Installment Sales Reviewer

Chapter 4

Installment Sales

Installment sales problems have appeared very often in the CPA exam. Therefore, candidates
should be familiar with the accounting techniques applicable to this topic.

When a sale is made on the installment basis, the buyer usually makes a down payment and
promises to pay the balance in regular installments over a specified period of time. Profit on
installment sales is recognized only when earned. Although there are several theoretical points
at which the profit can be assumed to be earned, for CPA examinations purposes, the choice is
generally limited to the installment method.

Installment Method

Under this method, income is recognized only when collections are made. Problems requiring
the use of the installment method of recognizing income have appeared quite regularly in the
CPA exam. The following are the typical problems often encountered in the CPA exam:

1. Computation of Gross Profit Rate for each year of sales.
2. Computation of Realized Gross Profit for each year of sales.
3. Computation of Deferred Gross Account balance at the end of year.
4. Computation of Gain or Loss on repossessions.

Computation of Gross Profit Rate

To compute the realized gross profit in proportion to the collections made, it is necessary to
determine the gross profit rate for each year’s operations. The following are the formulas in
computing gross profit rate:

Current year sales: Gross Profit Rate = Gross Profit
Installment Sales

Prior year sales: Deferred Gross Profit (Beg.) – Prior Year Sales
Gross Profit Rate = Installment Accounts Receivable (Beg.) – Prior Year Sales

Computation of Realized Gross Profit

Once the gross profit rates are known, it is possible to compute the realized gross profit based
on cash collections. The formula to be used is:

Realized Gross Profit = Collections (excluding interest) x Gross Profit Rate (based on sale)
Missing Factors. In as much as the realized gross profit under the installment method depends
upon cash collections of receivables, it is important that the amounts collected must be known.
However, in some problems, the collections are not specifically stated. Such collections must be
reconstructed from related information available from the data given. The candidate should
remember the following format in computing the collections:

Installment accounts receivable – beginning Current Prior
Installment accounts receivable – end
Total credits Year Year
Credit for repossessions (unpaid balance)
Credit for installment A/C written off Sales Sales
Credit representing collections xx xx
Computation of Deferred Gross Profit, End (xx) (xx)
xx xx
(xx) (xx)
(xx) (xx)
xx xx

To compute the balance of Deferred Gross profit at the end of the year, the following formula
may be used:

Installment Account Receivable – End x GPR = Deferred Gross Profit – End xx
Or xx
xx
Deferred Gross Profit – before adjustment
Less: Realized gross profit
Deferred Gross Profit - End

Computation of Gain or Loss on Repossession

If a customer does not make an installment payment at the specified time, it is necessary to
repossess the merchandise in order for the seller to minimize his loss.

The gain or loss on repossession is computed as follows:

Fair value of repossessed merchandise xx
Less: Unrecovered cost - xx
xx xx
Unpaid balance
Less: deferred gross profit (unpaid balance x GP rate) xx
Gain (loss) on repossession

The fair value of repossessed merchandise at the time of repossession should be before
reconditioning cost and before adding a normal gross profit from sale of repossessed
merchandise.

Trade In

This type of installment sales used by car dealers, whereby an old car is received as down
payment from the buyer for sale of the new car. Usually the old car traded-in is overvalued to
induce the trade-in. for problem solving purposes the overvaluation is computed using a
formula below:

Trade-in value allowed on the old car Pxx
Less: Actual value
Estimated selling price Pxx
Less: Normal gross profit from the sale of used car Pxx
Reconditioning costs xx xx xx
Overallowance on the old car Pxx
The overallowance is treated as a deduction from the selling price of the new car. When there
is overallowance on the old car traded-in, the gross profit rate is computed as follows:

Gross profit ÷ Net Sales (net of overallowance)

The realized gross profit is also computed as follows:

Collections (cash + actual value of old car) x GPR

PROBLEMS

1. Oro Company began operations on January 1, 2012 and appropriately uses the
installment sales method of accounting. The following data are available for 2012 and
2013:

2012 2013

Installment sales P1,500,000 P1,800,000
Gross profit on sales 30% 40%
Cash collections from:
500,000 600,000
2012 sales - 700,000
2013 sales

The realized gross profit for 2013 is:

a. P720,000
b. 520,000
c. 460,000
d. 280,000

2. Roco Corp., which began business on January 1, 2013, appropriately uses the
installment sales method of accounting for income tax reporting purposes. The
following data are available for 2013:

Installment accounts receivable, 12/31/2013 P200,000
Installment sales for 2013 350,000
Gross profit on sales 40%

Under the installment method, what would be Roco’s deferred gross profit at December
31, 2013?

a. P20,000
b. 90,000
c. 80,000
d. 60,000

3. Gray Co., which began operations on January 1, 2013, appropriately uses the installment
method of accounting. The following information pertains to Gray operations for the
2013:

Installment sales P500,000
Regular sales 300,000
Cost of installment sales 250,000

Cost of regular sales 150,000
General and administrative expenses 50,000
Collections on installment sales
100,000

In its December 31, 2013 statement of financial position, what amount should Gray
report as deferred gross profit?

a. P250,000
b. 200,000
c. 160,000
d. 75,000

4. Filstate Co. is a real estate developer that began operations on January 2, 2013. Filstate
appropriately uses the installment method of revenue recognition. Filstate sales are
made on the basis of a 10% downpayment, with the balance payable over 30 years.
Filstate gross profit percentage is 40%. Relevant information for Filstate first year of
operations is as follows:

Sales P16,000,000
Cash collections 2,020,000
The realized gross profit and deferred gross profit at December 31, 2013 are:

a. P808,000 and P5,592,000
b. 5,040,000 and 808,000
c. 5,600,000 and 808,000
d. 808,000 and 6,400,000

5. Long Co., which began operations on January 1, 2013, appropriately uses the installment
method of accounting. The following information pertains to Long’s operations for the
year 2013:

Installment sales P1,000,000
Regular sales 600,000
Cost of installment sales 500,000
Cost of regular sales 300,000
General and administrative expenses 100,000
Collections on installment sales
200,0000

What is the total comprehensive income on December 31, 2013?

a. P400,000
b. 200,000
c. 300,000
d. 100,000

6. Kiko Co. began operations on January 1, 2013 and appropriately uses the installment
method of accounting. The following information pertains to Kiko’s operations for 2013:

Installment sales P800,000
Cost of installment sales 480,000
General and administrative expenses 80,000
Collections on installment sales 300,000

The balance in the deferred gross profit account at December 31, 2013 should be:

a. P120,000
b. 150,000
c. 200,000
d. 320,000

7. Tayag Corp., which began operations in 2013, accounts for revenues using the
installment method. Tayag’s sales and collections for the year were P60,000 and
P35,000, respectively. Uncollectible accounts receivable of P5,000 were written off
during 2013. Tayag’s gross profit rate is 30%. On December 31, 2013, what amount
should Tayag report as deferred revenue?

a. P10,500
b. 9,000
c. 7,500
d. 6,000

8. Laya Corp., which began operations on January 2, 2013, appropriately uses the
installment sales method of accounting. The following information is available for 2013:

Installment accounts receivable, December 31, 2013 P800,000
Deferred gross profit, December 31, 2013 560,000
40%
(before recognition of realized gross profit for 2013)
Gross profit on sales

For the year ended December 31, 2013, realized gross profit on sales should be:

a. P320,000
b. 340,000
c. 320,000
d. 240,000

9. Dulce Co., which began operations on January 1, 2012, appropriately uses the
installment method of accounting to record revenues. The following information is
available for the years ended December 31, 2012 and 2013:

2012 2013

Installment sales P1,000,000 P1,800,000
Gross profit realized on sales made in:
150,000 90,000
2012 - 200,000
2013
Gross profit percentages 30% 40%

What amount of installment accounts receivable should Dulce report in its December
31, 2013, statement of financial position?

