Chapter 7 - INSTALLMENT SALES

Multiple Choice Problems

25. a - Costs not yet recovered.

26. c
Cost, 20x4 P 30,000
20x4 cost recovery (20,000)
Remaining cost, 12/31/x4 P 10,000
20x5 collection 15,000
Gross profit – 20x5 P 5,000

27. d
Cost P 30,000
20x4 cost recovery ( 20,000)
20x5 cost recovery ( 10,000)
Remaining cost 0

The entire P20,000 payment received in 20x6 is recognized as gross profit.

28. d
Sale: Installment receivables 55,000
Inventory 30,000
Deferred gross profit 25,000

Payment: Cash 20,000

Installment receivables 20,000

Balance Sheet:
Installment receivables P55,000 – 20,000 P 35,000
Deferred gross profit ( 25,000)
Installment receivables (net) P 10,000

29. a
Sale: Installment receivables 55,000
Inventory 30,000
Deferred gross profit 25,000
2008: Cash 20,000
Installment receivables 20,000
Cash 15,000
Installment receivables 15,000
2009: Deferred gross profit 5,000
Realized gross profit 5,000
Balance Sheet:
Installment receivables P 20,000
Deferred gross profit ( 20,000)
Installment receivables (net) P 0

30. c
Note: Since the collectibility of the note is reasonably assured, the accrual basis should be
applied. Therefore, full gross profit is recognized in the year of sale.
Gross profit on sale:
 Sales (P187,500 x 4.3553) P816,619
Cost of sales 637,500
Gross profit (realized) P179,119

31. c
Total Income for 20x4:
Gross profit (realized) – No. 51 P179,119
Interest revenue—4 months: P816,619 x 10% x 4/12.. _ 27,221
Total income for 20x4 P206,340

32. b
Total Income for 20x5:
Gross profit (realized) – already recognized in 20x4 P 0
Interest revenue – 8 months in Year 1 (P81,662* x 8/12) P 54,441
4 months in Year 2 (P71,078* x 4/12) 23,693 78,134
Total Income for 20x5 P 78,134

*Schedule of Discount Amortization/Interest Income computation:

(1) (2) (3) (4)

Face Net Discount
Amount Unamortized Amount Amortization
Year of Note1 Discount (1) – (2) 10%  (3)
1 P1,125,000 P308,3813 P 816,6192 81,6625
2 937,500 226,7194 710,781 71,078

1 P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the previous
balance.
2 The present value of sales/receivables: P187,500 x 4.3553 = P816,619
3 P1,125,000 – P816,619
4 (2) – (4)
5 Discount amortization give rise to recognition of interest revenue/income.

33. a
Note: Since the collectibility of the note cannot be reasonably assured, the installment sales
method should be applied. Also, if the there is high degree of uncertainty as to collectibility,
the cost recovery method may be used.
Installment sale: Gross profit (P179,119/P816,619) 22% (rounded)

Gross profit earned in 20x4 (P0* x 22%) P 0

* no collections in 20x4.

34. a
Total Income for 20x4:
Gross profit earned in 20x4 (P0* x 22%) P 0
Interest revenue (refer to No. 52 27,221
Total income for 20x4. P 27,221

35. d
Collections in 20x5 (August 31, 20x5) P 187,500
Less: Interest revenue/income from September 1, 20x4 to
 August 31, 20x5 (refer to schedule of amortization in No. 53) 81,662
Collection as to principal P 105,838
x: Gross Profit % (refer to No. 54) 22%
Gross profit realized in 20x5 P 23,284
Add: Interest revenue/income for 20x5 (refer to No. 53) 78,134
Total Income for 20x5 P 101,418

36. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25%

37. a (P800,000 x .25) – P90,000 = P110,000,

38. d P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.

39. a (P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.

40. d (P1,200,000  .30) – P120,000 = P240,000.

41. a P1,050,000  .30 = P315,000

P900,000 – [(P1,200,000 + P1,050,000)  .30] = P225,000.

42. b P24,000 – P7,200 = P16,800

P16,800 – P13,500 = P3,300 loss.

43. d [P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400.

44. d P8,400 – P5,880 = P2,520

(P3,000 – P300) – P2,520 = P180 gain.

