Solution Chapter 7

Chapter 7
Problem I
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of investment.
Following years: Each annual installment f P1,000 is profit.
2. 20x4: P4,000 is profit.

20x5: P1,000 is profit.
20x6: P750 is profit, and P250 is treated as return of investment.
Following years: Each annual installment is P1,000 is treated as a return of investment.
3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales

20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.
Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.
P425 per year is treated as return of investment.
Problem II
1. Entries in 20x4:
Cash...
Mortgage Notes Receivable ..
3, 500
20,500
Real Estate .
Gain on Sale of Real Estate ..
Cash
9,000
15,000
500
Mortgage Notes Receivable .
500
Entry in 20x5:
Real Estate .
16,500
Loss on Repossession of Real Estate ..
3,500
Mortgage Notes Receivable
2. Entries in 20x4
Cash
20,000
3, 500
20,500
Real Estate ..
9,000
Deferred Gross Profit on Installment Sales ............

Cash .
15,000
500
Mortgage Notes Receivable ....
500
Receipt P500 cash in 20x4 applicable to principal of note
Deferred Gross Profit on Installment Sales ...
2,500
Realized Gross Profit on Installment Sales...
2,500
Gross Profit Percentages

15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
Or P2,500
Entry in 20x5
Real Estate... 16,500
Deferred Gross Profit on Installment Sales .. 12,500
20,000
Gain in Repossession of Real Estate ..
9,000
Problem III
1.
a. Installment Contracts Receivable 19X8 250,000
Installment Sales
b. Cash ..
250,000
120,000
Installment Contracts Receivable 19X8
c.
Cost of Installment Sales ..
120,000
200,000
Merchandise Inventory ..
d. Merchandise Repossessions
200,000
14,500
Deferred Gross Profit on Installment Sales 19X8 ..
4,000
Loss on Repossession ...
1,500
Installment Contracts Receivable, 19X8 .
20,000
Gross Profit Percentages: 50,000/250,000, or 20%

Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000
Fair value of repossessed merchandise..
P 14,500
Less: Unrecovered cost:

Unpaid balanceP 20,000
Less: Deferred Gross Profit
20% x P20,000
4,000
Loss on repossession.
16,000
P 1,500
e. Expenses
16,000
Cash .
16,000
2. Adjustment to Recognize Gross Profit on Installments Sales:
a. To set-up Cost of Installment Sales:

No entry (since perpetual inventory method is used)
b. To set-up Deferred Gross Profit on Installment Sales:

Installment Sales
c.
250,000
Cost of Installment Sales .
200,000
Deferred Gross Profit on Installment Sales-20x4..
50,000
Adjustment to Recognize Gross Profit on Installment Sales:

Deferred Gross Profit on Installment Sales 20x4...
Realized Gross Profit on Installment Sales 20x4 .
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000
24,000
24,000
d. Closing of nominal accounts.

Realized Gross Profit on Installment Sales 20x4
24,000
Expenses .
16,000
Loss on Repossessions .
1,500
Income Summary .
6,500
To close the accounts for 20x4.
Problem IV
1.
January to December 31
20x4
20x5
(1) To record regular sales:

Accounts receivable
Sales
(2) To record installment sale:
Cash
Installment accounts receivable
Installment Sales
600,000
1,080,000
600,00
60,000
300,000
1,080,000
144,000
336,000
360,000
480,000
(3) To record cost of sales:

Periodic Method: No entry
Perpetual Method:
Regular Sales:
Cost of Sales
Merchandise inventory
Installment Sales:
Cost of installment sales
(4) To record collections:
Regular Sales:
Cash
Accounts receivable
Installment Sales:
Cash
Installment Accounts receivable
20x2
Installment Accounts receivable
20x3
Interest income
(5) to record payment of operating expenses:
Operating expenses
Cash
2.
480,000
864,000
480,000
252,000
864,000
312,000
252,000
144,000
312,000
360,000
144,000
108,000
360,000
204,000
72,000
72,000
36,000
60,000
72,000
90,000
102,000
90,000
102,000
Adjusting entries (end of the year):

(6) To recognize accrued interest receivable
Interest receivable
1,440
Interest income
2,880
1,440
2,880
(7) To set-up Cost of Sales:

Periodic Method:
480,000
864,000
480,000
864,000
Perpetual Method: No entry

(7) To set-up Cost of Installment Sales:
Periodic Method:
252,000
Shipment s on installment sales
312,000
252,000
312,000
Perpetual Method: No entry

(8) To set-up Deferred Gross Profit
Installment sales
360,000
480,000
252,000
Deferred gross profit 20x4
108,000
312,000

