INSTALLMENT SALES PROBLEMS:

SYNCHRONOUS DISCUSSION.

Problem 1
                 Gapan Corporation sells merchandise on the installment basis, and the uncertainties
of cash collection make the use of the installment sales method of accounting
acceptable. The following data relate to two years of operations.

2009 2010
Installment sales ............................ P480,000 P560,000
Cost of installment sales ....................  300,000  364,000
Gross profit .................................  180,000  196,000
Gross profit percentage ......................    37.5%      35%

Cash collections:
  2009 Sales ................................. P190,000 P210,000
  2010 Sales ................................. --  235,000

Record the transactions related to installment sales for 2009 and 2010.

JOURNAL ENTRIES

2009
2010
INST. AR 480,000
560,000
INST. SALES 480,000
560,000

COST OF INST. SALES 300,000

364,000
INVENTORY 300,000
364,000

CASH 190,000
445,000
INST. AR-2009 190,000
210,000
INST. AR-2010
235,000

INST. SALES 480,000

560,000
COST OF INST. SALES 300,000
364,000
DGP(UNREALIZED GP) 180,000
196,000

DGP (190,000 X 37.5%) 71,250 DGP-09 78,750

REALIZED GP 71,250 DGP-10
82,250

RGP 161,000
AR END FOR 2009 AT THE END OF 2010 (30,000/37.5%) 80,000
 OR (480,000-190,000-210,000) 80,000

Problem 2

                  Cavite Medical Center uses the cost recovery method in accounting for recognizing
revenue. The following information is available:

2009   2010   2011  

Sales ................... P45,000 P60,000 P85,000
Gross profit percentage . 37% 41% 40%
Cash collections:
   2009 ................. P24,000 P19,000 P 2,000
   2010 ................. 40,000 17,000
   2011 ................. 53,000

Determine the amount of gross profit to be recognized for 2009, 2010, and 2011.

IF SALES WAS P45,0000, THEN THE COST IS P28,350 (P45,000 X 100%-37%)

AMOUNT TO RECOVER
TOTAL COST FOR 2009 28,350
COLLECTED (24,000)
4,350
COLLECTED FOR 2010 (19,000)
REVENUE TO BE RECOGNIZED-2010 14,650
REVENUE TO BE RECOGNIZED-2011 2,000

Problem 3

                  Lucena Industrial sells machinery on the installment plan. On September 1, 2009,
Lucena entered into an installment sale contract with Western 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 2010.

Additional information:

(a) The cost of the machinery sold to Western was P637,500.

(b) The implicit interest rate on the installment sale is 10%.

Compute the income or loss before taxes that Lucena should record for the year
ended December 31, 2009, as a result of the above transaction, assuming that
circumstances are such that the collection of the installments due under the contract

(1) is reasonably assured.

(2) cannot be reasonably assured.

6 PAYMENTS X 187,500 = wrong 1,125,000 816,611 This is correct

COST OF INSTALLMENT SALES 637,500 637,500

GP 487,500 179,111 GPR = 179,111/816,611 = 21.93%

PV F A
4.355261  X 187,500 = 816,611
reasonably assured cannot be reasonably
assured
IAR         816,611                                                 IAR         816,611
    SALES                816,611                                     IS                        816,611

COS        637,500                                                 COS        637,500

   MACHINERY    637,500                                    MACHINERY    637,500
                                                                                               
                                                                                  IS            816,611
                                                                                       COIS                   637,500
                                                                                          DGP                   179,111

DEC
INT. REC  27,220
    INT. INCOME 27,220                                                    SAME

JAN REVERSING
INT. INCOME     27,220
       INT. REC                        27,220                                    same

AUG COLLECTION
CASH   187500
      IAR                                   105,839                  SAME
      INT. INCOME                81,661

816,611 X 10% X 4/12

                                                                                                DGP                       23,214
                                                                                                    RGP                                   23,214
                                                                                                105,839  X 179111/816611  = 23,214

Problem 4
On January 2, 2010, Yardley Co. sold a plant to Ivory, Inc. for P1.5 million.  On that
date, the plant's carrying cost was P1 million.  Ivory gave Yardley P300,000 cash and
a P1.2 million note, payable in four annual installments of P300,000 plus 12%
interest.  Ivory made the first principal and interest payment of P444,000 on
December 31, 2010.  Yardley uses the installment method of revenue recognition.  In
its 2010 income statement, what amount of realized gross profit should Yardley
report?

SOLUTION:

SELLING PRICE 1,500,000

CARRYING COSTS 1,000,000
GROSS PROFIT 500,000

GROSS PROFIT RATE (GPR) = 500,000/1,500,000 = 1/3 OR 33.33%

DOWN PAYMENT 300,000
1ST INSTALLMENT 300,000
TOTAL COLLECTION 600,000
MULTIPLY BY GPR 33.33%

REALIZED GROSS PROFIT 200,000