45. d
20x4: P24,000 – P0 = P24,000 collections x 39%P 9,360
20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42% 96,600
20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40% 62,000
Realized gross profit on installment sales in 20x6 P167,960

46. b
20x5 Sales 20x6 Sales Net
Market Values P 4,500 P 3,500
Less: Unrecovered Cost:
IAR, unpaid balances P10,000 P 5,000
x: Cost Ratio 50% 5,800 60% 3,000
Gain (loss) P (1,300) P 500 P( 800)

47. a
(1) Gain or Loss on repossession:
Estimated selling price P 1,700
Less: Normal profit (37% x P1,700) 629
Market value of repossessed merchandise P 1,071
Less: Unrecovered Cost:
Unpaid balance – 20x3 P 2,200
Less: DGP – x3 (P2,200 x34%) 748 1,452
Loss on repossession P( 381)
 (2) Realized gross profit on installment sales:
20x2 Sales: (P24,020 – P 0) x 35% P 8,407.0
20x3 Sales: (P344,460 – P67,440 – P2,200) x 34% 93,438.8
20x4 Sales: (P602,000 – P410,090) x 37% 71,006.7
Realized gross profit on installment sales P 172,852.5
48. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%. 22,929.6
20x4 Sales: (P410,090 x 37%) 151,733.3
P 174,662.9
49. d*
Resale Value P 8,500
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 – P1,896,300)/P3,010,000] x 8,500 3,145
Market Value of Repossessed Merchandise P 5,355
Less: Unrecovered Costs – 20x5
Defaulted balance* (P27,000 – P16,000) P 11,000
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x
P11,000 ___3,740 __7,260
Loss on repossession P( 1,905)

Entry made:
Inventory of RM* 11,000
IAR-20x5 11,000

Correct Entry (Should be):

Inventory of RM (at MV) 5,355
DGP-20x5 3,740
Loss on repossession 1,905
IAR-20x5 11,000

Correcting Entry:
DGP-20x5 3,740
Loss on repossession 1,905
Inventory of RM 5,645**

50. c
Installment Sales P 3,600,000
Less: Over-allowance:
Trade-in allowance P1,500,000
Less: MV of Trade-in Merchandise:
Estimated Resale Price P 1,400,000
Less: Normal profit (25% x P1,400,000) 350,000
Reconditioning costs 150,000 900,000 600,000
Adjusted Installment Sales P 3,000,000
Less: Cost of I/S 2,500,000
Gross Profit P 500,000
Gross profit rate: P500,000/ P3,000,000 16 2/3%
x: Collections –Trade-in merchandise (at MV) P 900,000
RGP on I/S in 20x4 P 150,000
51. c
Trade-in allowance P43,200
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs P36,000
Less: Reconditioning costs 1,800
Normal profit (15% x P36,000) 5,400 28,800
Over-allowance P 14,400

Installment sales P122,400

Less: Over-allowance 14,400
Adjusted Installment Sales P108,000
Less: Cost of Installment Sales 86,400
Gross profit P 21,600
Gross profit rate: P21,600/P108,000 20%

Realized gross profit:

Down payment P 7,200
Trade-in (at market value) 28,800
Installment collections:
(P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos. 21,600
Total collections in 2008 P 57,600
x: Gross profit rate 20%
Realized gross profit P 11,520

52. d
(Note: For financial accounting purposes, the installment-sales method is not used, and the full
gross profit is recognized in the year of sale, because collection of the receivable is reasonably
assured.)
Finley Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 20x3
Sales P4,584,000
Cost of Sales 3,825,000
Gross Profit 759,000
Interest Revenue (Schedule I) 328,320
Income before Income Taxes P1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales) P4,584,000
Payment made on January 1, 20x3 936,000
Balance outstanding at 12/31/x3 3,648,000
Interest rate 9%
Interest Revenue P 328,320
Quiz - VII
1. P920,000

20x4: P1,200,000 x 30% = P 360,000

20x5: P1,400,000 x 40% = 560,000 P920,000
2. P190,000
(P300,000 ÷ P750,000) x P250,000 = P100,000
[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000

