Thursday, July 23, 2015

INSTALLMENT SALES

INSTALLMENT SALES                                                                                             G.P. COSTA

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


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

Cash collections:


  2009 Sales .................................
P190,000
P210,000
  2010 Sales .................................
--
 235,000

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

IAR 2009                     480                                          IAR      2010    560
    IS                             480                                             IS                              560

COIS               300                                                      COIS               364
   Invty                         300                                             Invty                         364

Cash                190                                                      Cash                445
    IAR 2009                190                                              IAR 2009                 210
                                                                                       IAR 2010                  235

IS                     480                                                      IS                     560
   COIS                        300                                             COIS                        364
   DGP 2009                180                                             DGP 2010                196

DGP   2009     71.25                                                   DGP 2009       78.75
   RGP                         71.25                                       DGP 2010       82.25
                                                                                        RGP                        161
Problem 2

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


2009  
2010  
2011  
Sales ...................
%
P60,000
P85,000
Gross profit percentage .
37%
41%
40%
Cash collections:



   2009 .................
P24,000
P19,000
P 2,000
   2010 .................

40,000
17,000
   2011 .................


53,000

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

24,000 X 37% =
19,000 X 37%  +   40,000 X 41%  =
2,000 X 37%    + 17,000  X 41%   + 53,000 X 40%  =

Problem 3

                  Lucena Industrial sells machinery on the installment plan. On September 1, 2009, Lucena entered into an installment sale contract with Western Productions for a six-year period. Equal annual payments under the installment sale are P187,500 and are due on August 31 of each year beginning in 2010.

Additional information:

(a)
The cost of the machinery sold to Western was P637,500.
(b)
The implicit interest rate on the installment sale is 10%.

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

(1)
is reasonably assured.
(2)
cannot be reasonably assured.

4.355261  X 187,500 = 816,611

IAR         816,611                                                 IAR         816,611
    SALES                816,611                                     IS                        816,611

COS        637,500                                                 COS        637,500
   MACHINERY    637,500                                    MACHINERY    637,500
                                                                                               
                                                                                                IS            816,611
                                                                                                   COIS                   637,500
                                                                                                   DGP                    179,111
DEC
INT. REC  27,220
    INT. INCOME 27,220                                                   SAME
JAN REVERSING
INT. INCOME     27,220
       INT. REC                        27,220                                   same
AUG COLLECTION
CASH   187500
      IAR                                   105,839                 SAME
      INT. INCOME               81,661

816,611 X 10% X 4/12
                                                                                                DGP                       23,214
                                                                                                    RGP                                   23,214
                                                                                                105,839  X 179111/816611  = 23,214


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



Problem 5
San Marcelino Corporation started operations on January 1, 2011 selling home appliances and furniture sets both for cash and on installment basis. Data on the installment sales operations of the company gathered for the years ending December 31, 2011 and 2012 were as follows:


2011
2012
Installment Sales
200,000
250,000
Cost of Installment Sales
120,000
175,000
Cash Collected on Installment Sales
2011 Installment Sales
2012 Installment Sales

105,000

75,000
150,000

Required:
      i.        Deferred Gross Profit on December 31, 2011
     ii.        Realized Gross Profit on December 31, 2011
    iii.        Realized Gross Profit on December 31, 2012 and 2011 Installment Sales
   iv.        Realized Gross Profit on December 31, 2012 on 2012 Installment Sales
    v.        Deferred Gross Profit on December 31, 2012(Assuming the problem stated Cost Recovery method is used.)
   vi.        Deferred Gross Profit on December 31, 2011
  vii.        Realized Gross Profit on December 31, 2012 on 2011 Installment Sales (Assuming the problem stated Profit Realization method is used.)
 viii.        Deferred Gross Profit on December 31, 2011
   ix.        Realized Gross Profit on December 31, 2012.

Problem 6

Aman Group, Inc. sold a fitness equipment on installment basis on October 1, 2011. The unit cost to the company was 60,000 but the installment selling price was set to 85,000. Terms of payment included the acceptance of a used equipment given a trade-in value of 30,000. Cash of 5,000 was paid in addition to the added trade-in equipment with the balance to be paid in ten (10) monthly installments due at the end of each month of sale. It would require 1,250 to recondition the used equipment so that it would be resold for 25,000. A 15% gross profit rate was usual from the sale of used equipment. What amount of realized gross profit should Aman report during 2011?

