Chapter 07

Chapter 7
Problem I
1. Entries in 20x4:
Cash...
3,500
Mortgage Notes Receivable ..
Real Estate .
20,500
9,000
Gain on Sale of Real Estate ..

Cash
500
Mortgage Notes Receivable .
15,000
500
Entry in 20x5:
Real Estate . 16,500
Loss on Repossession of Real Estate ..
Mortgage Notes Receivable
2. Entries in 20x4
Cash
3, 500
Real Estate ..
3,500
20,000
20,500
9,000
Deferred Gross Profit on Installment Sales ............

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

2,500
Realized Gross Profit on Installment Sales...
Gross Profit Percentages
15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
Or P2,500
2,500
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 II
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 III
1.
a. Installment Contracts Receivable 19X8 250,000
Installment Sales
250,000
b. Cash .. 120,000
Installment Contracts Receivable 19X8
120,000
c. Cost of Installment Sales .. 200,000

Merchandise Inventory ..
200,000
d. Merchandise Repossessions
14,500
Deferred Gross Profit on Installment Sales 19X8 ..
Loss on Repossession ...
1,500
Installment Contracts Receivable, 19X8 .
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..
Less: Unrecovered cost:
Unpaid balanceP 20,000
Less: Deferred Gross Profit
20% x P20,000
4,000
Loss on repossession.
e. Expenses
Cash .
4,000
20,000
P 14,500
16,000
P 1,500
16,000
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 250,000
Cost of Installment Sales .
Deferred Gross Profit on Installment Sales-20x4..
50,000
200,000
c. Adjustment to Recognize Gross Profit on Installment Sales:

Deferred Gross Profit on Installment Sales 20x4... 24,000
Realized Gross Profit on Installment Sales 20x4 .
24,000
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000
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
1,080,00
0
600,000
Sales
1,080,0
00
600,00
(2) To record installment sale:

Cash
Installment accounts receivable
Installment Sales
60,000
300,000
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
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
Installment Accounts
receivable
20x2
72,000
72,000
36,000
60,000
72,000
Installment Accounts
receivable
20x3
Interest income
(5) to record payment of operating expenses:
Operating expenses
Cash
90,000
102,000
90,000
102,000
2.
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:
Shipment s on installment
252,000
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%.
(9) To record
installment
sales:
realized
gross
profit
168,000
on
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;
Collections principal
Multiplies by: Gross profit
%..........
20x4
P
72,000
20x5
P
60,000
____30%
P
21,600
____35%
P
21,000
P
42,600
Closing entries:
(10) To close realized gross profit account:
21,600
Income summary
42,600
21,600
42,600
(11) To close other nominal accounts

Sales
Interest income
Cost of sales
600,000
1,080,00
0
37,440
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
231,480
Retained earnings
89,040
231,480
Problem V
1.
Type of Sale
Regular Sales:
Cash sales
Credit sales
Total regular sales
Installment Sales
Total Sales
Ratio to Total
Sales
Amount
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
2.
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.
Type of Sale
Cash sales
Credit sales
Installment Sales
Total Sales
Amount
P 225,000
450,000
1,125,00
0
P 1,500,000
Amount based on
Cash
Sales
(100%)
P 225,000
375,000*
Ratio to Total
Sales
225/1,500
375/1,500
Allocated Cost
P
175,500
292,500
900,000**
P 1,250,000
900/1,500
__ 702,000
P 1,170,000
Gross profit rate

30%
36%
Cost ratio
70%
64%
Allocated Cost*
P 157,500
288,000
40%
60%
_ _675,000
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
1,125,00
0
P 1,800,000
P
* 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
P 108,000
P 12,000
Costs to sell and dispose.

