192 Chapter 4 aaa ICE QUESTIONS Note to the Examinees: A new problem was presented [Items No. 53 10 58) to illustrate the present vqive in valuing installment receivables/sales. This is actually in conformity with PERS No. 39 par. 45 (0), wherein "loans and receivables as defined in par. 9, shall be measured at amortized cost using the effective interest method”. This was also supported then by PAS 18 Example 8 of the Appendix (as amended by PAS 39) 5 follows: “Installment sales, under which the consideration is receivable in installments. Revenue attributable to the sales price, exclusive of interest, is recognized at the date of sale. The sales price is’ the present value of the consideration, determined by discounting the installments receivable at the imputed rate of interest. The interest element is recognized as revenve as it is eamed, using the effective interest method." i Using effective interest method means that present value is a must. Amortized cost is assumed to approximate the original invoice amount for short-term receivables with no stated interest rate if the impact of discounting would not be significant. 1... MM Company operations he eee the instalment ‘of accounting. The folowing data are available Srl ond 2012 2011 2012 1,200,000 __P'1,500,000 400,000 500,000 600,000, 30% The realized gross profit for 2012 is a. P240, c. P440,000 b. 390.000 d. 600,000 (AICPA) 2. TI Company, which began business on January 1, 2011, appropriately uses the instalment sales method of accounting. The following data are available for 2008: Installment accounts receivable, 12/31/11 ... 200,000 Deferred gross profit, 12/31/11 (before recognition f fit) 140,090, of FOSS Gross profit on sales Pe The cash collections and the realized gross profit on installment sales for the year ended December 31, 2011 should be Cash collections Realized gross profit a. P100,000. P80,000. b. 100,000 60,000 ot 150,000 80,000 d. 150,000. 60,000: (AICPA)Revenue Recognition — Installment Sales 193 3. Dudong Electronics makes all of its sales on credit and accounts for them using the installment sales method. For simplicity, assume that alll sales occur on the first day of the year and that all cash collections are made on the last day of the year. Dudong Electronics charges 18% interest on the unpaid installment balance Data for 2011 and 2012 are as follows: 2011 2012 P100,000 —P'120,000 60,000 80,000 40,000- 50,000 90,000 (Adapted) The interest income recognized in 2012 amounted to: a. P14,040 c. P35,640 b. 21,600 d. 49,700 Using the same information in No.3, compute the reaiized gross profit in 2012: a. P14,384 cc. P37,184 b. 22,800 d. 39,600 . The books of Harry Co. show the following balances on December 31, 2012: Accounts Receivable ..... P313,750 Deferred Gross Profit (before adjus' 38,000 Analysis of the accounts receivable reveal the following: Regular accounts... 207,500 2011 instalment accounts 16,250 2012 installment accounts 90,000 Sales on an installment basis in 2011 weremade at 30% above cost; in 2012, at 33 1/3 above cost. Expenses paid was P1,500 relating to installment sales. How much is the net income on installment sales? a. P11,000 c. P16,000 b. 11,500 d. 10,250. (PhilCPA)194 Chapter 4 6. DJ Co. accounts for installment sales on the installment basis. On January 1, 2012, ledger accounts included the following balances: Installment Receivable - Instaliment Receivable Deferred Gross Profit Deferred Gross Profit On December 31 + 2012, account balances before adjustments for realized gross profit on installment sales were: Instaliment Receivable P_ none Installment Receivable 42,000 Installment Receivable 100,500 Deferred Gross Profit 11,550 Deferred Gross Profit 62,000 Deferred Gross Profit 75810 Installment sales in 2012 were made at 42% above cost of merchandise. The total realized gross profit on installment sales in 2012: a. P132,510 c. P 97,510 b. 98,910 d. 102,834 (PhilCPA) 7. Dipolog;Company sells appliances on the installment basis: Below are information for the past three years: 2012 2011 2010 750,000 P600,000 — P-400,000 Cost of sales ... 450,000 375,000 260,000 Collections on: 2012 installment sales... 275,000 2011 installment sales... 180,000 240,000 2010 installment sales... 125,000 120,000 150,000 Installment sales Repossessions on defaulted accounts included one made on a 2012 sale for which the unpaid balance amounted to P5,000. The. depreciated valve of the appliance repossessed was P2,500. The realized gross profit in 2012 on collections of 2012 installment sales was: a. P108,000 c. P221,250 b. 110,000 d. 221/500 . (PhiICPA)Revenue Recognition - installment Sales 195 8. On January 1, 2011, Art Company sold its idle plant facility to Tony, Inc. for P1,050,000. On this date, the plant had a depreciated cost of P735,000. Tony paid P150,000 cash on January 1, 2011 and signed a P900,000 note bearing interest at 10%. The note was payable in three annual installments of P300,000 beginning January 1. 