a. P1,225,000
b. 1,300,000
c. 1,700,000
d. 1,775,000

10. On January 2, 2012, Black Co. sold a used machine to White, Inc. for P900,000, resulting
in a gain of P270,000. On that date, White paid P150,000 cash and signed a P750,000
note bearing interest at 10%. The note was payable in three annual installments of
P250,000 beginning January 2, 2013. Black appropriately accounted for the sale under
the installment method. White made a timely payment of the first installment on
January 2, 2013, of P325,000, which included accrued interest of P75,000. What amount
of deferred gross profit should Black report at December 31, 2013?

a. P150,000
b. 172,500
c. 180,000
d. 225,000

11. White Plains, Inc. sells residential lots on installment basis. The following data was taken
from the accounting records of the company as at December 31, 2013:

Installment accounts receivable, January 1 P755,000
Installment accounts receivable, December 31 840,000
Deferred gross profit, January 1 339,750
Installment sales 950,000

Complete (1) the realized gross profit on December 31, 2013 and (2) the balance of the
Deferred Gross Profit account on December 31, 2013.

a. (1) P389,250; and (2) P378,000
b. (1) 427,500; and (2) 389,250
c. (1) 330,750; and (2) 427,000
d. (1) 378,000; and (2) 339,750

12. In August, 2012, Mega World Inc. sold condominium units costing P1,440,000 for
P2,400,000 receiving P350,000 cash and a mortgage note for the balance payable in
monthly installments. Installment received in 2010 reduced the principal of the note to
a balance of P2,000,000. The buyer defaulted on the note at the beginning of 2013, and
the property was repossessed. The property had a fair market value of P1,150,000 at
the time of repossession.
Compute the gain (loss) on repossession if (1) profit is recognized at the point of sale
and (2) gross profit is recognized in proportion to collections.
a. (1) P(850,000); and (2) P(50,000)
b. (1) (850,000); and (2) (450,000)
c. (1) 850,000; and (2) (450,000)
d. (1) (50,000); and (2) 50,000

13. Sarao Motors sells locally manufactured jeeps on installment basis. Data presented
below related to the company’s operations for the last three calendar years:

2013 2012 2011

cost of installment sales P8,765,625 P7,700,000 P4,950,000
Gross profit rates on sales 32% 30% 38%

Installment accounts receivable, 12/31: 9,728,125 8,387,500 4,812,500
From 2013 sales 3,025,000 1,512,500
From 2012 sales
From 2011 sales

On December 31, 2013 how much is the (1) total realized gross profit and (2) deferred
gross profit?

a. (1) P3,044,250; and (2) P4,020,500
b. (1) 3,044,250; and (2) 4,125,000
c. (1) 3,733,750; and (2) 4,020,500
d. (1) 6,993,250; and (2) 4,020,500

14. Polo Company appropriately uses the installment sales method of recognizing revenue.
On December 31, 2013, the accounting records show unadjusted balances of the
following:

Installment accounts receivable – 2011 P12,000
Installment accounts receivable – 2012 40,000
Installment accounts receivable – 2013
Deferred gross profit – 2011 130,000
10,500

Deferred gross profit – 2012 28,900
Deferred gross profit – 2013 96,000
Gross profit rates:
35%
2011 34%
2012 32%
2013

For the year ended December 31, 2013, compute (1) total realized gross profit and (2)
the total cash collections in 2013:

a. (1) P182,000; and (2) P135,400
b. (1) 76,000; and (2) 233,000
c. (1) 158,000; and (2) 368,400
d. (1) 106,000; and (2) 97,600

15. Bally Company, which began operations on January 2, 2013 appropriately, uses the
installment method of revenue recognition. The following data pertains to the
company’s operations for the 2013:

Installment sales P1,000,000
Cost of installment sales 500,000
Collections on installment sales 150,000
Installment accounts receivable written off 50,000

What is the balance of Deferred Gross Profit account – 2013 on December 31, 2013?

a. P500,000
b. 150,000
c. 400,000
d. 320,000

16. Nike Company, which began operations on January 5, 2012, appropriately uses the
installment method of revenue recognition. The following information pertains to the
company’s operations for 2012 and 2013:

2012 2013

Sales P300,000 P450,000
Collections from:
100,000 50,000
2012 sales -0- 150,000
2013 sales
Accounts written off from 25,000 75,000
2012 sales -0- 150,000
2013 sales
Gross profit rates 30% 40%

What amount should Nike Company report as deferred gross profit in its December 31,
2013 statement of financial position?

a. P75,000
b. 80,000
c. 112,000
d. 125,000

17. The following accounts appeared in the accounting records of Adidas Sales Company as
of December 31, 2013:

Installment accounts receivable – 2012 P15,000 Repossessions P3,000
Installment accounts receivable – 2013 200,000 Installment sales 425,000
Inventory, December 31, 2012 Regular sales 385,000
Purchases 70,000 Deferred gross profit - 2012
555,000 54,000

Additional information:

Installment accounts receivable – 2012, January 1, 2013 P120,00
Inventory of new and repossessed merchandise, December 31, 2013 95,000
Gross profit rate on regular sales 30%

Repossession was made during the year, 2013. It was a 2012 sale and the corresponding
uncollected balance at the time of repossession was P7,200.

Compute (1) the total realized gross profit for 2013 and the (2) loss on repossession:

a. (1) P129,510; and (2) P960
b. (1) 129,510; and (2) 1,464
c. (1) 245,000; and (2) 960
d. (1) 85,500; and (2) 1,464

18. Mango Company, which sells appliances started operations on January 10,2013
operates on a calendar year basis, and uses the installment method of revenue
recognition. The following data were taken from the 2010 and 2011 accounting records:

2012 2013

Installment sales P480,000 P620,000
Gross profit rates based on cost 25% 20%
Cash collection on 2012 sales 130,000 240,000
Cash collection on 2013 sales 160,000
What is the amount of realized gross profit to be recognized on December 31,2013?
a. P124,500
b. P100,000

c. P92,000
d. P74,667

19. Lacoste Corporation has been using the cash method of revenue recognition. All sales
are made on account with notes receivable given by the customers. The income
statement for 2013 presented the following data:
Revenues – collection on principal P32,000
Revenues – interes 3,600
Cost of goods purchases (includes 45,200
inventory of goods on hand P2,000)
The balances due on the notes on December 31 were as follows:
Notes receivable P62,000
Unearned interest income 7,167
Assuming the use of the installment method of revenue recognition, what is the realized
gross profit on December 31,2013?
a. P16,080
b. P25,586
c. P18,060
d. P43,633

20. Sta. Lucia Realty Corporation sells residential subdivision lots on installment basis. The
following data were taken from the company’s accounting records as of December
31,2013. The company uses a uniform gross profit rate:
Installment accounts receivable:
January 1,2013 P1,510,000
December 31,2013 1,680,000
Unrealized gross profit – January 1,2013 679,500
Installment sales – 2012 1,180,000
Installment sales - 2013 1,900,000
How much is the gross profit realized during the year 2013?
a. P778,500
b. P679,500
c. P756,500
d. P630,500

21. The following information pertains to a sale of real estate by RR Co. to SS Co. on
December 31,2012:
Carrying amount P2,000,000
Sales price:
Cash P300,000
Purchase money mortgage 2,700,000 3,000,000
The mortgage is payable in nine annual installments of P300,000 beginning December
31,2013 plus interest of 10%. The December 31,2013 installment was paid as scheduled,

together with interest of P270,000. RR uses the cost recovery method to account for the
sale. What amount of income should RR recognize in 2013 from the real estate sale and
its financing?
a. P570,000
b. P370,000
c. P270,000
d. P0

22. Action Inc. sold a fitness equipment on installment basis on October 1,2013. The unit
cost to the company was P60,000 but the installment selling price was set at P85,000.
Terms of payment included the acceptance of a used equipment with a trade-in value of
P30,000. Cash of P5,000 was paid in addition to the traded-in equipment with the
balance to be paid in ten monthly installments due at the end of each month
commencing the month of sale.