Normal profit (20% x 108,000).
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.
6,000
__21,600
__39,600
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............
840,000
360,000
2,400,00
0
3,360,00
0
Installment sales.......
6,960,00
0
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............
840,000
2,400,00
0
3,360,00
0
Installment sales (net of over-allowance)..............
6,600,00
0
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).......
P1,200,0
00
P1,680,0
00
420,000
84,000
__336,00
0
Over-allowance
__840,00
0
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)..
Further, the entry to record the reconditioning costs is as follows:
P6,960,000
___360,000
P6,600,000
__3,920,00
0
P2,680,000
40.60%
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
P
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 .
15,000
Nov. 30 Cash .
1,150
Interest Income .
Interest Received: P55,00 at 12% for 1 month, or P550
550
600
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
60,000.00
Deferred Gross Profit on Installment Sales ..
15,000.00
Nov. 30 Cash
600
Interest Income
50.00
550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600P550, 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])
6,300
Depreciation Expense (1/2[2% of P90,000])
900
Land
10,000
Building ..
90,000
Deferred Gross Profit on Sale of Property
57,200
Deferred Gross Profit on Sale of Property 9,553
Realized Gross Profit on Sale of Property ...
Amount realized: (P25,000/150,000) x 57,200
2. 6/30x5: Cash 30,000
Notes Receivable ..
9,553
30,000
Deferred Gross Profit on Sale of Property . 11,440

Realized Gross Profit on Sale of Property
Amount realized (P30,000/P150,000) x 57,200
6/30/x6 Cash .
50,000
Notes Receivable
11,440
50,000
Deferred Gross Profit on Sale of Property 19,067

Amount Realized: (P50,000/P150,000) X 57,200
6/30/x7 Cash ..
15,000
Notes Receivable
15,000
Deferred Gross Profit on Sale of Property .

5,720
Amount Realized: (P15,000/P150,000) X 57,200
Problem X
Installment Contracts Receivable .
Installment Sales
200,000
200,000
Cost of Installment Sales ..

120,000
Merchandise Inventory
120,000
Cost of Sales: 60% of P200,000
Installment Sales ..
19,067
200,000
5,720
Cost of Installment Sales

Deferred Gross Profit on Installment Sales
Cash .
Installment on Contracts Receivable
120,000
60,000
124,000
20x4...
20x5...
20x6...
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
Accounts receivable .
17,000
Inventory ....
60,000
Other Assets ...
40,000
Total Assets P 214,500
Liabilities
Accounts payable
P 40,000
Deferred Gross Profit
20x6 P 15,125
20x5
3,600
20x4
960
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
70,000
19,685
P
Total Stockholders Equity

Total Liabilities and Stockholders Equity .
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 .
P154,815
P 214,500
Installment
Sales
P320,000
Regular
Sales
P125,000
232,000
P88,000
110,000
P15,000
15,125
P78,875
P15,000
Total
P445,00
0
342,000
P103,00
0
15,125
P87,875
50,040
P137,91
5
151,5
00
P
13,585
Operating Expenses ...

Net Loss ..
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
Deferred Gross profit on installment sales, 20x6
Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% P 15,125
Realized Gross Profit:
20x6
20x5
20x4
Collections on Installment Contracts Receivable ... P265,000
P138,000
P27,000
Installment sales gross profit percentage ..
27.5%
30%
32%
Realized Gross Profit .. P 72,875
P 41,400
P 8,640
Installment Sales 320,000
Cost of Installment Sales . 232,000
Deferred Gross profit -20x6
88,000
Deferred Gross Profit, 20x6 ...............
72,875
41,400
8,640
Realized Gross Profit on Installment sales 122,915
Income Summary
Shipment on Installment of Sales
Merchandise Inventory, Jan. 1, 20x6 .
Purchases
170,000
232,000
52,000
350,000
Merchandise Inventory, Dec. 31, 20x6 ..

