x3. The company uses the
installment method. Additional information follows:
20x4
20x3
Installment sales P160,000 P184,000
Cost of installment sales 136,000 158,240
General and administrative expenses 20,000 8,400
Cash receipts on installment method sales
20x3 sales 40,000 89,600
20x4 sales - 36,800
Compute the balance of Deferred Gross Profit at December 31, 20x4.
ASAQ #1
Solutions
1. P920,000
20x4: P1,200,000 x 30% = P 360,000
20x5: P1,400,000 x 40% = 560,000 P920,000
2. P190,000
(P300,000 ÷ P750,000) x P250,000 = P100,000
[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000
3. P1,600– 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.
4. Zero/Nil
When the cost recovery method is used, gross profit is recognized only after all
costs have been recovered.
20x5
P45,000 x 63% = P28,350 Cost of sale
P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5.
Costs still to be recovered.
5. P19,250
20x6
Relating to 20x5 sales:
P19,000 - P4,350 = P14,650 Gross profit recognized
Relating to 20x6 sales:
P60,000 x 59% = P35,400 Cost of sale
P40,000 - P35,400 = 4,600 Gross profit recognized
P19,250 Recognized in 20x6
6. P21,000
20x7
Relating to 20x5 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... P 2,000
Relating to 20x6 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... 17,000
Relating to 20x7 sales:
P85,000 x 60% = P51,000 Cost of sale
P53,000 - P51,000 = .......... 2,000 Gross profit
recognized
P21,000 Recognized in 20x7
7. P320,000
[(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000
8. P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (P825,000 x 40%) = P390,000.
9. P 128,000
Installment Accounts Receivable, end of 20x4 P 320,000
x: Gross profit rate (66 2/3 / 166 2/3) _____40%
Deferred Gross Profit, end of 20x4 P 128,000
4. If the company used the cost recovery method of revenue recognition, the income
that should be recognized in 20x6 is ___________________.
5. If the cost recovery method continues to be used through 20x7, the amount of 20x7
income that should be recognized is ____________________.
Use the following information for questions 6 to 10:
Johnson Enterprises uses the cost recovery method of construction accounting for
all installment sales. Complete the following table:
20x4 20x5 20x6
Installment sales . . . . . . . . . . . . . . . . . . . . P 80,000 P 95,000 P ?
Cost of installment sales . . . . . . . . . . . . . . .. . . . . . ? 56,050 68,250
Gross profit percentage . . . . . . . . . . . . . . . . . . . . . 38% ? 35%
Cash collections:
20x4 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,600 46,400 5,600
20x5 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,800 ?
20x6 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,550
Realized Gross Profit on Installment Sales . . . . . . ? ? 16,050
6. The installment sales in 20x6:
7. The cost of installment sales in 20x4:
8. The collections in 20x6 for 20x5 sales:
9. The realized gross profit on installments sales in 20x4:
10. The realized gross profit on installments sales in 20x5:
Use the following information for questions 11 to 14:
Lake Power Sports sells jet skis and other powered recreational equipment.
Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski,
and then pay another 1/3 each year for the next two years. Because Lake has little
information about collectability of these receivables, they use the cost recovery
method to recognize revenue on these installment sales. In 20x4 Lake began
operations and sold jet skis with a total price of P900,000 that cost Lake P450,000.
Lake collected P300,000 in 20x4, P300,000 in 20x5, and P300,000 in 20x6
associated with those sales. In 20x5 Lake sold jet skis with a total price of
P1,500,000 that cost Lake P900,000. Lake collected P500,000 in 20x5, P400,000 in
20x6, and P400,000 in 20x7 associated with those sales. In 20x7 Lake also
repossessed P200,000 of jet skis that were sold in 20x5. Those jet skis had a fair
value of P75,000 at the time they were repossessed.
11. In 20x7, Lake would record a loss on repossession of:
12. In 20x4, Lake would recognize realized gross profit of:
13. In 20x6, Lake would recognize realized gross profit of:
14. In its December 31, 20x5, balance sheet, Lake would report:
a. Deferred gross profit of P800,000.
b. Deferred gross profit of P650,000.
c. Installment receivables (net of deferred) ofP700,000.
d. Installment receivables (net of deferred) of P400,000.
Rubric 20
Score
20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0
Consignment Sales
SAQ # 2
Use the following information for questions 1 and 2:
1. The following summary on the books of KK Company in relation to consignment
transaction from SS, Inc. appears as follows:
Consignment sales, 4 watches at P1,700,000
Consignor’s costs:
Shipment of 10 Rolex “Daytona” watches, P2,000,000
Freight-out, P100,000
Consignee’s charges:
Cartage-in, P75,000
Commission, P340,000
Advertisement, P200,000
Advances received by the consignor amount to P500,000.