2012. Art appropriately accounted for the sale under the instaliment method. Tony made a timely payment of the first installment on January 1, 2012 of P390,000 which included interest of 90,000 to date of payment. Ai December 31, 2012, Art has deferred gross profit of a. —P153,000 c. — P225,000 b. 180,000 d. 270,000 (AICPA) 9. On October |, 2011, Rodel Corporation, areal estate developer, sold land to Gerry Company for P5,000,000. Gery paid cash of P600,000 and signed aten- year P4,400,000 note bearing interest at 12%. The carying amount of the land ‘was P4,000,000 on the date of sale. The note was payable in forty quarterly principal installments of P110,000 beginning January 2, 2012. Rodel appropriately accounts for the sale under the cost recovery method. On January 2, 2012, Geny paid the first principal installment of P1 10,000 andiinterest ‘of P132,000. For the year ended December 31, 2012, what total amount of income should Rodel recognize from the land sale and the financing? Be nO) ¢. — P508,200 b. 208,000 d. 309,640 (AICPA) 10. Asser Computer Co. began operation at the beginning of 2012. During the year, it had cash sales of P6,875,000 and sales on installment basis of P16,500,000. Asser adds a markup on cost of 25% on cash sales and 50% on installment sales. Installments receivable at the end of 2012 is P6,600,000. Total realized gross profit for 2012 is: a. P1,375,000 c. P4,675,000 b. — 3,300,000 d. 3,575,000 (Adapted) 11. Conrado Motors 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 inst. sales......... 8,765,625 P7.700,000 4,950,000 Dec. 31 balance: Inst. R'ble, 2012... 9,728,125 Inst.R'ble, 2011... 3,025,000 8,387,500 Inst. R’ble, 2010 1512500. 4,812,500 Gross profit rate . 30% 28%196 Chapter4 Conrado Motors uses the installment method of accounting, what would the company report as total realized gross Profit for the year 2012? a. P1,012,000 cc. P3,753,750 b. 3,044,250 d. 6,993,250 (Adapted) . The various documents and records which were recovered immediately after a fire gutted its premises, EMC Marketing Co. gathered the following information (the company uses the installment method of accounting): 2010 2011 2012 Installments sales P500,000 800,000 Pre (8) Cost of inst. sales (2) 600,000 (?) Gross Profit on inst. sales (2) (2) 282,000 Collection on: 2010sales 50,000 250,000 100,000 2011 sales L 200,000 500,000 2012sales = = 400,000 Realized gross prof on installments sales 11,000 (2) 241,000 Based on the information given above, the cost of installment sales for the year 2012 was: a. P 900,000 ¢. — P¥32,000 b. 918,000 d. 940,000 (Adapted) . EMC Motors, a dealer of motor vehicle, sales exclusively on installment basis. One of its customers, Mr. Ambo purchased a motorcycle for P45,375. The cost to EMC was P25,410. After: making an initial payment of P6,050, Mr. Ambo defaulted on subsequent payments. EMC lost no time in fepossessing the motor vehicle which, by this time, was appraised at a value of P12,450. EMC had to incur additional cost of repairs/ remodelling of P1,650 before the motor vehicle was subsequently resold for P27,500 to Mr. Joey who made an initial payment of P6,875. How much profit was realized on the sale to Mr. Joey? a. P3,025 c. , P3575 bi, 3.300: gd. 3850 (Adapted)Revenue Recognition — Installment Sales 197 14. Lane Company, which began operations on January 1, 2011, appropriately uses the installment method of accounting. The following information pertains to Lane's operations for the year 2011: Installment sales Regular sales .. Cost of installment sales Cost of regular sales .... 300,000 General and administrative expenses 100,000 Collections on installment sales 200,000. The deferred gross profit account in Lane's December 31, 2011 balance sheet should be: a. _P150,000 cc. - P400,000 b. 320,000 d. 500,000 (AICPA) 15. The Central Plains Subdivision sells residential subdivision lots on installment basis. The following information was taken from the company’s records as at December 31, 2011: Installment Accounts Receivab| January 1, 2011 P755,000 December 31,2011 840,000 Unrealized Gross Profit, January 1, 339,750 Installment Sales .... 950,000 How much is the balance of Unrealized Gross Profit as at December 31, 20117 a. P378,000 cc. P427,500 b. 339,750 d. 389,250 (PhilCPA) 16. Gema, Inc. began operations on January 1, 2011 and appropriately uses the installment method of accounting. The following data are available for 2011: Installment accounts receivable, 12/31/2011 Installment sales for 2011 Gross profit on sales. P600,000 1,050,000 40%198 18. Chapter 4 Under the installment method, Gema's deferred gross profit at December 31, 2011 would be a. P360,000 c. — P240,000 b. 270,000 d. 180,000 (AICPA) . Vic Corporation, which began business on January 1, 2011, appropriately uses the installment sales method of accounting. The following data are available: 12/31/2011 12/31/2012 Balance of deferred gross profit on sales account: 2011 P300,000 — P120,000 2012 440,000 Gross profit rate on sales 30% 40% ‘The installment accounts receivable balance at December 31, 2012is a. 1,000,000 c. —P1,400,000 b.* 1,100,000 d. —_ 1,500,000 (AICPA) Cente, Inc. appropriately uses the installment method of accounting to recognize income in its financial statements. Some pertinent data relating to this method of accdunting include: 2010 2011 2012 P375,000 P360,000 285,000 _ 252,000 Installment sales .. Cost of installment sale: Gross profit ... 