Income Summary
60,000
60,000
Sales .
125,000
Income Summary .
Realized Gross Profit on Installment Sales.....
Income Summary .
Income Summary
Operating Expenses ...
125,000
122,915
122,915
151,500
Retained Earnings ..
Income Summary ...
151,500
13,585
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
Deferred Gross profit, 20x5
Loss on Repossessions..
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
1,900
4,000
3,600
9,500
GG SALES CORPORATION
Income Statement
For Year Ended December 31,
20x6
Sales ............
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
Sales
P500,000
Regular
Sales
P192,000
Total
310,000
P190,000
32,300
150,000
P42,000
460,000
P103,000
32,300
P157,700
P42,000
P199,700
P692,000
Installment basis (see gross profit schedule) .
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
20x5
20x4
Collections of Installment contracts receivable.. P415,000
P210,000 P 37,000
Installment sales gross profit percentage ..
38%
40%
45%
Realized gross profit ..P157,700
P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash ...
P 25,000
Installment Accounts Receivable 20x6 P 80,000
20x5 20,000
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 .
Total Liabilities and Stockholders Equity ..
4. Installment Sales ..
500,000
Cost of Installment Sales ..
Deferred Gross Profit, 20x6 ..
157,500
141,350
P 257,000
310,000
190,000

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...
Income Summary ..
35,000
35,000
Sales ....
192,000
Income Summary
192,000
Realized Gross Profit on Installment Sales..

Income Summary ..
258,350
258,350

Loss on Repossession .
3,500

Operating Expenses ..
Retained Earnings
Income Summary .
300,000
3,150
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
20x5: 34% x P274,820
93,438.80
8,407.00
20x6; 37% x P191,910

71,006.70
Total
P172,852.50
2. Deferred gross profit 20x5

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..
381.00
Inventory of repossessed merchandise..
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.
1,600.00
Merchandise Inventory (Piano)
Deferred Gross Profit on Installment Sales
1,000.00
600.00
Cash ..........................
160.00
Installment Contracts Receivable
2.
Cash ........................
160.00
Interest Income
Cash ......................
160.00
Interest Income .
3.
4.
160.00
14.40
145.60
11.47
148.53
Deferred Gross Profit on Installment of Sales ..

225.45
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)
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 XV 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
Inventory
Cash
120,000
50,000
50,000
50,000
50,000
300,000
210,000
90,000
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 XVI 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 =
P816,61
9
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) =
22% rounded
Gross profit earned in 20x5 (P0 x 22%)
P
0
Interest revenue
Total income for 20x5
Multiple Choice Problems
1. b
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000
27,221
P 27,221
P390,000
2. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P
2,200
20x5 sales: P50,000 x 25%
12,500
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800)
10,575
P 25,275
Realized Gross Profit on Sales in 20x5

10,500
Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%)
5,000
Realized Gross Profit in 20x5 for 20x4 sales
5,500
Divided by: Collections in 20x5 for 20x4 sales
25,000
Gross Profit % for 20x4 sales
P
P
22%
3. 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.
4. a
P0.
5. c
6. e, 20x6 0; 20x7 - 0
Unrecovered costs,1/1/20x4
Less: Collections
1/1//20x4
110,000
0
Add: Sales on account

Total
Less: 1/1/20x5
Collections in 20x4
1/1//20x5
Total
Less: 1/1/20x6
Collections in 20x5
1/1//20x6
Total
Less: 1/1/20x7
Collections in 20x6
1/1//20x7
Total
Less: 1/1/20x8
Collections in 20x7
7. b
15,000
15,000
10,500
__4,500
105,500
10,500
30,000
40,500
25,500
15,000
90,500
25,500
60,000
85,500
40,500
45,000
45,500
40,500
24,000
64,500
70,000
20x4: P150,000 (P568,620 x 10%) = P93,138.

20x5: (P568,620 P93,138) x 10% = P47,548.
8. a refer to No. 3 for discussion.

Cost, January 1, 20x4
Less: Collections including interest 20x4
Unrecovered Cost, December 31, 20x4
9. c
____-045,500
60,000
32,170
P 27,830
(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.
10. b [(P3,600,000 .20) + (P3,600,000 .80 x 8/12] P2,400,000 = P240,000.

11. b refer to No. 3 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
12. b [(P1,400,000 P980,000) P1,400,000] x P840,000 = P252,000.
13. 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.
14. c P1,200,000 P720,000 = P480,000 gross profit (40% gross profit rate)
P480,000 (P288,000 .4) = P364,800.
15. d [P225,000 + (P120,000/40%)]
16. b (P36,000 24%) + (P198,000 30%) = P810,000.

