AFAR 2: Accounting for Special Transactions

Installment Sales
SAMPLE PROBLEMS (Adapted)

PROBLEM 1 - JOURNAL ENTRIES: Regular Sales and Installment Sales

Assume the following information detailing transactions for the two years of HAE IN Corporation:

2024 2025
Sales:
Regular
2024: Cash, P360,000, On account, P240,000 600,000 -
2025: Cash, P480,000, On account, P600,000 - 1,080,000
Installment Sales
Down payment ----------------------------------------- 60,000 144,000
Balance --------------------------------------------------- 300,000 336,000
Cost of Sales:
Regular----------------------------------------------------------- 480,000 864,000
Installment ----------------------------------------------------- 252,000 312,000
Collections:
Accounts Receivable------------------------------------------ 144,000 360,000
Installment accounts receivable,
2024 sales, applying to
Principal--------------------------------------------------- 72,000 72,000
Interest----------------------------------------------------- 36,000 28,800
2025 sales, applying to
Principal--------------------------------------------------- - 60,000
Interest----------------------------------------------------- - 43,200
Accrued Interest Receivable, December 31:
2024 sales ------------------------------------------------- 1,440 1,080
2025 sales ------------------------------------------------- - 1,800
Operating Expenses paid 90,000 102,000

Requirement: Prepare necessary journal entries for the years 2024 and 2025.

PROBLEM 2 – Repossession

HYUN WOO Corporation started operations on January 1, 2022 selling home appliance and furniture sets both for cash
and on installment basis. Data on the installment sales operations of the company gathered for the years ending December
31,2022 and 2023 were as follows:

2022 2023
Installment Sales 1,200,000 1,500,000
Cost of Installment Sales 720,000 1,050,000
Cash collected on installment sales
2022 installment contracts 630,000 450,000
2023 installment sales 900,000

On January 6, 2023, an installment sale in 2022 was defaulted and the merchandise was repossessed. The estimated
resale value of the merchandise amounted to P20,000. There is a 10% normal profit based on estimated resale value. The
corporation incurred P3,000 disposal costs and P5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was P17,000. The operating expenses incurred in 2022 and 2023 amounted to P50,000 and P100,000,
respectively.

Compute for the following:

a. Gross profit rate for 2022 and 2023

b. Deferred gross profit as of 2023 from 2022 and 2023 sales
c. Valuation of the repossessed merchandise at the time of repossession
d. Gain or (loss) on repossession
e. Realized gross profit after gain or (loss) on repossession in 2022 and 2023

PROBLEM 3 – Trade Ins

On March 1, 2024, QUEENS Company sells a sports utility vehicle for P5,700,000 with the vehicle costing P3,850,000. An
old vehicle was accepted as down payment and an allowance of P900,000 was allowed on the trade-in. In addition to the
trade-in vehicle, a downpayment of P2,000,000 cash and the balance to be paid at the end of each month in thirty-five equal
monthly installments of P80,000 commencing the month of sale. The company estimated that the old vehicle has an
estimated resale price of P1,400,000 after reconditioning costs of P350,000. The company expects a 20% profit from the
resale and costs to sell (commission) of 5%.

Questions:

a. How much is the fair value of traded in vehicle?

b. How much is the under/(over) allowance in trade in?
c. What is the gross profit rate?
d. How much is the total realized gross profit in 2024?