It would require P1,250 to recondition the used equipment so that it could be resold for
P25,000. A 15% gross profit was usual from sale of used equipment. The realized gross
profit from the 2013 collections amounted to
a. P4,000
b. P34,000
c. P10,000
d. P8,000

23. M & J Corp. which sells goods on installment basis, recognizes at year end gross profit
on collections which is consisted of cost and gross profit. It reported the following:
December 31
January 1

Installment receivables
2011 P120,100
2012 1,722,300 0
P337,200
2013 0 2,050,450

Sales and cost of sales for the three years are as follows:

2011 2012 2013

Sales P1,900,000 P2,610,000 P3,010,0000
Cost of sales 1,235,000 1,425,000 1,896,300
In 2013 the company repossessed merchandise with resale value of P8,500 from
customers who defaulted in payments. The sales were made in 2012 for P27,000 on
which P16,000 was collected prior to default. As collections are made, the company
debits cash and credits installment receivable. For default and repossessions, the
company debits installment receivable. The amount of adjustment on the inventory of
repossessed merchandise to the extent of the unrealized gross profit was
a. Zero
b. A decrease of P6,240
c. A decrease of P2,500

d. A decrease of P3,740

24. On October 2013, Haybol Realty Co. sold to Mae Balay a property for P500,000 which is
carried in its books for P250,000. The company received P100,000 on the date of the
sale and a mortgage note for P400,000 payable in twenty (20) semiannual installments
of P20,000 plus interest on the unpaid principal at 16% per annum.

The realized profit to be recognized by Haybol Realty Corp. in 2013 if gross profit is
recognized periodically in proportion to collections would be
a. P50,000
b. P100,000
c. P60,000
d. P250,000

25. Quincy Enterprises uses the installment method of accounting and has the following
data at year-end:
Gross margin on cost 66 2/3%
Unrealized gross profit P192,000
Cash collection including down payments 360,000
What was the total amount of sale on installment basis?
a. P480,000
b. P648,000
c. P552,000
d. P840,000

26. The Brownout, Inc. began operating at the start of the calendar year 2013 uses the
installment method of accounting:
Installment sales P400,000
Gross margin based on cost 66 2/3%
Inventory, Dec. 31,2013 80,000
General and administrative expenses 40,000
Accounts receivable, Dec. 31,2013 320,000
The balance of the deferred gross profit account at December 31,2013 should be:
a. P192,000
b. P96,000
c. P128,000
d. P80,000

27. Tear Drops Corp. started operations on 1 January 2012 selling home appliances and
furniture on installment basis. For 2012 and 2013 the following represented operational
details.

In thousand Pesos

2012 2013

Installment sales P1,200 P1,500
Cost of installment sales 720 1,050
Collections on installment sales
2012 630 450
2013 0 900
On 7 January 2013, an installment sale account in 2010 defaulted and the merchandise
with a market value of P15,000 was repossessed. The related installment receivable
balance as of date of default and repossession was P24,000.

The balance of the unrealized gross profit as of the end of 2013 wa
a. P218,400
b. P192,000
c. P360,000
d. P275,000

28. Four J Co. sold goods on installment. For the year just ended the following were
reported:
Installment sales P3,000,000
Cost of installment sales 2,025,000
Collections on installment sales 1,800,000
Repossessed accounts 200,000
Fair market value of repossessions 120,000

The gain(loss) on repossession is:
a. (P15,000)
b. P15,000
c. (P80,000)
d. P5,000

29. A refrigerator was sold to Fernandina Castro for P16,000, which included a 40% markup
on selling price. She made a down payment of 20%, payment of four of the remaining 16
equal payment and defaulted on further payments. The refrigerator was repossessed, at
which time the fair value was determined to be P6,800.

The repossession resulted to the following (loss) gain:
a. P(1,040)
b. P1,040
c. P4,056
d. P2,960

30. The Company uses the installment method of accounting to recognize income, Pertinent
data are as follows:

Installment sales 2011 2012 2013
Cost of sales P300,000 P375,000 P360,000

225,000 285,000 252,000

Balances of Deferred Gross Profit at Year end P15,000
2011 P52,500 P-
2012 - 54,000 9,000
2012 - - 72,000
The total balance of the Installment Accounts Receivable on December 31,2013 is:
a. P270,000
b. P277,500
c. P279,500
d. P300,000

31. In its first year of operations, Guijo Company’s sales were as follows:

Sales basis Mark-up on cost Sales
P250,000
Cash 25%
Charge 33-1/3% 400,000
installment 50% 600,000
The cost of goods sold for the year was P900,000.

No. 31 – Continued
If collections on installment sales during the year amounted to P240,000, how much was
the total gross profit realized at the end of the year?
a. P50,000
b. P60,000
c. P80,000
d. P230,000

32. A sale on installment basis was made in 2013 for P8,000 at a gross profit of P2,800. At
the end of 2013, when the installment account receivable had a balance of P3,500, it
was ascertained that the customer would be unable to make further payments. The
merchandise was then repossessed and was appraised at a value of P1,500. The loss on
repossession was:
a. P3,500
b. P2,000
c. P775
d. P1,775

33. On January 1,2012 Blim Company commenced its sales of gas stoves. Separate accounts
were set up for installment and cash sales, but perpetual inventory record was not kept.
On the installment sales of a down payment of 1/3 was required, with the balance
payable in 18 equal monthly installments.

The transactions of the Blim Company are as follows:

2012 2013

Sales: P27,000 P37,000
New gas stoves for cash

New gas stoves on installment 330,000
(including the 1/3 cash 235,000 215,000
down payment)
Purchases 193,000 60,000
Physical inventories at
December 31:
New gas stoves at cost 45,500
Cash collections on installment contracts, exclusive of down payments:
2012 sales 54,000 77,000
2013 sales - 70,000

No. 33 – Continued

The realized gross profit for the year 2013 that would be reported on the income
statement amounted to:
a. P131,530
b. P140,000
c. P123,350
d. P131,500

34. The data below are taken from the records of Jess Appliance Co., which sells appliances
exclusively on the installment basis.

2011 2012 2013

Installment sales P365,500 P417,800 P610,750
Gross profit 36% 39% 40%
The balance in the Installment Accounts Receivable controlling accounts at the
beginning and end of 2013 were:

2013

From sales made in: January 1 December 31

2011 P17,400 P-
2012 205,400 25,800
2013 - 305,520
There was one repossession recorded during 2013, it related to a 2012 sale. The
repossessed appliance was sold at its fair value of P200, which equaled the uncollected
balance in the customer’s installment accounts receivable.

The total realized gross profit on prior year sales on December 31, 2013 and the gain
(loss) from the sale of the repossesses appliance are:
a. P76,230 and P(78)
b. P76,230 and P78
c. P69,966 and P78
d. P75,230 and P78

35. Mr. Matias Manuel is a dealer in appliance who sells on an installment basis. A
refrigerator which originally cost P924 was sold by him for P1,650 to Jose Santos who
made a down payment of P220, but defaulted in subsequent payments.
No. 35 – Continued
Mr. Manuel repossessed the refrigerator at an appraised value of P460. To improve its
salability, he expended P60 for reconditioning. He was able to sell the refrigerator to
Pedro Reyes for P1,000 at a down payment of the first installment of P250.

The realized gross profit from the first installment sale (to Jose Santos) and from the
second installment sale (to Pedro Reyes) are:
a. P96.80 and P100
b. P26.40 and P120
c. P96.80 and P120
d. P26.40 and P100

36. The Bengal Furniture Company appropriately used the installment sales method in
accounting for the following installment sale. During 2013 Bengal sold furniture to an
individual of P3,000 at a gross profit of P1,200. On June 1 2013, this installment account
receivable had a balance of P2,200 and it was determined that no further collections
would be made. Bengal therefore repossessed the merchandise. When reacquired, the
merchandise was appraised as being worth only P1,000. In order to improve its
salability, Bengal incurred costs P100 for reconditioning. What should be the loss on
repossessions attributable to this merchandise?
a. P220
b. P320
c. P880
d. P1,100

37. Standard Sales Corporation accounts for sales on the installment basis. The balances of
control accounts for Installment Contracts Receivable at the beginning and end of 2013
were:

Installment contract receivable - 2011 Jan. 1,2013 Dec. 31,2013
Installment contract receivable – 2012 P24,020 -
Installment contract receivable – 2013 344,460
- P67,440
410,090

No. 37 – continued

During 2013, the company repossessed a refrigerator which had been sold in 2012 for P5,400
and P3,200 had been collected prior to default. The company sales and cost of sales figures are
summarized below:

Net sales 2011 2012 2013
Cost of sales P380,000 P432,000 P602,000
247,000 285,120 379,260

The resale price of the repossessed merchandise is P2,000 after reconditioning cost of P200 and
a normal gross profit of 35%.