Gross profit rate 20x4: P 108,000 / P360,000 = 30%.
Gross profit rate 20x5: P168,000 / P480,000 = 35%.
168,000
(9) To record realized gross profit on installment

sales:
25,200
25,200
21,000
Realized gross profit
25,200
46,200
20x4: Realized gross profit on installment sales:

Collections applying as to principal..P 72,000
Multiplied by: Gross profit rate.
30%
Realized gross profitP 21,600
20x5: Realized gross profit on installment sales;
20x4
20x5
Collections principal
P 72,000
P 60,000
Multiplies by: Gross profit %..........
____30%
____35%
P 21,600
P 21,000
P 42,600
Closing entries:
(10) To close realized gross profit account:
Income summary
(11) To close other nominal accounts
21,600
42,600
21,600
42,600
Sales
600,000
Interest income
1,080,000
37,440
Cost of sales
74,880
480,000
864,000
Operating expenses
90,000
102,000
Income summary
67,440
188,880
(12) To close results of operations:

Income summary
89,040
Retained earnings
231,480
89,040
231,480
Problem V
1.
Type of Sale
Regular Sales:
Cash sales
Credit sales
Total regular sales
Installment Sales
Total Sales
Amount
Ratio to Total Sales
P 225,000
___450,000
P 675,000
_ 1,125,000
P 1,800,000
Allocated Cost
P *146,250
**292,500
P 438,750
__731,250
P 1,170,000
675/1,800
1,125/1,800
*P225,000/P1,800,000 x P1,170,000 = P146,250

**P450,000/P1,800,000 x P1,170,000 = P292,500
The allocation above was based on the assumptions that the markup for each type of sale is the
same. Normally, the selling prices of the merchandise are not the same for each type of sales.
2.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
Amount
P 225,000
450,000
1,125,000
P 1,500,000
Amount based on
Cash Sales (100%)
P 225,000
375,000*
900,000**
P 1,250,000
Ratio to Total
Sales
225/1,500
375/1,500
900/1,500
Gross profit rate

30%
36%
40%
Cost ratio
70%
64%
60%
Allocated Cost
P 175,500
292,500
__ 702,000
P 1,170,000
*P450,000 / 120% = P375,000

**P1,125,000 / 125% = P900,000
3.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
Amount
225,000
450,000
1,125,000
P 1,800,000
P
Allocated Cost*
P 157,500
288,000
_ _675,000
P 1,170,000
* Amount of sale x cost ratio.
Problem VI
The entries are required under the periodic method:
Repossessed merchandise......
Deferred gross profit 20x4............
Loss on repossession...
Installment accounts receivable 20x4.
68,400
48,000
3,600
120,000
To record repossessed merchandise.
Repossessed merchandise......
Cash, etc (or various credits)................
12,000
12,000
To record reconditioning costs
The loss on repossession is computed as follows:

Estimated selling price after reconditioning costs..............
Less: Reconditioning costs
Costs to sell and dispose.
Normal profit (20% x 108,000).
P 108,000
P 12,000
6,000
__21,600
__39,600
Market value before reconditioning costs..

Less: Unrecovered cost
Installment accounts receivable 20x4,
unpaid balance...
Less: Deferred gross profit 20x4 (P120,000 x 40%).....
Loss on repossession.
P 68,400
P120,000
__48,000
__72,000
P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise...............
Over-allowance on trade-in merchandise.
Cash..
Installment accounts receivable 20x4............
Installment sales.......
840,000
360,000
2,400,000
3,360,000
6,960,000
To record installment sales with trade-in.
Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales,
the entry would be as follows:
Cash..
Installment accounts receivable 20x4............
Installment sales (net of over-allowance)..............
840,000
2,400,000
3,360,000
6,600,000
To record installment sales with trade-in.
The over-allowance is computed as follows:

Trade-in allowance..................
Less: Market value before reconditioning costs:
Estimated resale price after reconditioning costs.
Less: Reconditioning costs..
Costs to sell (5% x P1,680,000)
Normal profit (20% x P1,680,000).......
Over-allowance
P1,200,000
P1,680,00
0
420,000
84,000
__336,000
__840,000
P 360,000
The gross profit rate on installment sales is computed as follows:

Installment sales......
Less: Over-allowance
Adjusted Installment Sales
Less: Cost of installment sales.
Gross profit.
Gross profit rate (P2,680,000/P6,600,000)..
P6,960,000
___360,000
P6,600,000
__3,920,000
P2,680,000
40.60%
Further, the entry to record the reconditioning costs is as follows:

Cash, etc (or various credits)..............
420,000
420,000
To record reconditioning costs.
Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4
is computed as follows:
Trade-in merchandise (market value before reconditioning costs)
Down payment
Installment collection (March 31 December 31: P80,000 x 10 months)
Total collections..
Multiplied by: Gross profit rate in 20x4..
Realized gross profit on installment sales of new merchandise
840,000
2,000,000
___800,000
P3,640,000
___40.60%
P1,477,840
Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance:
Oct. 31 Cash 20,000
Mortgage Notes Receivable . 55,000
Real Estate .
60,000
Deferred Gross Profit on Installment Sales .
Nov. 30 Cash .
15,000
1,150
600
Interest Income .
550
Interest Received: P55,00 at 12% for 1 month, or P550
Dec. 31 Cash 1,144

600
Interest Income
544
Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
31 Deferred Gross Profit on Installment Sales .. 4,240

Realized Gross Profit on Installment Sales
4,240
Gross Profit Percentage: 15,000/75,000, or 20%

Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the
contract:
Dec. 31 Cash 20,000.00
Mortgage Notes Receivable 55,000.00
Real Estate
Deferred Gross Profit on Installment Sales ..
Nov. 30 Cash
60,000.00
15,000.00
600
50.00
Interest Income
550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50,
is reduction in principal)
Dec. 31 Cash .
600.00
50.50
Interest Received
549.50
Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in

principal.
31 Deferred Gross Profit on Installment Sales
4,020.10
4,020.10
Gross Profit Percentage: 15,000/75,000, or 20%

Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or
P4,020.10
Problem IX
1. 6/30x4: Cash. 25,000
Notes Receivable 125,000
Accumulated Depreciation (3.1/2[2% of P90,000])
Depreciation Expense (1/2[2% of P90,000])
6,300
900
Land
10,000
Building ..
90,000
Deferred Gross Profit on Sale of Property
Deferred Gross Profit on Sale of Property
57,200
9,553
Realized Gross Profit on Sale of Property ...
9,553
Amount realized: (P25,000/150,000) x 57,200

2. 6/30x5: Cash 30,000
Notes Receivable ..
30,000
Deferred Gross Profit on Sale of Property . 11,440
Realized Gross Profit on Sale of Property
11,440
Amount realized (P30,000/P150,000) x 57,200

6/30/x6 Cash .
Notes Receivable
50,000
50,000
Deferred Gross Profit on Sale of Property 19,067

Amount Realized: (P50,000/P150,000) X 57,200
6/30/x7 Cash ..
Notes Receivable
Deferred Gross Profit on Sale of Property .
Amount Realized: (P15,000/P150,000) X 57,200
19,067
15,000
15,000
5,720
5,720
Problem X
Installment Contracts Receivable . 200,000
Installment Sales
200,000
120,000
Merchandise Inventory
120,000
Cost of Sales: 60% of P200,000

Installment Sales ..
200,000
Cost of Installment Sales
120,000
Deferred Gross Profit on Installment Sales
60,000
Cash . 124,000
Installment on Contracts Receivable 20x4...
30,000
34,000
60,000
Deferred Gross Profit on Installment Sales -20x4 13,800

Deferred Gross Profit on Installment Sales-20x5 ...
14,280
Deferred Gross Profit on Installment Sales -20x6 ...
24,000
Realized Gross Profit on Installment Sales ...
52,080
Realized Gross Profit

20x4: 46% of P30,000 or P13,800
20x5: 42% of P34,000 or P14,280
20x6: 40% of P60,000 or P24,000
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment
sales 20x6 . 27.5%
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts
receivable 20x5 ..
30%
20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts

receivable 20x4 ..
32%
2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash ....................
P27,500
Installment Accounts Receivable 20x6 .. P 55,000

20x5 ..
12,000
20x4 ..
3,000
70,000
Accounts receivable .
17,000
Inventory ....
60,000
Other Assets ...
40,000
Total Assets P 214,500
Liabilities
Accounts payable
Deferred Gross Profit
20x6 P 15,125
P 40,000
20x5
3,600
20x4
960
19,685
Total Liabilities
59,685
Stockholders Equity
Capital Stock ..
P 100,000
Retained Earnings .. P 68,400

Balance, Jan. 1, 20x6 .
13,585
Balance, Dec. 31, 20x6 .
54,185
Total Stockholders Equity

P154,815
Total Liabilities and Stockholders Equity .
P 214,500
WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6
Sales ............
Cost of goods sold:
Merchandise Inventory, Jan. 1 P 52,000
Purchases .................. 350,000
Merchandise Available for sale .................
402,000
Less: Merchandise Inv. Dec. 31
60,000
Gross Profit ..
Less: Deferred Gross Profit on 19X34
Realized Gross Profit on current years sales .
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule) .
Total Realized Gross Profit .
Operating Expenses ...
Net Loss ..
Installment
Sales
P320,000
Regular
Sales
P125,000
232,000
P88,000
15,125
P78,875
110,000
P15,000
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
Deferred Gross profit on installment sales, 20x6
P15,000
Total
P445,000
342,000
P103,000
15,125
P87,875
50,040
P137,915
151,500
P 13,585
Installment contracts receivable, P320,000 less collections P265,000