The consignor’s net profit from the sale of the consigned goods was:
4. Europe Appliances consigned five electric fans, which cost P800,000 each, to
Germany Marketing Co., which was to sell them for a commission of 15% of
selling price. Any accounts receivable arising from the sale of the consigned
goods were to be the property of Europe Appliances.
The consignment consisted of 10 units which cost Africa P200,000 each, and on
which freight outward of P60,000 was paid.
The consignment profit and the cost of inventory of consigned goods are:
ASAQ # 2
1. P585,000
Sales P1,700,000
Less Charges:
Cartage-in P
75,000
Commission 340,000
Advertisement _200,000 _615,000
Due to Consignor P1,085,000
Less: Advances __500,000
Amount remitted P 585,000
2. P290,000
Sales P1,700,000
Less: Consignor’s charges:
Cost (P2,000,000 x 4/10) P
800,000
Freight-out (P100,000 x 4/10) __40,000 840,000
Consignee’s charges:
Cartage-in (P75,0000 x 4/10) P
30,000
Commission 340,000
Advertisement _200,000 __570,000
Consignment profit P 290,000
3. P213,006
Sales on consignment is first determined by using an algebraic equation as
shown below:
Let X = Sales
.15X = Commission
Activity 2
1. On May 15, 20x7, Japan Sales Company received a shipment of merchandise
with a selling price of P15,000 from China Company. The consignment
agreement provided for a sale of merchandise on credit with terms of 2/10, n/30.
The commission of 15% was to be based on the accounts receivable collected by
the consignee. Cash discounts taken by customers, expenses applicable to
goods on consignment and any cash advanced to the consignor were deductible
from the remittance by the consignee.
Japan Sales Company advanced P6,000 to China Company upon receipt of the
shipment. Expenses of P80,000 was paid by Japan. By June, 20x7, 70% of the
shipment had been sold, and 80% of the resulting accounts receivable had been
collected, all within the discount period. Remittance of the amount due was made
June 30, 20x7.
The consigned goods cost China Company P10,000 and freight charges of
P120,000 had been paid to ship it to Japan sales Company.
The cash remitted by Japan Sales Company and the cost of inventory on
consignment are:
2. On May 1, the Thailand products Company ships five (5) of its appliances to the
Korea Company on consignment. Each unit is to be sold at P250,000 payable
P50,000 in the month of purchase and P10,000 per month thereafter. The
consignee is to be entitled to 20% of all amounts collected on consignment sales.
Korea Company sells 3 appliances in May and 1 in June. Regular monthly
collections are made by the consignee, and appropriate cash remittances are
made to the consignor at the end of each month. The cost of the appliances
shipped by the consignor was P155,000 per unit. The consignor paid shipping
costs to the consignee totaling P50,000.
4. The account sales submitted by a consignee to Barbie Company for the month of
February, 20x7 is shown below:
The consignee rendered an account sale at the end of the first month showing,
among other things, the following information.
Advertising……………………… P 2,250,000
Delivery expense…………………………………………………….. 1,125,000
Commission…………………………………………………… 3,375,000
The amount remitted by Dave Co. and the consignment profit of Anton Corp. are:
6. On January 1, 20x7, Dreicy Electrical Shop received from Kim Trading 300
pieces of bread toasters. Dreicy was to sell these on consignment at 50% above
cost for a 15% commission on the sales price. After selling 200 pieces, Dreicy
had the remaining unsold units repaired for some electrical defects for which
P2,000 was spent. Kim subsequently increased the selling price of the remaining
units to P33,000. On January 31, Dreicy remitted P6,498,000 to Kim after
deducting 15% commission, P85,000 for delivery expenses and P200,000 for the
repair of the defective units.
The consigned goods cost Kim Trading P20,000 per unit, and P900,000 was paid
to ship them to Dreicy Electrical Shop. All expenses in connection with the
consignment are reimbursable to the consignee.
The consignor considers all shipments as sales and credits the consignee’s
account for remittances made. The consignee remits for the units as soon as they
are sold, and the remittances for 20x5 amounted to P58,590. The inventory on
consignment as of December 31, 20x5 was 1,200 units.
8. The Mang Cha-a Publishing ships 8-volume sets of encyclopedia to book dealers
on consignment. The sets are to be sold at an advertised price of P99. The cost
per set is P50. Consignees are allowed a commission of 30% of the sales price,
and are to be reimbursed for freight relating to the consigned goods.
Both the consignor and the consignee take physical inventories, and they adjust
and close their books at year-end.
On January 31, Karen submitted a liquidation report which shoed sales of 6 units
and accompanied by a remittance for P27,300 after a 15% commission on the
sales price and the following deductions:
Rubric 10 points
Grade
1.0 1.4 1.9 2.5 3 3.4 3.8 4.0 4.5 4.8 5.0
Score
10 9 8 7 6 5 4 3 2 1 0