Special Revenue Recognition: Installment Sales

Identify the choice that best completes the statement or answers the question.

____ 1. Nicole Inc. uses installment sales method in accounting for its installment sales. On January 1, 2012, Nicole
had an installment account receivable from Tom with a balance of 99,000. During 2012, 22,000 was collected
from Tom. When no further collection could be made, the merchandise sold to Tom was repossessed. The
merchandise had FMV of 35,750 after the company spent for 3,300 for reconditioning of the merchandise.
The merchandise sold with a gross profit rate of 40%.

Determine the gain or loss on repossession:

a. P13,750 b. P11,550 c. P10,450 d. P7,150

____ 2. Churba has a normal gross profit on installment sales of 30%. A 2010 sales resulted in a default early in 2012.
At the date of default, the balance of installment receivable was P180,000, and the repossessed merchandise
has a fair value of P101,250. Assuming the repossessed merchandise is to be recorded at fair value, the gain or
loss on repossession should be.
a. P56,250 gain c. P24,750 loss
b. P56,250 loss d. P24,750 gain

____ 3. AJ sells locally manufactured jeepneys on the installment basis. The information presented below relates to
operations during the past three years:
2012 2011 2010
Cost of installment sales 1,753,625 1,540,000 990,000
Dec. 31, balance of IAR
2012 1,945,625
2011 605,000 1,677,500
2010 302,500 962,500
GP Rates 32% 30% 28%
The total realized gross profit using the cost recovery for year 2011?
a. P55,000 b. P302,500 c. P522,500 d. P82,500

____ 4. The total realized gross profit on installment sales on 2012 is?
a. P633,235.38 c. P609,085.29
b. P202,635.29 d. P650,085.38

____ 5. On July 1, 2012, Honda sold a new car to Mr. Joe with an invoice price of P220,000, with a 20% trade
discount if the sale fall on July 1 to August 31, 2012, the car cost P165,000. It granted Mr. Joe an allowance
of P85,000 for his old car as trade in. The appraised value before reconditioning cost of P2,000 of the car was
estimated to be P81,700. The balance was payable as follows: down payment of P35,000 and the remaining
balance to be paid in 20 monthly payments starting October 1, 2012. On April 1, the customer defaulted on
payment and the car was repossessed, its appraised value after reconditioning cost of 3,000 is P45,000.

What is the gross profit rate on the installment sales?

a. 23.15% c. 3.34%
b. 4.46% d. 23.86%

____ 6. How much is the gross profit to be recognized in the year 2012?
a. P31,253 c. P31,424
b. P30,489 d. P30,026

____ 7. How much is the gross profit to be recognized in the year 2013?
a. 58,725 c. 3,473
b. 6,688.5 d. 3,579

____ 8. What is the gain or loss on repossession to be recognized in 2013?

a. (11,298) c. 3,213
b. 6,213 d. (8,298)

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____ 9. On August 1, 2010, The Believer Corp. sold an inventory to Never Give Up Co. for P2,200,000. Terms of the
sale called for down payment of P550,000 and four annual installment of P412,500 due on August 1, 2011.
The inventory cost is P825,000. The company uses the perpetual inventory system.

Compute the amount of realized gross profit recognized in 2011using the installment method and accrual
method, respectively.
a. P343,750 and P412,500 c. P601,562 and P1,375,000
b. P343,750 and P1,375,000 d. P257,812 and P0

____ 10. Compute the amount of realized gross profit using the profit realization method.
a. 0 c. 962,500
b. 550,000 d. 412,500

____ 11. December 31, 2012, Suzuki, a dealer of motorcycles, sell exclusively on installment basis. One of its
customer, Mr. Alto purchased a motorcycle for P136,125. The cost was P76,230. After making an initial
payment of P18,150 the balance to be paid in 10 monthly installment beginning next month, Mr. Alto
defaulted on subsequent payments. Suzuki lost no time in repossessing the motor vehicle, by this time, was
appraised at a value of P42,900 after incurring reconditioning cost of P4,950. The motorcycle was
subsequently resold to Mr. Fino for 82,500 who made an initial payment of P20,625.

How much profit was realized by Suzuki in 2012?

a. 8,662.5 c. 9,900
b. 12,375 d. 7,986

____ 12. How much is the gain or loss on repossession?

a. P46,992 gain c. P28,116 loss
b. P28,116 gain d. P46,992 loss

____ 13. QR appliances sells home theater set both on installment and cash basis. Mr. X purchased a set from QR
appliances on March 30, 2012 for 367,500, which has a cost of 289,800. A used set is accepted as down
payment, P89,600 being allowed on the trade in. The used set can be resold for P112,140 after reconditioning
cost of P5,362. The company expects to make a 20% gross profit on the sale of used set. The balance of the
sale is to be paid on a 10-month installment basis starting May 1, 2012. Mr. X defaulted payment starting
November 1, 2012 and the set was immediately repossessed. The repossessed merchandise was appraised at a
value of P65,625 at the time of repossession. QR had to incur additional cost of repairs amounting to P6,475
before the car was subsequently resold on December 1, 2012 for P90,125 cash to Mr. Y.