Or P55,000; P55,000 x 27.5% P 15,125
Realized Gross Profit:

20x6
Collections on Installment Contracts Receivable ... P265,000
Installment sales gross profit percentage ..
27.5%
20x4
P138,000
P27,000
30%
Realized Gross Profit .. P 72,875
Installment Sales
20x5
32%
P 41,400
P 8,640
320,000
Cost of Installment Sales . 232,000

Deferred Gross profit 88,000
Deferred Gross Profit, 20x6 ............... 72,875

Deferred Gross Profit, 20x5 ............... 41,400
Deferred Gross Profit, 20x4 ...............
8,640
Realized Gross Profit on Installment sales 122,915
Income Summary
170,000
Shipment on Installment of Sales
232,000
Merchandise Inventory, Jan. 1, 20x6 .
52,000
Purchases
350,000
Merchandise Inventory, Dec. 31, 20x6 ..
60,000
Income Summary
Sales .
60,000
125,000
Income Summary .
Realized Gross Profit on Installment Sales.....
125,000
122,915
Income Summary .
Income Summary
122,915
151,500
Operating Expenses ...
151,500
Retained Earnings ..
13,585
Income Summary ...
13,585
Problem XII
1. Calculation of gross profit percentage on installment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6 38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 . 40%
20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment
accounts receivable 20x4 . 45%
2.
Deferred Gross Profit, 20x6
1,900
Deferred Gross profit, 20x5
4,000
3,600
Loss on Repossessions..
9,500
Cancellation of deferred gross profit,

balances upon repossessions:
20x6: 38% of P5,000, or P1,900
20x5: 40% of P10,000, or P4,000
20x4: 45% of P8,000, or P3,600
GG SALES CORPORATION
Income Statement
Sales ............
Installment
Sales
P500,000
Regular
Sales
P192,000
Total
P692,000
Cost of goods sold:

Merchandise Inventory, Jan. 1 P 30,000
Purchases .................. 445,000
Repossessed Merchandise ..
10,000
Merchandise Available for sale .................
495,000
Less: Merchandise Inv. Dec. 31
35,000
Gross Profit ..
Less: Deferred Gross Profit on 20x6 sales (see schedule)
Realized Gross Profit on current years sales .
Add: realized gross profit on prior years sales on
Installment basis (see gross profit schedule) .
310,000
P190,000
32,300
P157,700
150,000
P42,000
460,000
P103,000
32,300
P199,700
P42,000
100,650
P300,350
3,500
P296,850
300,000
P 3,150
Deduct loss on repossession .

Total Realized Gross Profit .
Operating Expenses
Net Loss ..
Analysis of Gross Profit on Installment Sales

Schedule to Accompany Income Statement
Deferred gross profit on Installment sales before defaults, 19X8:

Installment contracts receivable, P500,00, less collections, P415,000, or
P85,000; P85,000 x 38% .
P 32,300
Realized Gross Profit:

20x6
Collections of Installment contracts receivable.. P415,000
Installment sales gross profit percentage ..
20x5
P210,000 P 37,000
38%
Realized gross profit ..P157,700
20x4
40%
45%
P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash ...
Installment Accounts Receivable 20x6 P 80,000
20x5 20,000
P 25,000
20x4
5,000
105,000
Accounts receivable ..
40,000
Inventory .
35,000
Other Assets
52,000
Total Assets .P
257,000
Liabilities
Accounts payable .
P 75,000
Deferred Gross Profit 20x6 . P 30,400

20x5 .
8,000
20x4 .
2,250
40,650
Total Liabilities
115,650
Stockholders Equity
Capital Stock .
P100,000
Retained Earnings . P 44,500

Balance, Jan. 1, 20x6
3,150
Balance, Dec. 31, 20x6
41,350
Total Stockholders Equity .
141,350
Total Liabilities and Stockholders Equity ..

4. Installment Sales ..
P 257,000
500,000
310,000
Deferred Gross Profit, 20x6 ..
190,000
157,500
84,000
16,650
258,350
Income Summary
185,000
Shipment on Installment Sales
310,000
Merchandise Inv, January 1, 20x6 .
30,000
Purchases .
455,000
Repossessed Merchandise ..
10,000
Merchandise Inv, December 31, 20x6...
35,000
Income Summary ..
Sales ....
35,000
192,000
Income Summary
Realized Gross Profit on Installment Sales..
192,000
258,350
Income Summary ..
Income Summary
258,350
3,500
Loss on Repossession .
Income Summary
3,500
300,000
Operating Expenses ..
Retained Earnings
300,000
3,150
Income Summary .
3,150
Problem XIII
1.
Deferred gross profit 20x4..
8,407.00
Deferred gross profit 20x5.. 93,438.80
Deferred gross profit 20x6.. 71,006.70
Realized Gross Profit on Installment Sales (20x4 20x6)..
172,852.50
Computation of GP rates:
20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35%