The total realized gross profit on December 31,2013 and the gain (loss) on repossession are:

a. P172,892.5 and P(381)
b. P172,852.5 and P(452)
c. P142,500 and P(452)
d. P142,500 and P452

38. The 680 Appliance Company reports gross profit on the installment basis. The following data are
available:

Installment sales 2011 2012 2013
Cost of goods – installment sales P240,000 P250,000 P300,000
Gross profit 180,000 181,250 216,000
60,000 68,750 84,000
Collections:
P45,000 P75,000 P72,500
2011 installment contracts 47,500 80,000
2012 installment contracts 62,500
2013 installment contracts
P12,500 P15,000
Defaults: 6,500 6,000
Unpaid balance of 2011 16,000
Installment contracts 9,000
Value assigned to repossessed
Merchandise
Unpaid balance of 2012
Installment contracts
Value assigned to repossessed
Merchandise

No. 38 - Continued
The total realized gross profit after loss on repossession for 2013 is:

a. P49,775
b. P57,625
c. P48,975
d. P56,625

39. Partial trial balance of Lakan Appliance Corporation as of the end of the fiscal year September

30,2013 follows:

Debit Credit
P50,000
Deferred gross profit – 2012

Installment account receivable - 2012 P12,500 375,000
Installment account receivable – 2013 150,000 312,500
Installment sales 62,500
Inventory, September 30,2012 3,750
Loss on repossession 435,000
Purchases 2,500
Repossessions
sales

The post closing trial balance on September 30,2012 shows the following balances of certain
accounts:

Installment contract receivable - 2012 P100,000
Deferred gross profit – 2012 50,000
The gross profit rate on regular sales during the year was 30%

The inventory of new and repossessed merchandise on September 30,2013 amounted to
P75,000. Unpaid balance on repossessed merchandise sale of 2012 is P6,250.

The total realized gross profit on December 31,2013 is:
a. P141,875
b. P101,250
c. P40,625
d. P140,875

40. Carlos Labung Appliance Co., sold a stove, costing P1,000 for P1,600 on September 2012. The
down payment was P160, and the same amount was to be paid at the end of each succeeding
month. Interest was charged on the unpaid balance of the contract at ½ of 1% a month,
payments being considered as applying first to accrued interest and the balance to principal.

After paying a total of P640, the customer defaulted. The stove was repossessed in February
2013. It was estimated that the stove had a value of P560 on a depreciated cost basis.

The realized gross profit and the gain (loss) on repossession on December 31,2013 are:
a. P232.76 and P(52.07)
b. P240.00 and P(52.07)
c. P232.76 and P(40.00)
d. P240.00 and P(40.00)

41. The Julia Appliance company makes all sales on installment contracts and accordingly reports
income on the installment basis. Installment contracts receivables are accounted for by years.
Defaulted contracts 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 realizable values. The following data
relate to the transactions during 2012 and 2013

Installment sales 2012 2013
Installment contract receivable, Dec. 31: P150,000 P198,500

2012 sales 80,000 25,000
2013 sales 95,000
Purchases 100,000 120,000
New merchandise inventory, Dec. 31 at cost 10,000 26,000
Loss on repossessions 6,000
The company auditor disclosed that the inventory taken on December 31,2013 did not include

certain merchandise received as a trade-in on December 2,2013 for which an allowance was

given. The realizable value of the merchandise is P1,500 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 2013, a 2012 contract was defaulted and the merchandise was repossessed. At the

time of default, the repossessed merchandise had a fair value of P2,500. The repossessed

merchandise was neither recorded nor included in the physical inventory on December 31,2013.

The total realized gross profit at December 31,2013 and the adjusted gain (loss) on repossession

are:

Realized Gross profit Gain(Loss) on repossesion
a. P70,000 P1,100
b. P70,000 (P1,100)
c. P50,400 P1,100
d. P50,400 (P1,100)

42. Kanlaon Corporation started operations on January 1,2012, selling home appliances and
furniture sets both under cash and under installment basis. Data on the installment sales
operations for the two years ended December 31, 2012 and 2013 are as follows:

Installment sales 2012 2013
Cost of installment sales P400,000 P500,000
Cash collections on:
240,000 350,000
2012 installment contracts
2013 installment contracts 210,000 150,000
- 300,000
The balance of the Deferred Gross profit account on December 31,2013 is:

a. P130,000

b. P160,000

c. P190,000

d. P76,000

43. United Trading accounts for sales under the installment method. On January 1,2013 its ledger

accounts included the following balances:

Installment Receivable, 2011 P38,500

Installment Receivable, 2012 155,000
Deferred Gross Profit, 2011 11,550
Deferred Gross Profit, 2012 62,000

Installment sales in 2013 were made at a 42% gross profit rate. December 31,2013 account
balances before adjustments were as follows:

Installment Receivable, 2011 P-0-
Installment Receivable, 2012 42,000
Installment Receivable, 2013 100,500
Deferred Gross Profit, 2011 11,550
Deferred Gross Profit, 2012 62,000
Deferred Gross Profit, 2013 75,810
The total realized gross profit on December 31,2013 is:
a. P90,350
b. P97,510
c. P98,910
d. P97,350

44. Presented below is the unadjusted trial balance, as of December 31,2013 of Moslim Products

Corporation:

Cash P5,000
Installment Accounts Receivable - 2012 40,000
Installment Accounts Receivable - 2013 140,000
Inventory, December 31,2013 200,000
Other Assets 497,000
Trade Accounts Payable P50,000
Unrealized Gross Profit - 2011 10,000
Unrealized Gross Profit – 2012 86,000
Unrealized Gross Profit – 2013 100,000
Capital stock 600,000
Retained Earnings 80,000
Repossession Gain 6,000
Operating expenses 50,000 ________
P932,000 P932,000
The cost of goods sold had been uniform over the years at 60% of sales, and the company

adopts perpetual inventory procedures. On the installment sales, the company charges

installment accounts receivable and credits inventory and unrealized gross profit accounts.

Repossessions of merchandise have been made during 2013 due to some customers’ failure to
pay maturing installments. The analysis of these transactions have been summarized as follows:

Inventory P7,500
Unrealized gross profit - 2011 800
Unrealized gross profit – 2012 2,400

Installment accounts receivable - 2011 2,000

Installment accounts receivable – 2012 6,000
Repossession gain 2,700

The repossessed merchandise were unsold at December 31,2013 and it was ascertained that
these were booked, upon repossession, at their original cost. A fair valuation would be a sales
price of P10,000 after recorditioning cost of P1,000 and a normal gross profit.

The realized gross profit from 2013 sales and the gain (loss) on repossession on December
31,2013 are:
a. P44,000 and (P200)
b. P44,000 and P200
c. P56,000 and P300
d. P56,000 and P200

45. The following selected accounts appeared in the trial balance of Union Sales as of December
31,2013

Installment Accounts Receivable, 2012 sales Debit Credit
Installment Accounts Receivable, 2013 sales P15,000 P385,000
Inventory, December 31,2012 200,000 425,000
Purchases 70,000 54,000
Repossessions 555,000
Regular Sales 3,000
Installment sales
Unrealized Gross Profit, 2012

Additional information:

Installment Accounts Receivable, 2012 sales, P120,000
As of December 31,2012
95,000
Inventory of new and repossessed 30%
Merchandise, December 31,2013

Gross profit rate on regular sales during the year

Repossession was made during the year on a 2012 sale and the corresponding uncollected
amount at the time of repossession was P7,750.