25% Rate of gross profit on installment sal ‘ 24% H% 2010 2011 2012 Balance of deferred gross profit atyear end: From 2010sales P 52,500 P 15,000 P - From 2011 sales 54,000 9,000 From 2012'sales 72,000 Total ... P.52,500 P 69,000 P_ 81,000Revenue Recognition — Installment Sales 199 What amount of installment accounts receivable should be presented in Cente's December 31, 2012 balance sheet? a. — P270,000 c. — P279,000 b. 277,500 d. 300,000 {AICPA) 19. The following selected accounts appeared in the trial balance of Union Sales as of December 31, 2012: ’ Debit Credit Installment Receivable - 2011 sales Installment Receivable - 2012 sale: Inventory, December 31, 2011 Purchases .. Repossession Installment Sales Sales (Regular)... Unrealized Gross Prot 425,000 385,000 54,000 Additional information: Installment Receivable - 2011 sales, as of December 31, 2011 120,000 Inventory of new and repossessed merchandise as of December 31, 2012 95,000 Gross Profit percentage of regular sales during the year 30% on sales Repossession was made during the year. It was a 2011 sale and the corresponding uncollected account at the time of repossession was P7,750. (1) The total realized gross profit on installment sales in 2012, and (2) gain {loss) on repossession in 2012: {1) P129,262.50; (2) P(1,262.50) (1) 85,500.00; (2) (1,262.50) (1) 129,262.50; (2) 1,262.50 (1) 85,500.00; (2) 1,262.50 aogo (PhiICPA)200 20. 21. Chapter 4 Gloria Corporation started operations on January 1, 2011 selling home appliances and furniture sets both for cash and on installment basis. Data on the installment sales operation of the company gathered for the years ending December 31, 2011 and 2012 were as follows: 2011 2012 P400,000 500,000 240,000 350,000 Installment sales ... Cost of installment sales... Cash collected on installment sales 2011 instalment contracts .. 2012 installment contracts . 210,000 150,000 5 300,000 Additional information: On January 5, 2013 an installment sale in 2011 was defaulted and the merchandise with an appraised value of P5,000 was ‘Tepossessed. Related installment receivable balance on January 5, 2013 was P8,000. (1) The balance of Deferred Gross Profit on December 31 +2012, and (2) the gain or (loss) on repossession in 2013. a. (1) P130,000; (2) P200 ¢. (1) P 76,000; (2) P1,800 b. (1) 76,000; (2) 200 d. (1) 130,000; (2) (200) (PhiICPA) Jane Enterprises uses the installment method of accounting and it has the following .data at the year-end: Gross margin on cost .. 66-2/3% Unrealized gross profit 192,000 Cash collections including down payments .. 360,000 What was the total amount of sales on installment basis? a. P480,000 c. — P648,000 b. 552,000 d. 840,000 (PhilICPA)Revenue Recognition — Installment Sales 201 22. 23. 24. The Cindy, Inc. began operating at the beginning of the calendar year 2011 and, using the installment method of accounting, presented the following data for the first year: Installment sales Grass margin bas 66-2/3% Inventory, Dec. 31, 2011 ... 80,000 General and administrative expenses .. 40,000 Accounts receivable, Dec. 31, 2011 .. 320,000 The balance of the deferred gross profit account, end of 2011 should be: a. P192,000 c. P96,000 b. 128,000 d. 80,000 (PhiiCPA) These data pertain to installment sales of Kester Store: - Down payment: 20% — __ Installment sales: P545,000 in 2010; P785,000 in 2011; and, P968,000 in 2012. - — Mark-up on cost: 35% = Collections after down payment: 40% in the year of sale, 35% in the year after, and 25% in the third year. Compute the (1) Installment Accounts Receivable at the end of 2012, and (2) total unrealized gross profit at the end of 2012. ag. (1) P621,640; (2) 217,547 c. (1) PA64,640; (2) P161,166 b. (1) 464,640; (2) 217.574 dd. (1) 621,640; (2) 161,166 (PhilCPA) On January 2, 2071, the following are some data of the Claire Hills Subdivision, fully-developed subdivision which started sales in 2011. All sales are on a five-year installment plan. The sales terms provide for a 15% downpayment, with the balance payable in.60 monthly installments. An interest of 12% per ‘annum on the unpaid amount is to be paid with the monthly installments. Area of subdivision 200 subdivision lots, various sizes 52,250 Sq. M. Road lots.. 23,750 Sq. M. Parks, reserved for public use 4,000 Sq. M. Total .. 80,000 Sq. M.202 Chapter 4 Cost of subdivision Cost of raw land, 80,000 sq. m. 2,375,000 Surveying and laying monuments 45,000 Filling and leveling sub-grade land .. 130,000 Curbs, gutters, and drainage...... 310,000 Road bracing, filling, and paving 2,175,000 Electric light posts and lines... 190, Total... 5,225,000 25. The total selling price of the 200 subdivision lots, per the price lists, is P?,500,000. Total installment sales in 2011 ..... Installment receivable, Dec. 31, 2011 Interest income in 2011 .. Operating expenses in 201 Compute the (1) unrealized gross profit on December 31, 2011, and (2) the net income for 2011. ¢. (1)P. 877,030; (2)P_ 673,100 d. (1) 1,552,500; (2) 1,355,230 (PhilCPA) The Jaja Sales Co. which began the appliances business on January 1, 2010 reports gross profit on the installment basis. The following information relative to the installment sales are available: 2010. 