Calculation of collections in 20x6:

20x4: Beginning balance
P 24,020
20x5: P344,460 (beginning balance) P67,440 (ending balance)

P2,200 (write-offs on default)
274,820
20x6: P602,000 (sales) P410,090 (ending balance)
191,910
Calculation of realized gross profit:

20x4: 35% x P24,020
8,407.00
20x5: 34% x P274,820
93,438.80
20x6; 37% x P191,910
71,006.70
Total
2. Deferred gross profit 20x5
P172,852.50
748.00
Inventory of Repossessed Merchandise.
748.00
To reduce by 20x5 deferred gross profit related to defaulted contract and requiring
cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date);
inventory now reported at P2,200 (balance of installment contract), less P748 or
P1,452.
Loss on repossession..
Inventory of repossessed merchandise..
381.00
381.00
To reduce inventory to market as follows: to realize a gross profit of 37% on a

resale estimated at P1,700, the repossessed merchandise should be reported at a
value of 63% of P1,700, or P1,071; the inventory then requires a further write-down
of P381 (P1,452 P1,071)
Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on
sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit
margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248
(P1,700 P1,452), the later period would actually have to absorb a loss as a result of such valuation.
Recording the goods at resale value reduced by the companys usual profit margin on sales is
recommended, for such practice will charge the next period with no more than the utility of the goods
carried forward.
Problem XIV HH Instruments

1.
Installment Contracts Receivable .
Merchandise Inventory (Piano)
Deferred Gross Profit on Installment Sales
2.
3.
4.
1,600.00
1,000.00
600.00
Cash ..........................
Installment Contracts Receivable
160.00
Cash ........................
Interest Income
Installment Contracts Receivable .
160.00
Cash ......................
Interest Income .
160.00
Deferred Gross Profit on Installment of Sales ..

Realized Gross Profit on Installment of Sales
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)
160.00
14.40
145.60
11.47
148.53
225.45
225.45
Merchandise Inventory (piano) ... 560.00

Deferred Gross Profit on Installment of Sales ........... 374.55
Loss on Repossessions .
64.36
998.81
Deferred Gross profit cancelled upon repossession:
37.5% of P998.81 (balance in installment contracts
receivable account) or P 374.55
Problem XIV Big Bear

20x4:
Installment receivables
Inventory
Deferred gross profit
Cash
250,000
150,000
100,000
80,000
20x5:
Cash
80,000
120,000
20x6:
Cash
120,000
50,000
50,000
50,000
Inventory
50,000
300,000
210,000
90,000
Cash
135,000
135,000

40,500
40,500
Gross profit deferred at sale = 30% x P300,000 = P90,000.

Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500
(Or cash collected x GP% =P135,000 x 30% = P40,500)
Problem XV Tappan Industrial
(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale.
Determination of selling price:
PVn = R(PVAFn/i) Table IV
PVn = P187,500 x 4.3553 n = 6, i = 10%
PVn = P816,619 (rounded)
Gross profit on sale:
Sales
Cost of sales
Gross profit
Interest revenue--4 months: P816,619 x 10% x 4/12 =
Total income for 20x5 = P179,119 + P27,221 =
P816,619
637,500
P179,119
_ 27,221
P206,340
(2) No reasonable assurance assume the use of installment sales method

Installment sale: Gross profit (P179,119/P816,619) =
Gross profit earned in 20x5 (P0 x 22%)
Interest revenue
0
27,221
Total income for 20x5

Multiple Choice Problems
1. c
20x4: P1,200,000 x 30% = P 360,000
20x5: P1,400,000 x 40% = 560,000
22% rounded
P 27,221
P920,000
2. d [P225,000 + (P120,000/40%)]
3. b (P36,000 24%) + (P198,000 30%) = P810,000.
4. d
Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%
20x4 Sales: P120,000/ 30%
P 400,000
20x5 Sales: P440,000/ 40%
1,100,000
P 1,500,000
5. b [(P1,000,000 P200,000) x (P1,000,000 P600,000)/P1,000,000 = P320,000
6. b
[(P1,400,000 P980,000) P1,400,000] x P840,000 = P252,000.
7. c
P1,200,000 P720,000 = P480,000 gross profit (40% gross profit rate)

P480,000 (P288,000 .4) = P364,800.
8. c
P300,000 + P50,000 = P350,000

P350,000 P245,000 = P105,000 gross profit (30% gross profit rate)
(P300,000 P100,000) x 30% = P60,000.
9. c
P1,800,000 P1,080,000 = P720,000 (40% gross profit rate)