17. 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
18. c
Sale: Installment receivables
Inventory
3,600,000
900,000
Payment: Cash
500,000
100,000
Balance Sheet:
Installment receivables (4,500,000 500,000)
4,000,000
Deferred gross profit (900,000 100,000)
800,000
Installment receivables (net)
4,500,000
500,000
100,000
P 3,200,000
19. 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.
20. No requirement
21. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000
22. a
Gross profit % = (P900,000

P450,000)/P900,000 = 50%
20x4: 50% x P300,000 = P150,000
23. 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
24. c
20x4 Sales:
300,000
150,000
150,000
Installment receivables = P900,000 P300,000 (x4 collections)

- P300,000 (x5 collections) =
P
Deferred gross profit = P450,000 P150,000 (x4 collections)

Net installment receivable for 20x4 sales
20x5 Sales:
Installment receivables = P1,500,000 P500,000 (x5 collections)=
P1,000,000
= P600,000 P200,000 (x5 collections) =
400,000
Net installment receivable for 20x5
= P 600,000
Total
= P 750,000
25. a - Costs not yet recovered.
26. c
Cost, 20x4
20x4 cost recovery
Remaining cost, 12/31/x4
20x5 collection
Gross profit 20x5
27. d
Cost
20x4 cost recovery
20x5 cost recovery
Remaining cost
P 30,000
(20,000)
P 10,000
15,000
P 5,000
P 30,000
( 20,000)
( 10,000)
0
The entire P20,000 payment received in 20x6 is recognized as gross profit.

28. d
Sale:
Inventory
Payment: Cash
Balance Sheet:
Installment receivables P55,000 20,000
29. a
55,000
20,000
30,000
25,000
20,000
P 35,000
( 25,000)
P 10,000
Sale:
Inventory
55,000
30,000
25,000
2008: Cash
Cash
20,000
20,000
15,000
2009: Deferred gross profit
15,000
5,000
5,000
Balance Sheet:
P 20,000
( 20,000)
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
Interest revenue4 months: P816,619 x 10% x 4/12..
Total income for 20x4
32. b
Gross profit (realized) already recognized in 20x4
0
Interest revenue 8 months in Year 1 (P81,662* x 8/12)
4 months in Year 2 (P71,078* x 4/12)
78,134
Total Income for 20x5
78,134
P179,119
_ 27,221
P206,340
P
P 54,441
23,693
P
*Schedule of Discount Amortization/Interest Income computation:
Year
1
2
1
(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.
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%)
* no collections in 20x4.
34. a
Gross profit earned in 20x4 (P0* x 22%)
Interest revenue (refer to No. 52
Total income for 20x4.
P
0
27,221
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
Net
Market Values
Less: Unrecovered Cost:
IAR, unpaid balances
x: Cost Ratio
Gain (loss)
20x6 Sales
P 4,500
P10,000
50%
5,800
P (1,300)
P 3,500
P 5,000
60%
P
3,000
500
P( 800)
47. a
(1) Gain or Loss on repossession:
Estimated selling price
1,700
Less: Normal profit (37% x P1,700)
Market value of repossessed merchandise
Less: Unrecovered Cost:
Unpaid balance 20x3
Less: DGP x3 (P2,200 x34%)
1,452
Loss on repossession
P
629
P 1,071
P 2,200
P( 381)
(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%
93,438.8
20x4 Sales: (P602,000 P410,090) x 37%
Realized gross profit on installment sales
48. c
Entry made:
8,407.0
71,006.7
P 172,852.5
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
49. 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
748
P174,662.9
P 8,500
3,145
P 5,355
P 11,000
___3,740
__7,260
P( 1,905)
Inventory of RM*
IAR-20x5
Correct Entry (Should be):
Inventory of RM (at MV)
DGP-20x5
IAR-20x5
Correcting Entry:
DGP-20x5
Inventory of RM
50. 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
600,000
3,000,000
Less: Cost of I/S
2,500,000
Gross Profit
Gross profit rate: P500,000/ P3,000,000
x: Collections Trade-in merchandise (at MV)
900,000
RGP on I/S in 20x4
150,000
11,000
11,000
5,355
3,740
1,905
11,000
3,740
1,905
5,645**
P 3,600,000
P1,500,000
P 1,400,000
350,000
150,000
900,000
P
500,000
16 2/3%
P
P
51. 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
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
Cost of Sales
Gross Profit
Interest Revenue (Schedule I)
Income before Income Taxes
P4,584,000
3,825,000
759,000
328,320
P1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales)
Payment made on January 1, 20x3
Balance outstanding at 12/31/x3
Interest rate
Interest Revenue
P4,584,000
936,000
3,648,000
9%
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
P60,000 x 59% = P35,400
Cost of sale
P40,000 - P35,400 =
6. P21,000
20x7
Since all costs have been
recovered, all cash collected is
recognized as gross profit ......
Since all costs have been
recovered, all cash collected is
recognized as gross profit ......
P85,000 x 60% = P51,000
P53,000 - P51,000 = ..........
4,600
P19,250
Gross profit recognized