2011 2012 P360,000 P375,000 -P-450,000 270,000. _271,875 _ 324,000 Installment sales Cost of installment Gross profit ..... P 90,000 103,125 P126,000 Collections: 2010 installment contracts P 67,500 P112,500 P108,750 2011 installment contracts 71,250 120,000 2012 installment contracts 93,750 Defaults: * Unpaid balance of 2010 installment contracts P 18,750 P 22,500, Value assigned to repossessed merchandise .. rf 9,750 9,000 Unpaid balance of 2011 installment contracts 24,000 Value assigned to repossessed merchandise ... 13,500Revenue Recognition ~ Installment Sales 203 26. 27. (1) The realized gross profit on installment sales during 2012, and (2) the loss on repossession during the year 2012: Q. (1) P86,437.50; (2)P12,225 cc. (1) P86,437.50; (2)P11,775 b. (1) 90,300.00; (2) 11,775 d. (1) 88,687.50; (2) 34.275 (PhiICPA) The Mercy Sales Co. employs the perpetual inventory basis in its accounting for new cars. On August 15, 2011, a new car was sold to Rose Castro with alist price of P220,000 costing P165,000. It granted Ms. Castro an allowance ‘Of P85,000 for her old car as trade-in, the current value of which was estimated to be P81,700. The balance of P135,000 was payable as follows: Cash at time of purchase P35,000, balance in 20 monthly payment of P5,000, first payment being made onSeptember 1, 2011.On April 1, 2012, Ms. Castro defaulted in the payment of March 1, 2012 installment. The new car sold was repossessed; its value to the seller is P40,000. (use two decimal places for gross profit percentage) (1) The total realized gross profit on installment salesin 2011 and (2) gain {loss) on repossession in 2012. a. (1) P32,617; (2)P(15811) cc. (1) P32,617; (2)P(13,298) b. (1) 37,889; (2) (13,298) dd. (1). 87,966; (2) 13,298 (PhilCPA) Gianne Co., sold a computer on installment basis on October 1, 2011. The Unit Cost to the company was P86,400, but the installment selling price was set at P122,400. Terms of payment included the acceptance of a used computerwith a trade-in allowance of P43,200. Cash of P7,.200 was Paid in addition to the traded-in computer 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 P1,800 to recondition the used computer so that it could be resold for P36,000. A 15% gross profit was usual from the sale of used. computer. The realized gross profit from the 2011 collections amounted to: a. P 5,760 c. P11,520 b. 14,400, d. 48,960 (Adapted) }. Following data pertain to Mabait Company which sells appliances on the installment basis:204 Chapter 4 2010 2011 2012 Installment Sales P420,000 480,000 Cost of Sales. 237,900 243,600 288,000 From Sales Made in 2010 2011 2012 Instaliment Accounts 300,000 60,000 320,000 Repossessions on defaulted: accounts were made during 2012, as follows: From Sales Made in 2011 2012 Account balance: P 10,000 P5,000 Appraised value ofrepossessed merchandise 4,500 3,500 (1) The total realized gross profit on instalment sales in 2012, and (2) net gain (loss) on repossession on defaulted contracts of 2011 and 2012. a. (1) P 62,000; (2) P(800) c. (1).P167,960; (2) P( 800) b, (1) 167,960; (2) 800 d. (1) 96,600; (2) (1,300) (PhilCPA) 29. Mr. Matias is a dealer in appliance who sells. on an installment basis. A refrigerator which originally cost P9.240 was sold by him for P16,500 to Jose who made a down payment of P2,200, but defaulted in subsequent payments. Mr. Matias repossessed the refrigerator at an appraised value of P4,600. To improve its salability, he expended P600 for reconditioning. He was able to sell the refrigerator to Pedro for P10,000 at a down payment of the first installment of P2,500. The realized gross profit from the (1) first installment sale — Jose; (2) from the second installment sale — Pedro are: a. (1) P968; (2) P1.350 c. (1) P_ 968; (2) P1,200 b. (1) 264; 2) 1.200 de (I) 230. 1,350: p (PhiICPA)Revenue Recognition ~ Installment Sales 205 31. was determined that no further collections would be made. Molino, therefore, repossessed the merchandise. When feacquired, the merchandis was appraised as being worth only P1,000, In order to improve its salability, Bengal incurréd costs Of P100 for feconditioning. Normal profit on resale is P200. What should be the loss on repossession attributable to this merchandise? a, 220 Cc. P320 b. 620 da. 880 (Adapted) merchandise had a fair value of P13,500. Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on repossession should be: a. PO Cc. a P3,300 loss b. P3300 gain d. a P7,500 loss Fryman Furniture uses the. installment-sales method. No further collections ‘could be made on an account witha balance of P18,000. it was estimated that the repossessed furniture Could be sold as is for P5,400, or for P6,300 if P300 were spent reconditioning it. The gross profit rate on the original sale was 40%: The loss on repossession was: a: P4,500 c. - P12,000 b. P4800 d. P12,600 . Oliver Co. uses the installment-sales method. When an account had a balance of P8,400, no further collections could be made and the dining foom set was repossessed. At that time, it was estimated that the dining room set could be sold for P2,400 as repossessed or for P3,000 if the company spent P300 reconditioning it. The QF6ss profit rate on this sale was 70%. The gain or loss on repossession was a a. P5,880 loss c. P 600 gain b. "P6,000 loss d. P 180 gain206 Chapter 4 34. Marceliano Sales Corp. accounts for sales on the installment basis. The balances of the control accounts for Installment Contracts Receivable at the beginning and end of 2012 were: ¥ Jan_1, 2012 Dec. 31,2012 Installment Contracts Receivable - 2010 P 24,020 ro Instaliment Contracts Receivable-2011 344,460 P 67,440 installment Contracts Receivable - 2012 es 410,090 During 2012, the company repossessed a refrigerator which had been sold in 2011 for P5,400 and P3,200 had been collected prior to default. The company sales and cost of sales figures are summarized below: 2010 2011 2012 P380,000 P432,000 — P802,000 247,000 285,120 379,260 Net Sales .. Cost of Sales Marceliano Sales Corp. values the repossessed goods at market value. The resale price of the repossessed merchandise amounted to P'1,700. (1) The gain (loss) or repossession; and (2) the total realized gross profit on installment sales for the-year 2012: a. (1) P(381); (2)P172852.50 c. (1): P248; (2)P172,852.50 b: (1) (381): (2) 71.00670 © d.(1). 248; (2) 71,006.70 (PhilCPA) 35. Gizelle, Inc. started operation’ at the beginning of 2012, selling home appliances exclusively on the: installment basis. Data for 2011 and 2012 follows: 2011 2012. Installment sales .. P600,000 — P750,000 420,000 450,000 285,000 22,500 = 300,000 Cost of installment sales 2011 installment accounts, end 2012 installment accounts, end On May 31, 2012, a 2011 instaliment account of P37,500 was defaulted and the appliance was repossessed. After reconditioning at a cost of P750, the repossessed appliance would be priced to sell for P30,000. The gain (loss) on repossession amounted to: a. P 3,000 c. P 9,000 b. (9,000) d. (3,750) (Adapted)Revenue Recognition — Installment Sales 207 36. Since there is no reasonable basis for estimating the degree of collectibility, Bloopers Company uses the installment method of revenue recognition for the following sales: 2012 2011 450,000 300,000 Sales Collection from: 2011 sales .. 50,000 100,000 2012 sales .. 150,000 fo Accounts written-o' 2011 sales .. 75,000 25,000 2012sales . 25,000 -0- 40% 30% Gross profit percentage What amount should Bloopers report as deferred gross profit in its December 31, 2012, balance sheet for the 2011 and 2012 sales? a. P75,000 c. P112,500 b. 80,000 d. 125,000 ; (AICPA) 37. James Smith Appliance Co.,sold an equipment costing P10,000 for P16,000 ‘on September 30, 2011. The down payment was P1,600, 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 1/2 of 1%a month, payments being considered as applying first to accrued interest and the balance to principal. After paying a total of P6,400, the customer defaulted. The equipment was repossessed in January 5, 2012. It was estimated that the equipment hada value of P5,600. : Compute the (1) total realized gross profit on installment sales and (2) the gain (loss) on repossession (rounded) a. (1) P2,328; (2) P521 c. (1) P2,400; (2) P(400) b. (1), 2,400; (2) 400 d.. (1) 2,328; (2) (521 (1) (2) 0) (2) » aGPA)208 38. Al. Chapter 4 On September 30, 2011, Bary bought a car for P3,600,000. A down payment Of P1,600,000 was made, with the balance due in 10 monthly installments, the first to be made at the end of October. Barry is to make monthly payments of P200,000 plus interest on the unpaid balance at 12%. What is the total collection on January 31, 2012? a. P200,000° ©. P216,000 b. 214,000 d. 218,000 Using the same information in No. 38 and Bary is to make equal monthly payments, each payment to apply first as interest at 12% on the unpaid principal and the balance as a reduction in principal. such equal payments are calculated to be P211,164,15. What is the unpaid balance of the installment receivable on January 31, 2012? a. P1,000,000 Cc. P1,223,796.90 b. 1,200,000 dg. 1,420,753.51 Using the same information in No. 38, what is the approximate effective interest rate if monthly payments of P200,000 plus interest at 12% charged ‘on the original principal amount of P360,000? a. 10% Cc. 32.73% b. 12% d. 39.38% Sharon Company uses the installment sales method in accounting for its installment sales. On January 1, 2011, Sharon Company had an installment account receivable from Rowena with a balance of P18,000. During 2011, P4,000 was collected from Rowena. When no further collection could be made, the merchandise sold to rowena was repossessed. The merchandise had a fair market value of P6,500 after the company spent for P600 for reconditioning of the merchandise. The merchandise was originally sold with a gross profit rate of 40%. Determine the gain or loss on repossession and cost of repossessed merchandise, respectively: a. P2,500 loss; P6,500 c. b. — P2,100 loss; P6,500 d. (Adapted)Revenue Recognition ~ Installment Sales 209 42. The following table are available for Charo Company: 2010 2011 2012 Installment sales .... P50,000 P80,000 P g Cost of installment sales .. ? 