RESALE VALUE                                            25,000
RECON COST           1250
NORMAL PROFIT    3750                            5,000
TRUE WORTH OF
MERCHANDISE TRADED-IN                       20,000

SP                                           85,000
TRADE IN VALUE                 -30,000
CASH                                      -5000
INSTALlMENT                                    -15,000

BALANCE                               50,000/10 = 5000 /MONTH
RGP = COLLECTION X GPR

COLLECTION = 20,000  + 5,000 + 15,000  = 40,000

TRADE-IN ALLOWANCE                  30,000
TRUE WORTH OF MTI                     20,000
OVER-ALLOWANCE``                      10,000

ADJUSTED SALES = 85,000 – 10000 =75000
GP = 75,000 – 60,000 = 15,000

GPR = 20%
RGP = 40,000 X 20% = 8,000

Problem 7
The Cavite Furniture Company appropriately used the installment sales method in accounting for the following installment sale. During 2012, Cavite sold furniture to Bulacan Co. for P3,000 at a gross profit of P1,200. On June 1, 2012, this installment account receivable had a balance of 2,200 and it was determined that no other collections would be made. Cavite, therefore, repossessed the merchandise. When reacquired, the merchandise was appraised as being worth only for P1,000. In order to improve its salability, Cavite incurred costs of P100 for reconditioning. Normal profit on resale is P200. What should be the loss on repossession attributable to this merchandise?

Problem 8

Matson Company sold some machinery to the Finney Company on January 1, 2011. The cash selling price would have been P473,850. Finney entered into an installment sales contract which required annual payments of P125,000, including interest at 10%, over five years. The first payment was due on December 31, 2011. What amount of interest income should be included in Matson’s 2012 income statement (the second year of the contract)?


a.    P12,500.
b.    P39,624.
c.    P25,000
d.    P34,885.

Problem 9
On January 1, 2010, Colt Co. sold land that cost P60,000 for P80,000, receiving a note bearing interest at 10%. The note will be paid in three annual installments of P32,170 starting on December 31, 2010. Because collection of the note is very uncertain, Colt will use the cost recovery method. How much revenue from this sale should Colt recognize in 2010?




Problem 10
Malinta Company sells appliances on the installment basis. Below are the information for the past three years:


2012
2011
2010
Installment Sales
750,000
600,000
400,000
Cost of Installment Sales
450,000
375,000
260,000
Collection On
2012 Inst. Sales
2011 Inst. Sales
2010 Inst. Sales

275,000
180,000
125,000


240,000
120,000



150,000

Repossessions on defaulted accounts included one made on a 2012 sale for which the unpaid balance amounted to 5,000. The FMV after incurring a reconditioning cost of 500 is 5,500.

Required:

a. Realized Gross Profit in 2012 on collections of 2012 installment sales
b. Deferred Gross Profit, end on December 2012 installment sales
c. Loss on Repossession

Problem 11
Jay & Bee Co., which sells on installment basis, recognizes, at year-end, gross profit based on collections made.  Operations data follow:
                                                                     January 1     December 31
                  Installment receivable:
                        2010                                  P    120,000        P    -0-
                        2011                                     1,722,300            337,200
                        2012                                            -0-              2,050,450
                 
                                                      2010             2011             2012
                  Sales                     P1,900,000   P2,160,000   P3,010,000
                  Cost of sales           1,235,000     1,425,600     1,896,300

In 2012, the company repossessed merchandise with a resale value of P8,500 from a customer who defaulted on his payments.  The account was incurred for P27,000 in 2011, and P16,000 had been paid prior  to the default.  As collections are made, the company debits cash and credits the related installments receivable; for defaults, the company debits inventory of repossessed merchandise and also credits the related installment receivable account.  The amount of the adjustment on inventory of repossessed merchandise would be:


a.    P-0-
b.    P2,500
c.    P3,740
d.    P5,645



Problem 12
Home Appliances, Inc. began operation in May, 2010 by selling exclusively on the installment basis.  Using the installment method of income recognition, the company summarized the following data at the end of the first eight-month period:  installment sales, P450,000; various expenses, P23,000; accounts receivable, P330,000; and, inventory, P80,000.  If the gross margin based on cost is 66-2/3%, the net income was:



Problem 13
Marcum Co., which began operations on January 1, 2010, appropriately uses the installment method of accounting. The following information pertains to Marcum’s operations for the year 2010:
Installment sales                                       P1,500,000
Regular sales                                                 600,000
Cost of installment sales                                750,000
Cost of regular sales                                      300,000
General and administrative expenses           100,000
Collections on installment sales                     300,000