Recognized in 20x6
P 2,000
17,000
2,000
Cost of sale
Gross profit
recognized
Recognized in 20x7
P21,000
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
x: Gross profit rate (66 2/3 / 166 2/3)
_____40%
Deferred Gross Profit, end of 20x4
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 =
20x4: P184,000 x P158,240 =
Gross profit realized:
0.15 x P40,000 =
0.15 x P89,600 =
0.14 x P36,800 =
Balance of Gross Profit Deferred:
P49,760 - P24,592 = P25,168
P24,000
25,760
P49,760
P 6,000
13,440
5,152
P24,592
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
P 320,000
P 128,000
Deferred gross profit 300

Installment Accounts receivable..
Gain on repossession
750
50
17. 0
Less: Collections
Less: Collections
Profit 20x5
Profit 20x5
100
70
30
40
10
30
18. P10 refer to No. 17

19. P30 refer to No. 17
20. Zero
Unrecovered costs 20x4
Less: Collections 20x4
Unrecovered costs, 12/31/20x4
Additional costs 20x5
Total costs
Total costs
Total costs
Profit 20x7
21.
22.
23.
24.
120,000
______0
120,000
_20,000
140,000
80,000
60,000
20,000
80,000
40,000
40,000
10,000
50,000
100,000
50,000
P50,000 profit refer to No. 20

P105,000 = P68,250 / (100% - 35%)
P31,000 = P50,000 x (100% - 38%)
P43,700
Unrecovered costs Cost of installment sales for 20x5 installment sales
Less: Collections in 20x5 for 20x5 installment sales
Less: Collections in 20x6 for 20x5 installment sales (balancing figure)
Realized GP on I/S in 20x6 for 20x5 sales
56,050
_22,800
33,250
_43,700
*10,450
Realized GP on I/S in 20x6

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
Realized GP on I/S in 20x6 for 20x5 installment sales
16,050
__5,600
*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
_22,800
8,200
26. P41,000
Unrecovered costs Cost of installment sales for 20x4 installment
sales
Realized GP on I/S in 20x5 for 20x4 installment sales
Realized GP on I/S in 20x5 for 20x5 installment sales:
Unrecovered costs Cost of installment sales for 20x5
31,000
_25,600
5,400
46,400
41,000
56,050
installment
Sales
Realized GP on I/S in 20x5
22,800
33,250
____-041,000
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
P 80,000
Loss on repossession (plug) P 45,000
Installment receivable
28. Zero
P450,000 cost
P 200,000
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:
300,000
Installment receivables = P900,000 P300,000 (x4 collections)