The total realized gross profit on December 31,2013 and the (loss) on repossession are:
a. P85,5000 and P(1,262.5)
b. P129,262.5 and P(1,262.5)
c. P43,762.5 and P1,262.5
d. P119,622.5 and P1,262.5

46. The books of Paiyakan Company show the following account balances on December 31,2013:

Accounts receivable P313,750
Deferred gross profit (before adjustment) 38,000
Analysis of the accounts receivable reveals the following:
Regular accounts P207,500
2012 installment accounts receivable 16,250
2013 installment accounts receivable 90,000
Sales on installment basis in 2012 were made at 30% above cost, and in 2013 at 33-1/3% above

cost. Expenses paid relating to installment sales were P1,500.

How much is the total comprehensive income on installment sales?
a. P10,000
b. P10,250
c. P11,000
d. P11,500

47. The Famcor Sales Company employs the perpetual inventory basis in the accounting for new
cars. On August 15,2012, a new car costing P165,000 and with a list price of P220,000 was sold
to Rose Castro. The company granted Ms. Castro an allowance of P85,000 on the trade-in of her
old car, the current value if which was estimated to be P81,700; the balance of P135,000 was
payable as follows: P35,000 cash at the time of purchase and twenty monthly payments of
P5,000 starting September 1, 2012.

On April 1,2013, Ms. Castro defaulted in the payment of the March 1,2013, installment. The new
car sold was repossessed, and its value to the seller was P40,000.

The total realized gross profit and the gain (loss) on repossession on December 31,2013 are:
a. P32,616.62 and P(13,298)
b. P32,616.62 and P13,298
c. P37,388.62 and P15,810.62
d. P27,844.62 and P(15,810.62)

48. The Jade Appliances Company started business on January 1,2013. Separate accounts were
established for installment and cash sales. On installment sales, the price was 106% of the cash
sales price. A standard installment contract was used whereby a down-payment of ¼ of the
installment price was required, with the balance payable in 15 equal monthly installment. (the
interest charge per month is 1% of the unpaid cash sale price equivalent at each installment.)

Installment receivable and installment sales were recorded at the contact price. When contracts
were defaulted, the unpaid balances were charged to Bad Debts Expense. The following data are
available:

Sales: P126,000
Cash sales 265,000
Installment sales 230
Repossessed sales

Inventory, January 1,2013: 58,060
Merchandise inventory

Purchases, 2013 209,300
New merchandise

Inventories, physical, December 31,2013 33,300
New merchandise 180
Repossessed inventory

Cash collections on installment contract 2013: 66,250
Down payments
Subsequent installments (including interest of P9,252.84 on
all contracts except on defaulted contracts) 79,341

Five contracts totaling P1,060 were defaulted, in each case after 3 monthly installments were paid.

Interest should be recognized in the period earned.

The total realized gross profit on December 31,2013 is:

a. P99,024.85
b. P99,084.87
c. P99,184.85
d. P95,024.85

49. The following data were taken from the records of Camille Appliance Company before its
accounts were closed for the year 2013. The company sells exclusively on the installment basis
and its uses the installment method of recognizing profit:

Installment sales 2009 2010 2011
Cost of installment sales P400,000 P440,000 P420,000
Operating expenses 240,000 272,800 256,200
Balances as of December 31: 100,000 94,000 96,000
Inst. Contracts Receivable -2011
Inst. Contracts Receivable -2012 220,000 110,000 28,000
Inst. Contracts Receivable -2013 250,000 92,000
238,000
During 2013, because some customers can no longer be located, the company wrote off P9,000

of the 2011 installment accounts and P2,800 of the 2012 installment accounts as uncollectible.

Also during 2013, a customer defaulted and the company repossessed merchandise appraised at
P2,400 after costs reconditioning estimated at P400. The merchandise had been purchased in
2011 by a customer who still owed P5,000 at the date of the repossession.

The total comprehensive income on December 31,2013 is:
a. P157,156
b. P61,000
c. P60,156
d. P59,156

50. Jing Trading Company, which started operations on January 2,2012, sells video equipment on
installment terms. Whenever a contract is in default, Jing repossesses the merchandise and
writes this off to a Loss on Defaulted Contracts account. Information regarding the repossessed
goods are not recorded in the books but are kept on a memo basis. Proceeds from the sale of
these goods are credited to the Loss on Defaulted Contracts account. The following information
are taken from the books of Jing:

Installment contracts receivable, 2012 2013 December 31
Installment contracts receivable, 2013 P2,000
Sales 40,000 2012
Loss on defaulted contracts 125,000 P31,500
Allowance for defaulted contracts
4,275 -
2,250 75,000

250
2,250

Additional information:
a. No repossessed video equipment was sold in 2012 or 2013 for more than the unpaid

balance of the original contract. A further analysis of the Loss on Defaulted Contracts
accounts showed the following breakdown:

Contracts written off 2012 2013
Less: sales of repossessed goods
Loss a defaulted contracts Contracts Contracts
P3,750 P1,500
800 175
P2,950 P1,325

The repossessed goods on hand on December 31,2013, all of which were repossessed from
2012 contracts, are valued at P200.

b. The P2,000 balance of the Installment Contracts Receivable 2012 account is currently due
and collectible.

c. The gross profit rates on installment sales were 40% in 2012 and 42% in 2013.
d. The rate of bad debts loss for 2013 is estimated to be the same as the 2012 experiences rate

based on sales:

The required balance of the allowance for Defaulted Contracts account and the realized
gross profit on December 31,2013 from 2012 sales are:
a. P3,675 and P10,300
b. P3,675 and P9,300
c. P3,675 and P10,300
d. P4,675 and P9,300

ANSWERS

1. C 11. A 21. D 31. D 41. B
2. C 12. A 22. D 32. C 42. D
3. B 13. A 23. D 33. A 43. A
4. A 14. B 24. A 34. B 44. B
5. C 15. C 25. D 35. C 45. B
6. C 16. A 26. C 36. B 46. B
7. D 17. A 27. A 37. B 47. A
8. D 18. D 28. A 38. A 48. A
9. C 19. A 29. B 39. A 49. C
10. A 20. A 30. B 40. A 50. A

SOLUTIONS AND EXPLANATIONS
1. The answer can be computed by using the basic formula, collections x gross profit
rate.

Collections during 2013 2012 sales 2013 sales
Gross profit rate P600,000 P700,000
Realized gross profit 30% 40%
P180,000 P280,000

Total realized gross profit (P180,000 + P280,000) 460,000

2. Installment account receivable, 12/31/13 P200,000
Gross profit rate 40%
Deferred gross profit, December 31,2013 P80,000

3. Installment sales P500,000
Collections 100,000
Installment accounts receivable, 12/31/13 400,000
Gross profit rate (P250,000/P500,000) 50%
Deferred gross profit, 12/31/13 P200,000
Or
Deferred gross profit(P500,000 – P250,000) 250,000
Realized gross profit, 12/31/13 (P100,000x50%) 50,000

Deferred gross profit, 12/31/13 P200,000

4. Realized gross profit (P2,020,000 x 40%) P808,000

Deferred gross profit, 12/31/13: P13,980,000
Installment accounts receivable, 12/31/13 40%
(P16,000,000 - P2,020,000) P5,592,000
Gross profit rate
Deferred gross profit, 12/31/13

5. Regular sales P200,000 P600,00
cost of regular sales 50% 300,000
Gross profit on regular sales P300,000
Realized gross profit on installment sales:
Collections 100,000
Gross profit rate (P500,000/P1,000,000) 400,000
Total realized gross profit 100,000
General and administrative expense P300,000
Total comprehensive income

6. Installment sales P800,000
Cost of installment sales 480,000
Deferred gross profit 320,000
Realized gross profit (P300,000 x 40%*) 120,000
Deferred gross profit, 12/31/13 P200,000
*Gross Profit Rate (P320,000/P800,000) = 40%

7. Installment sales P35,000 P60,000
Less: Collections 5,000
Accounts written off 40,000
Installment accounts receivable, 12/31/13 20,000
Gross profit rate 30%
Deferred gross profit, 12/31/13 P6,000

8. Installment sales (P560,000/40%) P1,400,000
Less: installment accounts receivable, 12/31/13 800,000
Collections P600,000
Gross profit rate 40%
Realized gross profit P240,000

9.