P720,000 (P825,000 x 40%) = P390,000.
10. a 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.
P8,000 x (P30,000 P24,000)/P30,000 = P1,600
11. b
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000
P390,000
12. d same with No. 4

13. b
Installment Accounts Receivable, end of 20x4
x: Gross profit rate (66 2/3 / 166 2/3)
Deferred Gross Profit, end of 20x4
14. b
20x4: P150,000 (P568,620 x 10%) = P93,138.
20x5: (P568,620 P93,138) x 10% = P47,548.
P 320,000
_____40%
P 128,000
15. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
20x5 sales: P50,000 x 25%
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)
Realized Gross Profit on Sales in 20x5
Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
Realized Gross Profit in 20x5 for 20x4 sales
Divided by: Collections in 20x5 for 20x4 sales
Gross Profit % for 20x4 sales
2,200
12,500
10,575
P 25,275
P 10,500
5,000
P 5,500
P 25,000
22%
16. a
Installment Sales Method:
20x3 Sales: P240,000 x 25/125P 48,000
20x4 Sales: P180,000 x 28/128
39,375
Realized Gross Profit on Installment SalesP 87,375
Cost Recovery Method:
20x3 Cost: P480,000 / 1.25
Less: Collections in 20x3
Collections in 20x4
Unrecovered Cost, 12/31/20x4
P384,000
140,000
240,000
P 4,000
Under the cost recovery method, no income is recognized on a sale until the cost of the item sold
is recovered through cash receipts. All cash receipts, both interest and principal portions, are applied
first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all
costs have been recovered, the recognized revenue after the cost recovery represents income
(interest and realized gross profit). This method is used only when the circumstances surrounding a
sale are so uncertain that earlier recognition is impossible.
17. a
(1) Gain or Loss on repossession:

Estimated selling price
Less: Normal profit (37% x P1,700)
Market value of repossessed merchandise
Less: Unrecovered Cost:
Unpaid balance 20x3
Less: DGP x3 (P2,200 x34%)
Loss on repossession
P 1,700
629
P 1,071
P 2,200
748
(2) Realized gross profit on installment sales:

20x2 Sales: (P24,020 P 0) x 35%
20x3 Sales: (P344,460 P67,440 P2,200) x 34%
20x4 Sales: (P602,000 P410,090) x 37%
Realized gross profit on installment sales
1,452
P( 381)
8,407.0
93,438.8
71,006.7
P 172,852.5
18. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%.
20x4 Sales: (P410,090 x 37%)
19. a refer to No. 16 for discussion.
Cost, January 1, 20x4
Less: Collections including interest 20x4
Unrecovered Cost, December 31, 20x4
22,929.6
151,733.3
P174,662.9
P
P
20. b
(P300,000 P750,000) x P250,000 = P100,000

[(P270,000 P900,000) x P300,000] + P100,000 = P190,000.
21. d
[P5,600 x (1 .40)] (P2,100 P140) = P1,400.
22. d
P8,400 P5,880 = P2,520

(P3,000 P300) P2,520 = P180 gain.
23. b
P24,000 P7,200 = P16,800

P16,800 P13,500 = P3,300 loss.
24. d
(P2,000,000 P1,500,000) P2,000,000 = 25%
25. a
(P800,000 x .25) P90,000 = P110,000,
26. d
P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
27. a
(P3,000,000 P2,100,000) P3,000,000 = 30%.
28. d
(P1,200,000 .30) P120,000 = P240,000.
29. a
P1,050,000 .30 = P315,000

P900,000 [(P1,200,000 + P1,050,000) .30] = P225,000.
30. c
(P3,600,000 P2,400,000) P3,600,000 = 33 1/3%

(P3,600,000 .20) + [(3,600,000 .80) 4/12)] = P1,680,000
P1,680,000 33 1/3% = P560,000.
31. b
[(P3,600,000 .20) + (P3,600,000 .80 x 8/12] P2,400,000 = P240,000.
27,830
60,000
32,170
32. a P0.
33. c
Sale: Installment receivables
Inventory
Payment: Cash
Balance Sheet:
Installment receivables (4,500,000 500,000)
Deferred gross profit (900,000 100,000)
Installment receivables (net)
4,500,000
3,600,000
900,000
500,000
500,000
100,000
100,000
P 4,000,000
800,000
P 3,200,000
34. b
12/15/x5 Cash [(P4,500,000 P500,000)/2 = P2,000,000]
2,000,000
2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)]
400,000
400,000
Balance sheet:
Deferred gross profit: P800,000 400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
35. b refer to No. 16 discussion.
Cost, January 1, 20x4.P 500,000
Less: Collections including interest 20x4.P241,269
Collections including interest 20x5 241,269
482,538
Unrecovered Cost, December 31, 20x5.P 17,462
36. c
Trade-in allowance
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs
Less: Reconditioning costs
Normal profit (15% x P36,000)
Over-allowance
Installment sales
Less: Over-allowance
Less: Cost of Installment Sales
Gross profit
Gross profit rate: P21,600/P108,000
P43,200
P36,000
1,800
5,400 28,800
P 14,400
P122,400
14,400
P108,000
86,400
P 21,600
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%
P 11,520
37. a - Costs not yet recovered.