P
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
=
300,000
P
0
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
31. 24%.
Determined from the repossession entry:
32. 35%
Installment sales
Cost of sales
Gross profit
Gross profit
Installment sales
33.
P2,400
= 24%
P10,000
P120,000
78,000
P 42,000
P42,000
- = 35% gross profit rate
P120,000
a. 20x4
Deferred gross profit balance
Gross profit rate
Beginning accounts receivable
Beginning accounts receivable
Ending accounts receivable
Cash collected
P 12,000
25%
P 48,000
P 48,000
(20,000)
P 28,000
b. 20x5
Deferred gross profit balance
Gross profit rate
Beginning accounts receivable*
Beginning accounts receivable*
Ending accounts receivable*
Cash collected
P 26,400
24%
P110,000
P110,000
(50,000)
P 60,000
c. 20x6
Installment sales20x6
Accounts receivable20x6
Cash collected
P120,000
(90,000)
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 (2010), P33,750; 20x5 (2011), P95,250
Gross profit realized in 20x4 (2010):
Installment sales = [(P300,000 P165,000)/P300,000] x P75,000
=
Gross profit realized in 20x5 (2011):
From 20x4 sales = [(P300,000 P165,000)/P300,000] x
P105,000 =
From 20x5 sales =
P47,250
48,000
[(P450,000 P270,000)/P450,000] x
P120,000 =
P95,250
36. 20x4 (2010), P148,750; 20x5 (2011), P275,250
Sales
Cost of sales
Gross profit
Gross profit realized on installment
sales
Total gross profit
37. 20x4 (2010), P148,750; 20x5 (2011), P275,250
.
Less: Deferred gross profit
Net of deferred gross profit
Theories
1.
False
20x4
(2010)
P450,000
335,000
P115,000
33,750
20x5
(2011
P450,000
270,000
P180,000
95,250
P148,750
P275,250
20x4
(2010)
P225,000
101,250
P123,750
20x5
(2011
P450,000
186,000
P264,000
6.
True
11
.
True
16
.
True
21
.
True
26.
True
12
.
13
.
14
.
15
.
False
17
.
18
.
19
.
20
.
True
22
.
23
.
24
.
25
.
True
27.
True
True
28.
False
True
29.
True
55
.
56
.
57
.
58
.
2.
True
7.
False
3.
False
8.
True
4.
True
9.
False
5.
True
10
.
True
30
.
35
.
40
.
45.
50
.
31
.
32
.
33
.
36
.
37
.
38
.
41
.
42
.
43
.
46.
47.
48.
51
.
52
.
53
.
b
b
P33,750
d
e
False
True
True
False
False
True
True
b
a
b
d
c
34
.
39
.
60.
C
B
65.
b
b
61
.
62
.
63
.
64
.
b
c
66
.
67
.
68
.
69
.
d
d
44
.
49.
54
.
59
.

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Chapter 07

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Chapter 7

Gain on Sale of Real Estate ..

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

Deferred Gross Profit on Installment Sales ...

c. Cost of Installment Sales .. 200,000

2. Adjustment to Recognize Gross Profit on Installments Sales:

c. Adjustment to Recognize Gross Profit on Installment Sales:

(1) To record regular sales:

(2) To record installment sale:

(3) To record cost of sales:

(7) To set-up Cost of Sales:

Perpetual Method: No entry

Perpetual Method: No entry

Cost of installment sales

Deferred gross profit 20x4

Deferred gross profit 20x5

Deferred gross profit 20x4

Deferred gross profit 20x5

Realized gross profit

20x4: Realized gross profit on installment sales:

(11) To close other nominal accounts

(12) To close results of operations:

*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:

Costs to sell and dispose.

To record installment sales with trade-in.

Alternatively, the over-allowance on trade-in merchandise may also be treated as net of

Installment sales (net of over-allowance)..............

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.

Dec. 31 Cash 1,144

Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction

Deferred Gross Profit on Sale of Property . 11,440

Deferred Gross Profit on Sale of Property 19,067

Deferred Gross Profit on Sale of Property .

Cost of Installment Sales ..

Cost of Installment Sales

Deferred Gross Profit on Installment Sales -20x4 13,800

Total Stockholders Equity

Operating Expenses ...

Merchandise Inventory, Dec. 31, 20x6 ..

Installment basis (see gross profit schedule) .

Deduct loss on repossession .

Deferred gross profit on Installment sales before defaults, 19X8:

Deferred Gross Profit, 20x5

Income Summary 185,000

Realized Gross Profit on Installment Sales..

Income Summary 3,500

Income Summary 300,000

20x6; 37% x P191,910

2. Deferred gross profit 20x5