2012 Sales 2013 Sales Total

Installment sales P1,000,000 P2,000,000 P1,700,000
Collections (RGP/GPR) (500,000) (300,000)
During 2010 (P150,000/P30%) (500,000)
During 2011: ________
2010 sales (P90,000/30%) P500,000 P1,200,000
2011 sales (P200,000/40%)
Installment accounts receivable 12/31/13

10. Deferred gross profit (gain) P150,000 P270,000
Realized gross profit:
Down payment 250,000 120,000
Installment collections excluding interest: 400,000 P150,000
(P325,000 – P75,000) 30%
Total collections P755,000
Gross profit rate (P270,000/P900,000) 950,000
Deferred gross profit, 12/31/13 P1,705,000
840,000
11. Installment accounts receivable, January 1 865,000
Installment sales 45%
Total 389,250
Less: Installment accounts receivable, Dec. 31 P840,000
Collections 45%
Gross profit rate (P339,750/P755,000) P378,000
Realized gross profit
Installment accounts receivable, December 31 P1,150,000
Gross profit rate 2,000,000
Deferred gross profit, December 31 P(850,000)

12. (1) Profit is recognized at the point of sale

Fair value of repossessed property
Less: Unrecovered cost (unpaid balance)
Loss on repossession

(2) Profit is recognized in proportion to collections

Fair value of repossessed property P2,000,000 P1,150,000
Less: Unrecovered cost 800,000
1,200,000
Unpaid balance P(50,000)
Deferred gross profit (P2,000,000 x 40%)
Loss on repossession

13. (1) total realized gross profit 2013 2012 2011
Installment accounts receivable, 1/1/13 P12,890,625 P8,387,500 P1,512,500
Installment accounts receivable, 12/31/13
Collections during 2013 9,728,125 3,025,000 -0-
Gross profit rates P3,162,500 P5,362,500 P1,512,500
Realized gross profit, 12/31/13
(Total, P3,044,250) 32% 30% 28%
P1,012,000 P1,608,750 P423,500

(2) deferred gross profit, December 31,2013: 2013 2012 2011
Installment accounts receivable, 12/31/13 P9,728,125 P3,025,000 P-0-
Gross profit rates 28%
Deferred gross profit, 12/31/13 32% 30% P-0-
P3,113,000 P907,500

14. (1) Total realized gross profit 2011 2012 2013
Deferred gross profit before adjustment P10,500 P28,900 P96,000
Deferred gross profit, end: 4,200
2011 sales (P12,000 x 35%) ______ 13,600 41,600
2012 sales (P40,000 x 34%) P6,300 _______ P54,400
2011 sales (P130,000 x 32%) P15,300
Realized gross profit, 12/31/13
Total (P76,000)

(2) Total collections in 2013 2011 2012 2013
Installment accounts receivable, beg P30,000
2011 sales (P10,500/35%) 85,000 P300,000
2012 sales (P28,900/34%) 12,000 40,000 130,000
2011 sales (P96,000/32%) P18,000 P45,000 P170,000
Installment accounts receivable, end
Collections during 2013
Total (P233,000)

15. P1,000,000
(150,000)
Installment sales
Collections (50,000)
Accounts written off
Installment accounts receivable, 12/31/13 800,000
Gross profit rate (P500,000/P1,000,000) 50%
Deferred gross profit, 12/31/13
P400,000

16. The balance of Deferred Gross Profit Account on December 31,2013 is computed follows:

Sales 2012 2013
Collections P300,000 P450,000
Accounts written off (150,000) (150,000)
Installment accounts receivable, 12/31/13 (100,000) (150,000)
Gross profit rates P50,000 P150,000
Deferred gross profit, 12/31/13 30% 40%
Total (P75,000) P15,000 P60,000

17. (1) Realized gross profit, December 31,2013 P385,000
Regular Sales 269,500
Cost of regular sales (70%) 115,500
Gross profit on regular sales (30%) 128,510
Realized gross profit on installment sales (Sched 1) P245,010
Total realized gross profit
2013
Schedule 1: 2012 P425,000
Installment accounts receivable, 1/1/13 P120,000 200,000
Installment accounts receivable, 12/31/13 15,000 225,000
Total credit 105,000 -0-
Less: credit for repossession (unpaid balance) 7,200 P225,000
Collections P97,800 38%
Gross profit rates: 45% P85,500
_______
2012 sales (P54,000/P120,000) P44,010 P425,000
2013 sales (Schedule 2)
Realized gross profit, 12/31/13 263,500
Total (P129,510) P161,500

Schedule 2: P70,000 P3,000
Installment sales 555,000
Cost of installment sales: (92,000)
Inventory, January 1,2013 533,000
Purchases 269,500
Inventory, December 31,2013 (New) 38%
Cost of sales
Cost of regular sales
Gross profit on installment sales
Gross profit rate (P161,500/P425,000)

(2) loss on repossession

Repossession merchandise P7,200
Unrecovered cost:
Unpaid balance

Deferred gross profit (P7,200 x 45%) 3,240 3,960
Loss on repossession P(960)

18. Total realized gross profit on December 31,2013 is computed below:

Collections during 2013 2012 2013
Gross profit rates on sales P240,000 P160,000
Realized gross profit 25%/125% 20%/120%
Total (P74,667) P48,000 P26,667

19. P32,000
Collections during 2013
Gross profit rate: P97,600 50.25%
Installment sales: (10,767) P16,080
Notes receivable (P32,000 + P62,000 + P3,600) P86,833
Unearned interest income (P7,167 + P3,600)
Installment sales 43,200
Cost of installment sales (P45,200 – P2,000) P43,633
Gross profit
Gross profit rate (P46,633/ P86,833)
Realized gross profit

20. Collections during 2013 (P1,510,000 + P1,900,000 – P1,680,000) P1,730,000
Gross profit rate (P679,500/ P1,510,000) 45%
Realized gross profit, 2013
P778,500

21 Zero, because the total cost of P2,000,000 is not yet fully recovered. The total collections
applying to principal as of December 31, 2013 is only P330,000 (P300,000 + P30,000), so no
income is yet to be recognized.

22. First the over- allowance on the equipment traded- in should be computed as follows:

Trade- in value 1,250 25,000 P30,000
Actual value: 3,750 5,000 20,000

Estimated sales price P10,000
Less: Reconditioning Cost

Gross profit(25,000 x 15%)
Over allowance

The over allowance is treated as a deduction from the selling price of new equipment.

The realized gross profit can now be computed as show below:

Collections 5,000 25,000
Downpayment: 20,000 15,000
40,000
Cash
Actual value of Trade- in
Installment collection (3 mos. X 5,000)
Total

Gross Profit Rate – (15,000/ 75,000) 20%
Realized gross profit, 12/31/2013 8,000

23. the unrealized gross profit relating to the unpaid balance of P11,000 (P27,000-P16,000) is
3,740 (11,000x34%). The inventory of repossessed merchandise is to be decreased by this amount.

24. Collection during 2013 100,000
Gross profit rate (250,000/500,000) 50%
REALIZED GORSS PROFIT
50,000

25. Installment accounts receivable-end: 192,000 480,000
Unrealized gross profit-end 40% 360,000
Divide by GPR on sales (66-2/3% / 116-2/3%) P840,000

ADD: Collections
Installment Sales

26. Installment accounts receivable P320,000
Gross Profit Rate on Sales (66- 2/3% / 166-2/3%) 40%
Deferred gross profit, 12/31/2013
P128,000
27.
In Thousand Pesos
Installment sales
Collection: 2012 Sales 2013 Sales

During 2012 P1,200 P1,500
During 2013
Repossession (unpaid balance) (630) (900)
Installment accounts receivable, 12/31/2013 (450) -
Gross Profit rate (GP/IS)
Deferred Gross Profit, 12/31/2013 (24) 600
Total balance is P218,400 (P38,400 + 180,000) 96 30%
28. Fair market value of repossessed merchandise P180
Less: Unrecovered cost 40%
P38.4
Unpaid balance
Loss on repossession 200,000 P120,000
65,000
135,000
P(15,000)

29. Fair value of repossessed merchandise P6,800

Unrecovered Cost:

Unpaid balance:

Sales 16,000

Collections:

Downpayment 3,200

Installment 3,200 6,400 9,600
3,840 5,760
Deferred gross profit (9,600 x 40%)
P1,040
Gain on repossession

30.