The deferred gross profit account in Marcum’s December 31, 2010 balance sheet should be


a.    P150,000
b.    P480,000
c.    P600,000
d.    P750,000



Problem 14
These data pertain to installment sales of Mickey’s Store:
-          Down payment: 20%
-          Installment sales: P545,000 in Year 1; P785,000 in Year 2; and P968,000 in Year 3.
-          Mark-up on cost: 35%
-          Collections after down payment: 40% in the year of sale, 35% in the year after, and 25% in the third year.

i.            The realized gross profit in Year 1 is:


a.    P109,357
b.    P  73,474
c.    P  99,190
d.    P114,825



ii.            The unrealized gross profit for installment sales made during Year 2, as at the end of Year 2, is:


a.    P  97,689
b.    P131,880
c.    P141,112
d.    P114,063



iii.            The installment Accounts Receivable account balance, as at the end of the Year 3, is:


a.    P652,722
b.    P621,640
c.    P602,991
d.    P685,359



iv.            The total unrealized gross profit, as at the end of Year 3, is


a.    P221,047
b.    P161,166
c.    P198,574
d.    P217,574



Problem 15
Several of Fox, Inc.'s customers are having cash flow problems.  Information pertaining to these customers for the years ended March 31, 2010 and 2011 follows:
3/31/10            3/31/11
Sales                              P 10,000          P 15,000
Cost of sales                       8,000                 9,000
Cash collections
   On 2010 sales                  7,000                 3,000
   On 2011 sales                         -                12,000

If the cost-recovery method is used, what amount would Fox report as gross profit from sales to these customers for the year ended March 31, 2011?


a.    P 2,000
b.    P 3,000
c.    P 5,000
d.    P15,000



Problem 16
Ondoy Co., which began operations on January 1, 2011, appropriately uses the installment method of accounting.  The following information pertains to Ondoy's operations for the year 2011:

Installment sales                                             P 1,000,000
Regular sales                                                         600,000
Cost of installment sales                                        500,000
Cost of regular sales                                              300,000
General and administrative expenses                   100,000
Collections on installment sales                 200,000

i.      The balance in the deferred gross profit account should be


a.    P 200,000
b.    P 320,000
c.    P 400,000
d.    P500,000



ii. The realized Gross profit on Installments sales for the year 2011 amounted to


  1. P400,0000
  2. P80,000
  3. P100,000
  4. P150,000



iii. The realized Gross profit for the year 2011 amounted to


  1. P400,0000
  2. P80,000
  3. P100,000
  4. P150,000



Problem 17
Quincy Enterprises uses the installment method of accounting and it has the following data at year-end:

Gross margin on cost                                          66-2/3%
Unrealized gross profit                                       P192,000
Cash collections including down payments         360,000

What was the total amount of sales on installment basis?


a.    P480,000
b.    P552,000
c.    P648,000
d.    P840,000



Problem 18
Budoy Co., which began operations on January 2, 2010, appropriately uses the installment sales method of accounting.  The following information is available for 2010:

Installment accounts receivable, December 31, 2010                                      P 800,000
Deferred gross profit, December 31, 2010 (before recognition of realized
   gross profit for 2010)                                                                                        560,000
Gross profit on sales                                                                                               40%

For the year ended December 31, 2010, cash collections and realized gross profit on sales should be
   Cash collections          Realized gross profit
a.    P 480,000                          P 320,000
b.    P 480,000                           P 240,000
c.    P 600,000                          P 320,000
d.    P 600,000                          P 240,000

Problem 19
On January 1, 2010, Enteng Co. sold a used machine to Cooper, Inc. for P525,000.  On this date, the machine had a depreciated cost of P367,500.  Cooper paid P75,000 cash on January 1, 2010 and signed a P450,000 note bearing  interest at 10%.  The note was payable in three annual installments of P150,000 beginning January 1, 2011.  Enteng appropriately accounted for the sale under the installment method.  Cooper made a timely payment of the first installment on January 1, 2011 of P195,000, which included interest of P45,000 to date of payment.  At December 31, 2011, Enteng has deferred gross profit of


a.    P105,000
b.    P 99,000
c.    P 90,000
d.    P 76,500



Problem 20.
From various documents and records which were recovered immediately after a fire gutted its premises, LAMBDA Marketing  Co. gathered the following information:

     2009          2010         2011
Installment sales                        P500,000   P800,000   P   (?)
Cost of installment sales                  (?)          600,000         (?) 
Gross Profit on ins. sales           P   (?)        P    (?)       P282,000
Collections on:
         1999 inst. accounts               50,000     250,000     100,000
         2010 inst accounts                     -          200,000     500,000
         2011 inst. accounts                    -                -           400,000
Realized gross profit fr. ins. sales   11,000         (?)         241,000

i.  Based on the information given above, the total realized gross profit in 2010 was:


a.    P  50,000
b.    P105,000
c.    P112,500
d.    P200,000



ii.              The cost of installment sales for the year 2011 was:


a.    P900,000
b.    P918,000
c.    P932,000
d.    P940,000



Problem 21
Quad, Inc. started operation at the beginning of 2010, selling home appliances exclusively on the installment sales basis. Data for 2010 and 2011 follows:
                                                    2010                    2011
         Installment sales                     P600,000            P750,000
         Cost of installment sales           420,000              450,000
         2010 inst. Accounts, end          285,000               22,500
         2011 inst. Accounts, end                   -                 300,000
        
         On May 31, 2011, a 2010 installment account of P37,500 was defaulted and the appliance was repossessed. After reconditioning at a cost of P750, the repossessed appliance would be priced to sell for P30,000.
i.   At the end of 2011, the total unrealized gross profit was:


a.    P120,000
b.    P126,750
c.    P138,000
d.    P146,250



ii. The default and repossession on May 31, 2011 resulted in a


a.    P3,000 gain.
b.    P3,750 gain.
c.    P8,250 loss.
d.    P9,000 loss.




Problem 22
On January 1, 2010, Nam Co. sold a used machine to Lock, Inc. for P420,000. On this date, the machine had a depreciated cost of P294,000. Lock paid P60,000 cash on January 1, 2010 and signed a P360,000 note bearing interest at 10%. The note was payable in three annual installments of P120,000 beginning January 1, 2011. Nam appropriately accounted for the sale under the installment method. Lock made a timely payment of the first installment on January 1, 2011 of P156,000, which included interest of P36,000 to date of payment. At December 31, 2011, Nam has deferred gross profit of


a.    P84,000
b.    P79,200
c.    P72,000
d.    P61,200



Problem 23
Hart, Inc. appropriately uses the installment method of accounting to recognize income in its financial statements. Some pertinent data relating to this method of accounting include:
      2009       2010          2011
Installment sales                        P300,000   P375,000   P360,000
Cost of installment sales              225,000     285,000     252,000
Gross Profit                                P 75,000    P  90,000   P108,000
Rate of gross profit                         25%           24%           30%

Balance of deferred gross profit at year-end:
2009                                     P52,500     P15,000       P –0-
2010                                                         54,000         12,000
2011                                                                              96,000
        Total                                    P52,500     P69,000     P108,000

What amount of installment accounts receivable should be presented in Hart’s December 31, 2011 balance sheet?


a.    P360,000
b.    P370,000
c.    P372,000
d.    P400,000



Problem 24
Abenson Trading Corp. sells household furniture both on cash and on installment basis. For each installment sales, a contract is entered into whereby the following terms are stated:
a.        A down payment of 25% of the installment selling price is required and the balance is payable in 15 equal monthly installments.
b.        Interest of 1% per month is charged on the unpaid cash sales price equivalent at each installment.
c.        The price on installment sales is equal to 110% of the cash sales price.

For accounting purposes, installment sales are recorded at contract price. Any unpaid balances on defaulted contracts are charged to uncollectible account expense. Sales of defaulted merchandise are credited to uncollectible account expense.  Interest are recorded in the period earned. For its first year of operation ending December 31, 2010, the books of the company showed the following:

Cash sales                                                      P378,000
Installment sales                                               794,970
Merchandise inventory, Jan. 1                         174,180
Purchases                                                         627,891
Merchandise inventory, Dec. 31                      108,630
Cash collections on installment contracts:
      Down Payment                                           198,750
      Installment payments, including interest
         of P27,758.52 (average of six monthly
         installments on all contracts, except
         on defaulted contracts)                             238,023

A contract amounting to P3,300 was defaulted after the payment of 3 installments.
i.            The gross profit rate based on total sales at cash sales price equivalent is:


a.    33.75%
b.    36.34%
c.    37.00%
d.    40.88%


ii.            The total interest earned for the first four months on the defaulted contract is:


a.    P60.94
b.    P69.30
c.    P72.07
d.    P80.85


iii.            The realized gross profit for the year 2010 is


a.    P151,335.35
b.    P161,789.16
c.    P249,674.52
d.    P291,355.95

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