3. P1,600– assume the use of installment sales method. It should be noted that if the
collectability is highly uncertain or extremely uncertain, the use of cost recovery method is
preferable.
4. Zero/Nil
When the cost recovery method is used, gross profit is recognized only after all costs have
been recovered.
20x5
P45,000 x 63% = P28,350 Cost of sale
P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5.
Costs still to be recovered.
5. P19,250
20x6
Relating to 20x5 sales:
P19,000 - P4,350 = P14,650 Gross profit recognized
Relating to 20x6 sales:
P60,000 x 59% = P35,400 Cost of sale
P40,000 - P35,400 = 4,600 Gross profit recognized
P19,250 Recognized in 20x6
6. P21,000
20x7
Relating to 20x5 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... P 2,000
Relating to 20x6 sales:
Since all costs have been
recovered, all cash collected is
recognized as gross profit ...... 17,000
Relating to 20x7 sales:
P85,000 x 60% = P51,000 Cost of sale
P53,000 - P51,000 = .......... 2,000 Gross profit
recognized
P21,000 Recognized in 20x7
7. P320,000
[(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000

8. P390,000
P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)
P720,000 – (P825,000 x 40%) = P390,000.
9. P 128,000
Installment Accounts Receivable, end of 20x4 P 320,000
x: Gross profit rate (66 2/3 / 166 2/3) _____40%
 Deferred Gross Profit, end of 20x4 P 128,000

10. P25,168, determined as follows:

Gross profit percentages:

20x3: P136,000/P160,000 = 85%; 100% x 85% = 15%
20x4: P158,240/P184,000 = 86%; 100% x 86% = 14%

To deferred gross profit:

20x3: P160,000 x P136,000 = P24,000
20x4: P184,000 x P158,240 = 25,760
P49,760

Gross profit realized:

0.15 x P40,000 = P 6,000
0.15 x P89,600 = 13,440
0.14 x P36,800 = 5,152
P24,592
Balance of Gross Profit Deferred:
P49,760 - P24,592 = P25,168

11. P 0 – all profit recognized in 20x5

12. P240 – (P1,200/P2,000) x P400
13. P100 - (100% of costs were fully recovered prior to 20x7
14. P10 million, the amount of sale
15 . P450 – [P1,000 – P250 = P750 – (P750 x 400/1,000)] = P450

16. P50 gain

Repossessed merchandise……………………………………… 500
Deferred gross profit……………………………………………… 300
Installment Accounts receivable…………………….. 750
Gain on repossession…………………………………… 50

17. 0
Unrecovered costs,1/1/20x4 100
Less: Collections 70
Unrecovered costs,1/1/20x5 30
Less: Collections 40
Profit – 20x5 10
Profit – 20x5 30

18. P10 – refer to No. 17

19. P30 –refer to No. 17

20. Zero
Unrecovered costs – 20x4 120,000
Less: Collections – 20x4 ______0
Unrecovered costs, 12/31/20x4 120,000
Additional costs – 20x5 _20,000
Total costs 140,000
Less: Collections – 20x5 80,000
Unrecovered costs, 12/31/20x5 60,000
Additional costs – 20x6 20,000
 Total costs 80,000
Less: Collections – 20x6 40,000
Unrecovered costs, 12/31/20x6 40,000
Additional costs – 20x7 10,000
Total costs 50,000
Less: Collections – 20x7 100,000
Profit – 20x7 50,000

21. P50,000 profit – refer to No. 20

22. P105,000 = P68,250 / (100% - 35%)
23. P31,000 = P50,000 x (100% - 38%)

24. P43,700
Unrecovered costs – Cost of installment sales for 20x5 installment sales 56,050
Less: Collections in 20x5 for 20x5 installment sales _22,800
Unrecovered costs, 12/31/20x5 33,250
Less: Collections in 20x6 for 20x5 installment sales (balancing figure) _43,700
Realized GP on I/S in 20x6 for 20x5 sales *10,450
*
Realized GP on I/S in 20x6 16,050
Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23) is
already recovered in 20x5 equivalent to collection __5,600
Realized GP on I/S in 20x6 for 20x5 installment sales *10,450
25. Zero – costs is not yet fully recovered, the profit should be recognized
Unrecovered costs – Cost of installment sales for 20x4 (No. 23) 31,000
Less: Collections in 20x4 for 20x4 installment sales _22,800
Unrecovered costs, 12/31/20x4 8,200