Deferred gross profit – Dec.31,2013 2012 Sales 2013 Sales
Divide by GPR (GP/IS) P9,000 P72,000
Installment accounts receivable, Dec.31,2013 24% 30%
Total balance of receivable on Dec. 31,2013 is
(P37,500 + 240,000) P37,500 P240,000

P277,500

31. Gross profit rate based on sales: 20% P50,000
Cash (25%/125%) 25% 100,000
Charge (33-1/3% / 133-1/3%) 33.33% 80,000
Installment (50% - 150%) P230,000
3,500 P1,500
Total realized gross profit: 1,225
Cash sales (250,000 x 20%) 2,275
Charge sales (400,000 x 25%) P775
Installment Sales (240,000 x 33.33%)

Total
32. Appraised value of repossessed merchandise

Less: Unrecovered cost:
Unpaid balance
Less: Deferred gross profit (3,500 x 35% *)

Loss on repossession

*Gross profit rate (P2,800 / 8,000) 35%
33.
2012 2013
Collections: Sales Sales
Downpayment (1/3 of sales)
Collection of installment receivables - P110,000
Total 77,000 70,000
77,000
Gross Profit rate (schedule 1) 180,000
Realized gross profit on Installment Sales 44% 45%
Realized gross profit on Cash Sales 2013 (P37,000 x 45%) 33,880
Realized Gross Profit (P131,530) 81,000
Schedule 1 - 16,650
P33,880 97,650
Sales: Cash
Installment 2013 2012
Sales Sales
Total 37,000 27,000
Cost of Sales: 330,000 235,000
367,000 262,000
Inventories, 1/1
Purchases 45,500 -
Total 215,000 193,000
Inventories 12/31 260,500 193,000
Cost of sales
Gross Profit 60,000 45,500
Gross profit rate (GP/IS) 200,500 147,500
P166,500 P114,500

45% 44%

34. P76,230 represents the total realized gross profit based on 2013 collections of Installment

Accounts Receivable of 2011 and 2012 sales.

2011 2012

Sales Sales

Collections:

Installment accounts receivable, 1/1/13 P17,400 P205,400

Installment accounts receivable, - 25,800
12/31/13
Total credits 17,400 179,600
Less: credit for repossession ______ 200
Collections during 2013 17,400 179,400
Gross profit rate 36% 39%
Realized gross proft, 12/31/13 P6,264 P69,966

Total realized gross profit: P76,230
(P6,264 + P69,966)

A P78 gain is realized from the sale of the repossessed merchandise as computed below:

Sales price P200

Unrecovered cost:

Unpaid balance P200

Less: deferred gross profit (P200 x 39%) 78 122

Gain on repossession P78

35. on the first installment, a profit of P96.80 is realized which is computed as follows:

Installment sales P1,650
924
Cost of sales
P726
Gross profit

Gross profit rate 44%

Realized gross profit P220
Collections 44%
Gross profit rate P96.8
Realized gross profit
P1,000
On the second installment, a profit of P120 is realized as shown below:
520
Sales

Cost of repossessed merchandise:

Appraised value P460

Add: reconditioning cost 60

gross profit P2,200 P480
Gross profit rate (P480/P1,000) 880 48%
Realized gross profit: P250
48%
Collections: P120
Gross profit rate P1,000
Realized gross profit 1,320
36. Appraised value of repossessed merchandise (P320)
Unrecovered cost:
Unpaid balance 2013
Less: deferred gross profit (P2,200 x 40%) P602,000
Loss on repossession
Gross profit rate (P1,200 + P3,000 ) =40% 410,090
191,910
37. The realized gross profit is computed as follows: _______
191,910
Installment contract receivable, 1/1/13 2011 Year of sales
Installment contract receivable, 12/31/13 P24,020 2012 37%
Total credit P71,006.7
Credit for repossession - P344,460
Collections 24,020 67,440 P8.407
Gross profit rate: ______ 93,438.80
2011: 133,000/380,000 24,020 277,020 71,006.70
2012:146,880/432,000 2,200 P172,852.5
2013:22,740/602,000
Realized gross profit 274,820
Total realized gross profit, 12/31/13:
2011 35% 34%
2012 ______ _______
2013 P8,407 P93,438.8
Total

The loss on repossession is computed as follows:

Actual value of repossession merchandise: P300 P2,000 P1,000
Resale price 700 1,000 1,452
Less: Reconditioning cost P(452)
Gross profit (P2,000 x 35%) P2,200
748
Unrecovered cost
Unpaid balance (P5,400-P3,200)
Less deferred gross profit (P2,200 x 34%)

Loss on repossession

38. This is computed by deducting the loss on repossession from the total realized gross profit:

Year of Sales

Collections 2011 2012 2013 Total
Gross profit rate P72,500 P80,000 P62,500 57,625

2011:P60,000/P240,000 25% 27.5% 28%
2012:P68,750/P250,000 ______ ______ P17,500
2013:P84,000/P300,000 P18,125 P22,000
Realized gross profit

Loss on repossession
Value of repossessed merchandise P6,000 P9,000
Unrecovered cost: 16,000
Unpaid balance 15,000
Less: deferred gross profit 4,400
2011:P15,000x25% 3,750 11,600
2012:P16,000x27% _____ (P2,600)
Unrecovered cost 11,250
Loss on repossession (P5,250) (7,850)
Total realized gross profit after loss on repossession P49,775

39. The computation is as follows: Year of sales 2013
Installment contract receivable, 1/1/13 2012 P375,000
Installment contract receivable, 12/31/13 (150,000)
Total credit P100,000
Credit for repossession (12,500) 225,000
Collections -
Gross profit rate (schedule ) 87,500
Realized gross profit (P141,875) (6,250) 225,000
81,250 45%

50% P101,250
P40,625

Schedule 1 : gross profit rate
2012 sales:
Gross = Deferred gross profit – 2012, 9/30/2012 P50,000 = 50%
profit rate Inst. Contract rec’ble – 2012, 9/30/2012 100,000

2013 sales:

Installment sales P375,000
Less: cost of installment sales-
P62,500
Cost of goods sold: 435,000
Inventories, 9/30/12 497,500
Purchases 72,500
Cost of goods available 425,000
Less: inventories, 9/30/12
(P75,000-P2,500)
Cost of goods sold

Less: cost of regular sales (70% x P312,500) 218,750 206,250
Gross profit on installment sales P168,750
Gross profit rate: (P168,750/P375,000)
45%
40. The realized gross profit is computed as follows: P620.69
Collections applying to principal (Sch. 1)
Gross profit rate (P600/P1,600) 37.5%
Realized gross profit rate P232.76

The loss on repossession is computed below: P979.31 P560
Fair value of repossessed merchandise 367.24 612.07
Less: unrecovered cost (P52.07)
Unpaid balance (sch. 1)
Less: deferred gross profit (P979.31 x 37.5%)
Loss on repossession

Schedule 1:

Date (1) Total (2) Applying to (3) Applying to (4) Balance of
Sept. 30 payment Interest 005 principal (1) principal (4)
Sept. 30 x (4) – (2) – (3)
Oct. 31 P160 P1,600
Nov. 30 160 - P160 1,440
Dec. 31 160 7.20 152.8 1287.20
160 6.44 153.56 1,133.64
640 5.67 154.33 979.31
P19.31 P620.69

41. P70,000 is the sum of the realized gross profit in 2012 and 2013 which are computed as follows:

Installment contract receivable, 2012 2013
beg. (1/1/13) P80,000 P200,000

Installment contract receivable, 25,000 95,000
beg. (1/1/13)
Total credits 55,000 105,000
Less: credit for repossession 6,000 -
Collections 49,000 105,000
Gross profit rate (schedule 1) 40% 48%
Realized gross profit 12/31/13 (P70,000) P19,600 P50,400