91,800 Gross profit .. 2g % 28,200 Gross profit percentage g 25% z Cash collections . 2010sales 2 25,000 10,000 2011 sales z 20,000 50,000 2012sales @ 45,000 Realized Gross Profit on Instaliment Sales 1,100 10,500 z Using installment method, compute the realized gross profit in 2012: a. 10,575 cc. P2,200 b. 12,500 d. 25.275 (Adapted) 43. On January 1, 2011, Janette Company sold 20,000 square meters of farmland for P600,000 to Michelle, taking in exchange a 10% interest bearing note Janette Company purchased the farmland in 2011 at a cost of P500,000. The note will be paid in three instalments of P241,269 including interest each on December 31, 2011, 20:2, and 2013. Shortly, after the sale Janette Company leams distressing news about Michelle's financial circumstances and because collectionis so uncertain and decides to account for the sale using the cost recovery method. Determine the Realized Gross Profit and interest Income for the year 2012, and Unrecovered Cost as of December 31, 2012, respectively. Po OP OP Oe P -O;P -0-;P 17,462 P__~0-; P60,000; P177,462 i P33,233; POP -O- aooo210 44. 45. 46. 47. Chapter4 On June 1, 2011, the Foster Company sold inventory to the Ushman Corporation for P400,000, Terms of the sale called for a down payment of P100,000 and four annual installments of P75,000 due on each June 1 beginning June 1, 2012. Each installment also include interest on the unpaid balance applying an appropriate interest rate. The inventory cost Foster P150,000. The company uses the perpetual inventory system. Compute the amount-of gross profit to be recognized in 2011. (Ignore interest charges). Point-of-Delivery Instaliment Cost Method Method. Recovery Method a. —P250,000 P62,500 P250;000 b. -0- 250,000 62,500 c 62,500 250,000 o- d. 250,000 62,500 (Adapted) Johnson Enterprises uses the cost recovery method for alll installment sales. Complete the following table: 2010 2011 2012 Installment sales P890,000 P95,000 Pe Cost of installment 2 56,050 68,250 Gross profit percentage 38% 2 35% Cash collections: 2010sales 25,600 46,400 5,600 22,800 2 ; 32,550 Realized Gross Profit on Installment Sales 2 % 16,050 The installment sales in 2012: a. P92,137.50 cc. P112,612.50 b. 105,000.00 d. 195,000.00 (Adapted) Using-the same information in No. 45, the cost of installment sales in 2010: a. Zero c. P47.619 b. —P30,400 d. 49,600 Using the same information in No. 45, the gross profit rate in 2011: a. 2% Cc. 59% b. 41% d. Cannot be determinedRevenue Recognition — Installment Sales 2u 48. 49. 51. Using the same information in No. 45, the collections in 2012 for 2011 sales: a. P10450 c. P43,700 b. 33,250 d. 48,600 Using the same information in No. 45, thé realized gross profit on installment sales in 2010: a. P9728 c. P4800 b. 7,049 d. Zero Using the same information in No. 45, the realized gross profit on installment sales in 2011: a. P8664 Cc. P18012 b. 9,348 d. 22,400 Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is unable to reliably predict bad debts. During 2011, Coaster sold equipment costing P2,400,000 for P3,600,000. The terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments for 2011 were made on schedule. Round answers to two places. Assuming that Coaster uses the installment method of accounting for its installment sales, what amount of realized gross profit will Coaster report ints income statement for the year ended December 31, 2011? a. P1,680,000 cc. — P560,000 b. P1,120,000 d. P369,600 Assuming the same information in No. 51 and that Coaster uses the cost- recovery method of accounting for its installment sales, what amount of realized gross profit will Coaster report in its income statement for the year ended December 31, 20122 1G, =P 0 c. - P316,800 b. — P240,000 di. - -P960,000212 Chapter 4 (with Present Value Factor) Items 53 through 58 are based on the following information: Pampanga Industtial'sells machinery on the installment plan. On September 1, 2011, Pampanga entered into an installment sale contract with GMA Productions for a six-year period, Equal annual payments under the installment sale are P187,500 and are due on August 31 of each year beginning in 2012, Additional information: (a) The cost of the machinery sold to GMA was P637,500. (b) The implicit interest rate on the installment sale is 10%. Pampanga Industrial uses calendar year as a result of the above transaction and use effective-interest rate method of amortizing any discount. The present value factors at 10% for six periods are as follows: Yeor PVof PI PV of an annuity of PT 1 9091 9091 2 8264 1.7355 3 7513 2.4869 4 6830, 3.1699 5 6209 3.7908 6 5645, 4.3553 53. Assuming that circumstances are such that the collection of the installments due under the contract is reasonably assured, compute the realized gross profit on installment sales for 2011 (rounded): a. Tero ec. PA79N9 b. P81,250 d. 487,500 54. Using the same information in No. 53, compute the total income for 2011 {rourtded): a. P 27,221 c. P206,340 b. 108,471 d. 541,721 55. Using the same information in No. 53, compute the total income for 2012 (rounded): a. P71,221 €. P206,340 b. 108,471 d. 257,433=_—-=- ' Revenue Recognition ~ Installment Sales U3 56. Se 59. Assuming that circumstances are such that the collection of the installments due under the contract cannot be reasonably assured, compute the realized gtoss profit on installment sales for 2011 (rounded): a. . Zero c. PI79,119 b. P81,250 d. 487,500 Using the ame information in No. 56, compute the total income for 2011 (rounded): a. P27,221 Cc. P206,340 b. 108,471 d. 541,721 . Using the same information in No. 56, compute the total income for 2012 {rounded): a. P 78,134 c. P102,194 b. 101,418 da: 119,384 The Ana Motors Company makes all sales on installment contracts ani accordingly reports income on the installment basis. installment contrac’ 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 valves. The following data relate to the transactions during 2011 and 2012 2011, 2012 Installment sales .... P 150,000 P198,500 Instaliment contract receivable, 12/31 2011 sales 80,000 25,000 95,000 100,000 120,000 New merchandise inventory, 12/31 at cost 10,000 26,000 Loss on repossessions .... iG; 000 The company auditor disclosed that the inventory taken on December 31, 2012 did not include certain merchandise received as trade-inon December 2, 2012 for which an allowance was given. The appraised 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 2012, 2011 contract was defaulted.and the merchandise was repossessed. At the time of default, the repossessed merchandise had an appraised value of P2,500. The repossessed merchandise was neither recorded nor included inthe physical inventory on December 31, 2012.214 Chapter 4 Compute the (1) total realized gross profit on sales in 2012 and (2) gain (loss) on repossession. a. © (1) P70,000; (2) P_ 100 ¢. (1) P50,400; (2) P(1,100) b. (1). 70,000; (2) (1.100) d. (1) 19,600; (2) 3,500 (PhIICPA) . On January 1, 2011 Blue 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 a down payment of 1/3 was required, with the balance payable in 18 equal monthly installments. The company adjusted its records at the end of each year to the “installment basis” by use of a deferred gross profit account, When contracts were defaulted, the unpaid balances were charged to a bad debts expense account, and sales of repossessed merchandise were credited to this account. At the end of the year the expense account was adjusted to reflect the actual loss. The transactions of the Blue Company are as follows: 2011. 2012 Sales: PAU MME 3 See TT New gas stoves for cash..... New gas stoves on installment Prcocing tbelBocideyn mayen 235,000 330,000 Repossessed gas slove 750 875 Purchases 193,000 215,000 Physical inventories at December 31 P 27,000 _ P 37,000 ‘New gas stoves at cost ..... 45,500 60,000 Repossessions at appraised value i 180 200 Unpaid balances of installment contracts ted: 2011 sales 3,580 4,650 2012sales = 3,750 Cash collections on installment contracts, exclusive of down payments: 2011 sales 54,000 77,000 2012sales ae 70,000 Compute the (1) balance of Instaliment Accounts Receivable - 2011 on December 31, 2012, and (2) The realized gross profit for the year 2012. a. (1) P17,437; (2) P114,880 ¢. (1) P22,087; (2}P131,500 b. (1) 17,437; (2) 131,530 d. (1) 22,087; (2) © 114,880 (PhiICPA)Revenue Recognition Installment Sales 215 61. The trial balance of Dumaguete Appliance Corporation as of the end of the fiscal year on September 30, 2012is: Debit Credit, Accounts receivable ... -P 100,000 Accounts payable P 100,000 Allowance for depreciation .. 33,750 Capital stock 125,000 Cash. 46,250 Deferred gross profit - 2011 50,000 Equipment ...... 112,500 Installment contract receivable - 2011 . 12,500 Installment contract receivable - 2012 . 150,000 Installment sales 2 375,000 30,000 312,500 The post-closing trial balance on Sept. 30, 2011 shows the following balances of cértain accounts: Installment contract receivable - 2011 P 100,000 Deferred gross profit ~ 2011 .... 50,000 The gross profit percentage on regular sales during the year was 30%. The accountant made the following entry for a repossession on a sale of 2011 towards the end of fiscal year: Repossessions .. P2,500 Loss on repossessions “ 3,750 Installment contract receivable - 2011 . P6,250 The. inventory of new and repossessed merchandise on Sept. 30, 2012 amounted fo P75,000.216 Chapter 4 The total realized gross profit for the fiscal year September 30, 2012: a. P141,875 c. P93,750 b. 101,250 vals 235,625, {PhilCPA} $2. Using. the same, information in Number 61, the correcting entry for repossession made on a sale of 2011 is: a. Deferred gross profit - 2011 3,125 Loss on repossession 3,125 b. Deferred gross profit - 2011 3,750 Loss on repossession 3,750 c.. Loss on repossession ..... 3,125 Installment contract rec’ble — 201 3,125 d. Noentry necessary (PhilICPA) 63. Using the same information in Number 61, compute the net income for the fiscal year September 30, 2012: a. 235,000 c. P235,625 b. 138,125 d. 137,500 (PhiICPA) 64. The following selected accounts are taken from the trial balance on December 31, 2012 of Cebu Company: Accounts receivable — charge sales .P 75,000 instalment receivables - 2010 15,000 Installment receivables - 2011 45,000 m Installment receivables - 2012 270,000 Merchandise inventory .. 