26. P41,000
Unrecovered costs – Cost of installment sales for 20x4 installment sales 31,000
Less: Collections in 20x4 for 20x4 installment sales _25,600
Unrecovered costs, 12/31/20x4 5,400
Less: Collections in 20x5 for 20x4 installment sales 46,400
Realized GP on I/S in 20x5 for 20x4 installment sales 41,000
Realized GP on I/S in 20x5 for 20x5 installment sales:
Unrecovered costs – Cost of installment sales for 20x5 installment
Sales 56,050
Less: Collections in 20x5 for 20x5 installment sales 22,800
Unrecovered costs, 12/31/20x4 33,250 ____-0-
Realized GP on I/S in 20x5 41,000
27. P 45,000
Installment receivable = P200,000
Deferred gross profit = P80,000 (P200,000 x 40%)
Fair value = P75,000

Repossessed inventory P 75,000

Deferred gross profit P 80,000
Loss on repossession (plug) P 45,000
Installment receivable P 200,000

28. Zero
P450,000 cost P300,000 collections = P150,000 unrecovered costs

29. P300,000
 20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost
recovered in 20x4, the other P150,000 of cost recovered in 20x5, so
P150,000 of gross profit recognized in 20x5, leaving P300,000 recognized in
20x6.
20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000
of cost recovered in 20x5, the other P400,000 of cost recovered in 20x5, so
P0 of gross profit recognized in 20x6.
Total: P300,000 + P0 = P300,000

30. d
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P 300,000
Deferred gross profit = P450,000 – P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) = 300,000
Net installment receivable for 20x4 sales = P 0

20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000

Deferred gross profit = P600,000 – P0 (all x5 collections to
cost recovery) = P 600,000
Net installment receivable for 20x5 = P 400,000
Total = P 400,000

31. 24%.
Determined from the repossession entry:
Deferred gross profit P2,400
———— = 24%
Installment accounts receivable P10,000

32. 35%
Installment sales P120,000
Cost of sales 78,000
Gross profit P 42,000

Gross profit P42,000

————- = 35% gross profit rate
Installment sales P120,000

33.
a. 20x4 Deferred gross profit balance P 12,000
Gross profit rate ÷ 25%
Beginning accounts receivable P 48,000
Beginning accounts receivable P 48,000
Ending accounts receivable (20,000)
Cash collected P 28,000

b. 20x5 Deferred gross profit balance P 26,400

Gross profit rate ÷ 24%
Beginning accounts receivable* P110,000
Beginning accounts receivable* P110,000
Ending accounts receivable* (50,000)
Cash collected P 60,000
 c. 20x6 Installment sales—20x6 P120,000
Accounts receivable—20x6 (90,000)
Cash collected P 30,000

34. P31,900
Total realized gross profit in 20x6
From 20x4 P28,000 × 25% = P 7,000
20x5 P60,000 × 24% = 14,400
20x6 P30,000 × 35% = 10,500
P31,900
*Excluding accounts receivable for repossessed merchandise.

35. 20x4 , P33,750; 20x5), P95,250

Gross profit realized in 20x4
Installment sales = [(P300,000  P165,000)/P300,000] x P75,000 = P33,750

Gross profit realized in 20x5 (:

From 20x4 sales = [(P300,000  P165,000)/P300,000] x P105,000 = P47,250

From 20x5 sales = [(P450,000  P270,000)/P450,000] x P120,000 = 48,000

P95,250

36. 20x4, P148,750; 20x5 =, P275,250

20x4 20x5
Sales P450,000 P450,000
Cost of sales 335,000 270,000
Gross profit P115,000 P180,000
Gross profit realized on installment sales 33,750 95,250
Total gross profit P148,750 P275,250

37. 20x4 =, P148,750; 20x5 =, P275,250

. 20x4 20x5
Installment accounts receivable P225,000 P450,000
Less: Deferred gross profit 101,250 186,000
Net of deferred gross profit P123,750 P264,000
Theories
1. False 6. True 11. True 16. True 21. True 26. True
2. True 7. False 12. False 17. True 22. True 27. True
3. False 8. True 13. False 18. False 23. True 28. False
4. True 9. False 14. True 19. False 24. True 29. True
5. True 10. True 15. True 20. True 25. True

30. c 35. b 40. a 45. b 50. d 55. d

31. b 36. d 41. e 46. c 51. c 56. b
32. b 37. d 42. b 47. c 52. b 57. d
33. b 38. e 43. b 48. c 53. a 58. c
34. c 39. c 44. d 49. d 54. b 59. c
60. C 65. b
61. B 66. b
62. b 67. d
63. c 68. d
64. d 69. c