The P1,100 adjusted loss is determined as follows: 6,000 P2,500
Value of repossessed merchandise 2,400 3,600
Unrecovered cost: (P1,100)
Unpaid balance
Less: deferred gross profit (P6,000 x 40%)
Adjusted loss on repossession

Schedule 1 – gross profit rates:

2012 Sales: P100,000 P150,000
Installment sales 10,000 90,000
Cost sales: P60,000
40%
Purchases
Merchandise inventory, 12/31 P200,000
Gross profit
Gross profit rate (P60,000/P150,000) 104,000
P96,000
2013 Sales:
48%
Adjusted installment sales P10,000
(P198,500 + P1,500, Trade-in) 120,000 2013
Cost of sales: 130,000 Sales
Merchandise inventory, 1/1 26,000 P500,000
Purchases (300,000)
Goods available for sale 200,000
Merchandise inventory, 12/31 30%
Gross profit P60,000
Gross profit rate (P96,000/P200,000) P11,550
62,000
42. The balance of deferred gross profit on Dec. 31,2013 is computed as follows: 75,810
149,360
Installment sales 2012 59,010
Collections in 2012 Sales P90,350
Collections in 2013 P400,000
(210,000)
Installment contract receivable, 12/31/13 (150,000)
Gross profit rate (GP/IS) 40,000
Deferred gross profit, 12/31/13 (P76,000) 40%
P16,000

43. Deferred gross profit before adjustment:

2011 sales -
2012 sales P16,810
2013 sales 42,210
Total
Less: deferred gross profit, end (IAR end X GPR)
2011 sales
2012 sales (P42,000 x 40%)
2013 sales(P100,500 x 42%)
Total realized gross profit, 12/31/13
2012 GPR: P62,000/P155,000 = 40%

44. The total realized gross profit is computed below:

2013 Installment sales: P100,000 P250,000
Unrealized gross profit, 2013 ÷ 40% 140,000
Divided by GPR on sales 110,000
Less: Installment receivable – 2013,12/31/13 40%
Collection from 2013 sales P44,000
Gross profit rate
Realized gross profit on 2013 sales P5,000

The gain (loss) on repossession is computed as follows: 4,800
P200
Actual value of repossessed P1,000 P10,000
merchandise: 4,000 5,000 Year of sales
2013
Sales price P2,000 8,000 Sales
Less: reconditioning cost 6,000 3,200
800 P425,000
Gross profit (P10,000 x 40%) 2,400 (200,000)
Less: unrecovered cost
-
Unpaid balance: 225,000
2011 accounts
2012 accounts 38%
P85,500
Deferred gross profit: P425,000
2011 account(P2,000 x 40%)
2012 account(6,000 x 40%) 263,500
161,500
Gain on repossession

45. Total realized gross profit is computed below:

Installment receivable, 1/1/13 2012
Installment receivable, 12/31/13 Sales
Defaulted balance P120,000
Collections (15,000)
Gross profit rates (7,750)
Realized gross profit, 12/31/13 97,250
Total (P129,562.50) 45%
P43,762.50

Gross profit rate: 45%
2012 sales (P54,000/P120,000) 70,000
2013 sales 555,000
Installment sales (95,000)
Cost of installment sale: 3,000
Inventory, 1/1 533,000
Purchases 269,500
Inventory, 12/31
Repossession
Total
Cost of regular sale (70% x P385,000)

Gross profit

GPR(P161,500/P425,000) 38%
P3,000
The loss on repossession is computed as follows: P7,750 4,262.50
Value of repossessed merchandise 3,487.50 P1,262.50
Less: unrecovered cost: P38,000
Unpaid balance
Deferred gross profit (7,750 x 45%) 26,250
Loss on repossession P11,750

46. P3,750 1,500
Deferred gross profit, before adjustment 22,500 P10,250
Less: deferred gross profit applicable to
100%
Uncollected installment accounts: 76.14%
2012: P16,250 x 30%/130% 23.86%
2013:P90,000 x 25% P 81,700
Realized gross profit 35,000
Less: Expenses 20,000
Net income on installment sales 136,700

47. The computation of the realized gross profit is shown below: .2386
List price P220,000 P32,616.62
Less: trade-in overallowance P85,000-P81,700 3,300
Adjusted selling price P216,700 P216,700
Less: cost of sales 165,000 146,700
Gross profit 51,700 P70,000
Value of old car trade-in .7614
Cash received at time of sale P53,298
Installment collected: P5,000 x4 P40,000
Total collections in 2013 53,298
Multiply by gross profit rate
Realized gross profit as of December 31,2013 P(13,298)
P126,000
Gain (loss) on repossession is computed as follows: P136,700
Adjusted selling price 10,000
Less: collections
In 2012 (No.47)
In 2013: P5,000 x 2
Defaulted balance
Multiply by cost rate
Unrecovered cost
Value of repossessed car
Less: unrecovered cost
Repossession gain (loss)

48. P66,250
Cash sales
Installment sales collected
Downpayment (P265,000 x ¼)

Subsequent installments P79,341 70,067.49 136,317.49
Less: interest (9,252.84) P262,317.49
Interest on defaulted contracts (sch.1)
Total collection (20.67) 37.75%
Gross profit rate (sch.2) P99,024.85
Realized gross profit, 12/31/13
(4) Cash
Schedule 1 – interest on defaulted contracts: collection
265
The total interest is determined through the use of the following table: 53
53
Installment (1) Equivalent (2) Contact (3) Interest 53

number cash sales 1- sales income1% P126,000
250,000
First month (4-3) price2-4 x1 376,000
Second month P1,000 P1,060 7.35
Third month 735 795 6.89 234,060
Fourth month 689.35 742 6.43 141,940
Total interest earned 689.35 689 20.67 37.75%
P157,156
Schedule 2 – gross profit rate: P58,060 (1,000)
The 37.75% gross profit rate is determined as follows: 209,300 156,156
Sales: 267,360
96,000
Cash sales 33,300 P60,156
Installment sales at cash
sales price (P265,000/106%) 2013
Total sales at cash sales Sales
price P420,000
Cost of sales:
Merchandise inventory, January 1
Purchases
Goods available for sale
Less: merchandise inventory, Dec. 31
Gross profit
Gross profit rate (P141,940/P376,000)
49.
Total realized gross profit (Sch.1)
Loss on repossession (Sch.2)
Total realized gross profit loss on repossession
Operating expenses
Net income, Dec. 31,2013

Schedule 1 – realized gross profit

Inst. Contract receivable, 1/1/13 2011 2012
Sales Sales
P110,000 P250,000

Inst. Contract receivable, 21/31/13 (28,000) (92,000) (238,000)
Accounts written off (9,000) (2,800) -
Defaulted accounts (5,000) - -
Collections 68,000 155,200
Gross profit rate (GP/IS) 40% 38% 182,000
Realized gross profit (P157,156) P27,200 P58,976 39%

P70,980

Schedule 2 - loss o repossession:

Appraised value of repossessed merchandise 5,000 P2,400
Less: reconditioning cots 2,000 400
Actual value at time of repossession
Less: unrecovered cost 2,000
3,000
Unpaid balance P(1,000)
Deferred gross profit (P5,000 x 40%)
Loss on repossession

51. The computation of the required balance of the allowance for defaulted contracts account is

shown below:
2013 Bad debts rate
Loss on defaulted contracts P250
Contracts written off 3,750
Sales of repossessed goods (800)
Value of repossessed goods (200)
Total 3,000
Divided by 2012 sales ÷75,000
Rate of bad debt loss 4%

Estimated loss from 2013 sales (125,000 x 4%) P5,000
Less: loss on defaulted contract – 2013 sales 1,325
Required balance of allowance, Dec. 31,2013
P3,675

The realized gross profit on Dec. 31,2013 from 2012 Sales is computed below: P31,500
Installment contract receivable – 2012, 1/1/13 (2,000)
Installment contract receivable – 2012, 12/31/13 (3,750)
Installment contract, receivable written off – 2012 sales 25,750
Collections during 2013
Gross profit rate – 2012 40%
Realized gross profit from 2012 sales, 12/31/13 P10,300