38. c
Cost, 20x4
20x4 cost recovery
Remaining cost, 12/31/x4
20x5 collection
Gross profit 20x5
P 30,000
(20,000)
P 10,000
15,000
P 5,000
39. d
Cost
20x4 cost recovery
20x5 cost recovery
Remaining cost
P 30,000
( 20,000)
( 10,000)
0
The entire P20,000 payment received in 20x6 is recognized as gross profit.

40. d
Sale:
Inventory
55,000
30,000
25,000
Payment: Cash
20,000
20,000
Balance Sheet:
Installment receivables P55,000 20,000
P 35,000
( 25,000)
P 10,000
41. a
Sale:
2008:
Inventory
55,000
30,000
25,000
Cash
20,000
20,000
15,000
15,000
5,000
Cash
2009:
5,000
Balance Sheet:
P 20,000
( 20,000)
P
0
42. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000

43. a Gross profit % = (P900,000 P450,000)/P900,000 = 50%
20x4: 50% x P300,000 = P150,000
44. c
20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50%
50% x P300,000 received in 2010 = P150,000
20x5 sales: Gross profit % = (P1,500,000
P900,000)/P1,500,000 = 40%
40% x P400,000 received in 2010 = P160,000

Total: P150,000 + P160,000 = P310,000
45. c
20x4 Sales: Installment receivables = P900,000 P300,000 (x4 collections)
- P300,000 (x5 collections) =
Deferred gross profit = P450,000 P150,000 (x4 collections)
Net installment receivable for 20x4 sales
=
P 300,000
150,000
P 150,000
20x5 Sales: Installment receivables = P1,500,000 P500,000 (x5 collections)=

= P600,000 P200,000 (x5 collections) =
Net installment receivable for 20x5
=
Total
=
P1,000,000
400,000
P 600,000
P 750,000
46. a
Installment receivable = P200,000
Deferred gross profit = P80,000 (P200,000 x 40%)
Fair value
= P75,000
Repossessed inventory P 75,000
P 80,000
Loss on repossession (plug)
P 45,000
Installment receivable
P 200,000
47. b - P450,000 cost P300,000 collections = P150,000 unrecovered costs

48. b
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
49. d
20x4 Sales: Installment receivables = P900,000 P300,000 (x4 collections)
Deferred gross profit = P450,000 P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) =
Net installment receivable for 20x4 sales
=
P 300,000
300,000
P
20x5 Sales: Installment receivables = P1,500,000 P500,000 (x5 collections)= P1,000,000

= P600,000 P0 (all x5 collections to
cost recovery) =
P 600,000
Net installment receivable for 20x5
=
P 400,000
Total
=
P 400,000
50. b same with No. 59.
51. 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
52. c
Total Income for 20x4:
Gross profit (realized) No. 51
Interest revenue4 months: P816,619 x 10% x 4/12..
Total income for 20x4
P179,119
_ 27,221
P206,340
53. b
Gross profit (realized) already recognized in 20x4
Interest revenue 8 months in Year 1 (P81,662* x 8/12)
4 months in Year 2 (P71,078* x 4/12)
Total Income for 20x5
P
P 54,441
23,693
78,134
P 78,134
*Schedule of Discount Amortization/Interest Income computation:
Year
1
2
(1)
Face
Amount
of Note1
P1,125,000
937,500
(2)
Unamortized
Discount
P308,3813
226,7194
(3)
Net
Amount
(1) (2)
P 816,6192
710,781
(4)
Discount
Amortization
10% (3)
81,6625
71,078
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.
54. 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%)
* no collections in 20x4.
55. a
Gross profit earned in 20x4 (P0* x 22%)
Interest revenue (refer to No. 52
Total income for 20x4.
56. d
Collections in 20x5 (August 31, 20x5)
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53)
Collection as to principal
x: Gross Profit % (refer to No. 54)
Gross profit realized in 20x5
Add: Interest revenue/income for 20x5 (refer to No. 53)
Total Income for 20x5
0
27,221
P 27,221
P 187,500
81,662
P 105,838
22%
23,284
78,134
P 101,418
57. d*
Resale Value
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 P1,896,300)/P3,010,000] x 8,500
Market Value of Repossessed Merchandise
Less: Unrecovered Costs 20x5
Defaulted balance* (P27,000 P16,000)
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x
P11,000
P 8,500
3,145
P 5,355
P 11,000
___3,740
Entry made:
Inventory of RM*
IAR-20x5
__7,260
P( 1,905)
11,000
11,000
Correct Entry (Should be):