52,500 Purchase: 390,000 Freight 3,000 Repossessed merchandise 15,000 Repossession loss 24,000 Cash sales P 90,000 Charge sales 180,000 Installment sales .. 446,400 Deferred gross profit - 2010 22,200 Deferred gross profit - 2011Revenue Recognition — Installment Sales 217 Additional information: a. Gross profit rate on 2010 installment sales was 30% and for 2011, the rate was 32%. b. _ Installment sales prices exceed cash sales prices by 24% while charge sales prices exceed cash sales prices by 20%. * c. The entry for repossessed goods was: Repossessed merchandise 15,000 Repossession loss .. 24,000 Installment receivables - 2010 P18,000 Installment receivables - 2011 21,000 d. Merchandise on hand at the end of 2012 (new and repossessed was P70,500. (1) Ifall sales were on cash basis, the total sales for 2012, and (2) The cost of goods sold on instaliment sales for 2012: a. (1) P600,000; (2) P272,160 c. (1) P516,328; (2) P390,000 b. (1) 600,000; (2) 234,000 dd. (1) 800,000; (2) 267.624 (PhilCPA) 65. Using the same information in Number: 64, The cash collections on Installment Sales for- 2010 2011 2012 a. P89,000 P 168,000 P176,400 b. 74,000 123,000 176,400 c. 41,000 57,000 176,400 d. 33,000 66,000 176,400 (PhilICPA) 66.. The following data were taken from the records of Samely Company, before the accounts are closed for the year 2012. The company sells exclusively on the installment basis and uses the installmenf method of recognizing profit. 2010 2011 2012 400,000 440,000 P420,000 Installment sales .. Cost of installment sales 240000 272800 256,200 Operating 100,000 94,000 104,000 expenses Balances as of Dec. 31 Inst. Contracts Rec'ble 2010 220,000 -—-110,000 28,000 Inst..Contracts Rec'ble 2011 250,000 92,000 Inst. Contracts Rec’ble 2012 238,000 Deferred gross profit - 2010 44,000 44,000 Deferred gross profit - 2011 95,000 95,000218 67. Chapter 4 During 2012, because the customers can no longer be located, the company wrote off P9,000 of the 2010 accounts and P2,800 of the 2011 accounts as uncollectible, and the entry made was: Operating expenses... Inst. contracts receivable 2010. Inst. contracts receivable 2011 11.800 Also during 2012 a customer defaulted and the company repossessed merchandise appraised at P4,000 after costs of reconditioning estimated at P400. The merchandise had been purchased in 2010 by a customer who. still owed P5,000 at the date of repossession, The entry made was: Inventory of repossessed merchandise Inst. contracts receivable 2010 5,000 5,000 Compute the {1) total realized gross profit on installment sales for the year 2012, and (2) The gain (loss) on repossession: a. (1) P157.156; (2) P(960) c. (1) P 86,176; (2) P(960) b. (1) 70,986; (2) 600d. (1) 157,156: (2) 600 (PhilCPA) Using the same information in Number 66, the correcting entry for write- offs: a. Deferred gross profit - 2010 .. 3,600 Deferred gross profit - 2011 .. 1,064 Operating Expenses 4,664 b. Deferred gross profit .. 4,664 Operating Expenses 4.664 c. Realized gross profit 4,664 Operating Expenses... | 4,664 d. Operating Expenses ... 4,664 Defened gross profit - 2010. 3,600 Deferred gross profit - 2011... 1,064 {PhilCPA)Revenue Recognition — Installment Sales 219 68. The Precious Appliance Company started business on January 1, 2011. Separate accounts were established for installment and cash sales. On installment sales, the contract price is 106% of the cash sale Price. A standard installment contract is used whereby a down payment of 1/4 of the installment price is required, with the balance payable in 15 equal monthly installments. The interest charged per month is 1% of the unpaid cash sales price equivalent. It is recognized in the period eamed. Installments receivable and installment sales are recorded at the contract price. When contracts are defaulted, the unpaid balances are charged to Bad Debt Expense. Sales of defaulted merchandise are credited to Bad Debt Expense. The following data show the results of transactions in 2011: Sales: Cash sales P126,000 Installment sales . 265,000 Repossessed sales 230 Merchandise inventory, January 1, 2011 58,060 Purchases 209,300 Merchandise inventory, December 31, 2011: New merchandise... Repossessed inventor Cash collections on installment:contract: Down payments a Subsequent installments including interest of P9,252.84 {average of six monthly installments on all contracts, except on defaulted contracts) ... 79,34) Five contracts totalling P1,060 were defaulted after 3 monthly installment poyments. The gross profit percentage in 2011 based on cash sales price equivalentis: a. 35% c. 37.75% b. 45% d. 37.00% (AICPA/PhiICPA)220 Chapter 4 69. Using the same information in No. 68, the total interest earned on a P1,060 instalment sale contract for the first four months is: a. P20.67 Cc. P3915 b. 37.16 d. 159.00 {AICPA/PhiICPA) 70. Using the same information in No. 68, compute the (1) net gain or (loss) on defaulted contracts during 201, and (2) the realized gross profit for 2008: Q. (1) P38.57; (2)P99,084.86 c. (1) P38.57: (2)P99,024.86 b. (1) P(38.57); (2)P99,024.86 — d._{1) P(38.57): (2) P99,084.86 (AICPA/PhIICPA)