How much is the over or under allowance on the installment sales?

a. P5,250 over c. P112 under
b. P17,178 under d. P112 over

____ 14. How much is the total realized gross profit for the year 2012?
a. P50,218 c. P68,243
b. P51,268 d. P69,293

____ 15. How much is the new cost basis of the repossessed inventory?
a. P65,625 c. P59,150
b. P72,100 d. P46,025

____ 16. How much is the gain or loss on repossession?

a. P37,835 loss c. P29,778 loss
b. P29,778 gain d. P23,303 loss

____ 17. How much is the net income to be recognized for the year 2012?
a. P69,293 c. P44,940
b. P51,415 d. P68,243

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____ 18. On July 10, 2012, PM Motors, which maintains a perpetual inventory records sold a new automobile to ANX
for P1.7 Million. The car costs the seller P1,301,250. The buyer paid 30% down and received P160,000
allowance on an old car traded, the balance being payable in equal monthly installment payments. The
monthly amortization amounts to P60,000 inclusive of 12% interest on the unpaid amount of the obligation.
The car traded in has a wholesale value of P240,000 after expending reconditioning cost of P45,000. After
paying three installments, the buyer suffered major financial setback incapacitating him to continue paying so
the car was subsequently repossessed. When reacquired, the car was appraised to have a fair value of
P600,000.

How much is the realized gross profit on installment sales during the year?
a. P213,899 c. P205,149
b. P37,649 d. Not enough information

____ 19. How much is the interest income?

a. 0 c. P29,404
b. P20,103 d. P30,900

____ 20. Prestige Corporation began operations on July 1, 2012. The following information extracted from its records
at year-end:

Cost of installment sales 546,875

Cost of regular sales 525,000
Mark-up on installment sales 140% of cost
Mark-up on regular sales 33 1/3 on sales
Balances at December 31, 2012:
Accounts Receivable 367,500
Operating expenses 398,125
Net income 170,625

A write-off of installment receivable amounting to P126,000 was made prior to the closing of 2012.

What is the ending balance of installment receivable as of December 31, 2012?

a. P661,500 c. P211,500
b. P787,500 d. P114,625

____ 21. How much is the collection on installment sales?

a. 525,000 c. 651,000
b. 399,000 d. 1,050,000

____ 22. On August 1, 2012, PAUL Corp. sold a piece of land costing P1,350,000 at a gross margin of 66 2/3% above
cost. The buyer pad a 20% down payment and made four installments of P90,000 each during the same year.
Using the installment method of accounting, how much is the realized gross profit in 2012?
a. 180,000 c. 486,000
b. 324,000 d. 216,000

____ 23. QR motors sells motor vehicles both on installment and cash basis. Mr. X purchased a car from QR motors on
March 30, 2011 for P210,000 which has a cost of P165,600. A used car is accepted as down payment, P51,200
being allowed on the trade in. The used car can be resold for P64,080 after reconditioning cost of P3,064. The
company expects to make a 20% gross profit on the sale of used car. The balance of the sale is to be paid on a
10-month installment basis starting May 1, 2011. Mr. X defaulted payment starting November 1, 2011 and the
car was immediately repossessed. The repossessed merchandise was appraised at a value of P37,500 at the
time of repossession. QR had to incur additional cost of repairs amounting to P3,700 before the car was
subsequently resold on December 1, 2011 for 51,500 cash to Mr. Y.

Compute for the realized gross profit on 2011.

a. P28,696 c. P29,296
b. P38,996 d. P28,969

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____ 24. Compute for the gain or loss on repossession
a. 13,316 gain c. 17,016 gain
b. 13,316 loss d. 17,016 loss

____ 25. How much is the net income to be recognized for the year 2011?
a. 25,680 c. 11,680
b. 29,380 d. 15,380

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INSTALLMENT SALESS
Answer Section

MULTIPLE CHOICE

1. ANS: A PTS: 1
2. ANS: C PTS: 1
3. ANS: D PTS: 1
4. ANS: C PTS: 1
5. ANS: D PTS: 1
6. ANS: C PTS: 1
7. ANS: D PTS: 1
8. ANS: A PTS: 1
9. ANS: D PTS: 1
10. ANS: D PTS: 1
11. ANS: D PTS: 1
12. ANS: C PTS: 1
13. ANS: A PTS: 1
14. ANS: C PTS: 1
15. ANS: B PTS: 1
16. ANS: D PTS: 1
17. ANS: C PTS: 1
18. ANS: A PTS: 1
19. ANS: C PTS: 1
20. ANS: A PTS: 1
21. ANS: A PTS: 1
22. ANS: B PTS: 1
23. ANS: B PTS: 1
24. ANS: B PTS: 1
25. ANS: A PTS: 1