Inventory of RM (at MV)
DGP-20x5
IAR-20x5
5,355
3,740
1,905
11,000
Correcting Entry:
DGP-20x5
Inventory of RM
3,740
1,905
5,645**
58. d
20x4: P24,000 P0 = P24,000 collections x 39%P
20x5: P300,000 P60,000 P10,000 defaults = P230,000 x 42%
20x6: P480,000 P320,000 P5,000 defaults = P155,000 x 40%
Realized gross profit on installment sales in 20x6
9,360
96,600
62,000
P167,960
59. b
Market Values
Less: Unrecovered Cost:
IAR, unpaid balances
x: Cost Ratio
Gain (loss)
20x5 Sales
P 4,500
P10,000
50%
5,800
P (1,300)
60. c
Installment Sales
Less: Over-allowance:
Trade-in allowance
Less: MV of Trade-in Merchandise:
Estimated Resale Price
Less: Normal profit (25% x P1,400,000)
Reconditioning costs
Less: Cost of I/S
Gross Profit
Gross profit rate: P500,000/ P3,000,000
x: Collections Trade-in merchandise (at MV)
RGP on I/S in 20x4
Theories
20x6 Sales
P 3,500
P 5,000
60%
P
3,000
500
Net
P( 800)
P 3,600,000
P1,500,000
P 1,400,000
350,000
150,000
900,000
600,000
P 3,000,000
2,500,000
P 500,000
16 2/3%
P 900,000
P 150,000
1.
2
.
3
.
4
.
5
.
True
True
7. True
6.
True
12. True
17. True
22. d
27. b
32. c
False
8. True
13. True
18. b
23. d
28. d
33. c
False
9. True
14. True
19. c
24. c
29. b
34. b
True
10 False
,
15, True
20. c
25. b
30. d
35. b
36.
41.
37.
38.
39.
40.
d
b
b
d
42. c
43. c
44. c
45.
11.
False
16.
True
21.
26.
31.

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Chapter 7

2. 20x4: P4,000 is profit.

3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales

Mortgage Notes Receivable .

Loss on Repossession of Real Estate ..

Mortgage Notes Receivable

Deferred Gross Profit on Installment Sales ............

Mortgage Notes Receivable ....

Receipt P500 cash in 20x4 applicable to principal of note

Deferred Gross Profit on Installment Sales ...

Realized Gross Profit on Installment Sales...

Gross Profit Percentages

Gain in Repossession of Real Estate ..

Installment Contracts Receivable 19X8

Cost of Installment Sales ..

Deferred Gross Profit on Installment Sales 19X8 ..

Loss on Repossession ...

Installment Contracts Receivable, 19X8 .

Gross Profit Percentages: 50,000/250,000, or 20%

Fair value of repossessed merchandise..

Less: Unrecovered cost:

2. Adjustment to Recognize Gross Profit on Installments Sales:

a. To set-up Cost of Installment Sales:

b. To set-up Deferred Gross Profit on Installment Sales:

Cost of Installment Sales .

Deferred Gross Profit on Installment Sales-20x4..

Adjustment to Recognize Gross Profit on Installment Sales:

d. Closing of nominal accounts.

To close the accounts for 20x4.

(1) To record regular sales:

(3) To record cost of sales:

Adjusting entries (end of the year):

(7) To set-up Cost of Sales:

Perpetual Method: No entry

Shipment s on installment sales

Perpetual Method: No entry

Cost of installment sales

Deferred gross profit 20x4

Deferred gross profit 20x5

(9) To record realized gross profit on installment

Deferred gross profit 20x5

Realized gross profit

20x4: Realized gross profit on installment sales:

Multiplies by: Gross profit %..........

Realized gross profit

(12) To close results of operations:

Ratio to Total Sales

*P225,000/P1,800,000 x P1,170,000 = P146,250

Gross profit rate

*P450,000 / 120% = P375,000

* Amount of sale x cost ratio.

To record repossessed merchandise.

To record reconditioning costs

The loss on repossession is computed as follows:

Market value before reconditioning costs..

To record installment sales with trade-in.

To record installment sales with trade-in.

The over-allowance is computed as follows:

The gross profit rate on installment sales is computed as follows:

Further, the entry to record the reconditioning costs is as follows:

To record reconditioning costs.

Deferred Gross Profit on Installment Sales .

Mortgage Notes Receivable