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Problem 1
1 All collections are applied to cost until fully recovered. Collections are applied first to cost until the
full amount of 900,000 is recovered. The profit will be recorded only in 2017 because by then the full
cost is recovered already.
2. This is the opposite of No. 1. Collections are applied to profit, then after the full profit of
300,000 is recovered all collections will be applied to cost
3. This method is called the installment sales method. Each collections is applied proportionately to cost
and gross profit.
2017
2016 sales = 175,000 x 20% = 35,000
2017 sales = 280,000 x 25% = 70,000
105,000
3. Balance - IAR, balance, Dec. 31 x GR rate
2016 sales = 20% (400,000 140,000 175,000) = 17,000
2017 sales = 25% (450,000 280,000) = 42,500
Problem 3
2017
2016 sales = 100,000 x 40% = 40,000
2017 sales = 150,000 x 30% = 45,000
85,000
3. Journal entries ( periodic inventory system)
2016
1. Installment Accounts Receivable 2016 300,000
Installment Sales 300,000
2. Cash 120,000
Installment Accounts Receivable - 2016 120,000
Year end
a. Cost of Installment Sales 180,000
Shipments on Installment Sales 180,000
2017
1. Installment Accounts Receivable 2017 400,000
Installment Sales 400,000
2. Cash 250,000
Year end
a. Cost of Installment Sales 280,000
Shipments on Installment Sales 280,000
3. Loss/gain on repossession
2015 2016
Unpaid balance 30,000 32,000
Deferred gross profit (30,000 x 25%) ( 7,500)
(32,000x 27.5%) ( 8,800)
Unrecovered cost 22,500 23,200
Value of repossessed merchandise (12,000) (18,000)
Loss (gain) on repossession 10,500 5,200
Problem 7
Problem 8
1. The company is using perpetual inventory because there is no purchase account on the
trial balance, instead what they have is cost of installment sales. So if the method being
used in perpetual the merchandise inventory account on the trial balance is the ending
inventory.
2. Adjusting is to record the deferred gross profit and the amount realized during the period.
Because the company is using perpetual, we need two entries. The cost of installment
sales is recorded already. For periodic inventory system, there are 3 entries including the
recording of the cost of installment sales.
Closing entries
Sales 353,000
Realized gross profit 69,350
Cost of sales 255,000
Loss on repossession 800
Selling and administrative expenses 128,000
Income summary 38,550
Closing entries
a. Sales 350,000
Merchandise inventory, end 38,500
Realized gross profit 107,040
Shipments on installment sales 242,000
Merchandise inventory, beg/ 52,500
Purchases 390,000
Freight-in 5,000
Repossessed merchandise 15,000
Selling & administrative expenses 100,000
Loss on repossession 11,880
Income Summary 163,160
Sales 350,000
Less: Cost of regular sales (350,000 x 52 %) 182,000
Gross profit on regular sales 168,000
Realized gross profit on installment sales 107,040
Total realized gross profit 275,040
Less: Loss on repossession 11,880
Net realized gross profit 263,160
Less: Selling & administrative expenses 100,000
Net income 163,160
Problem 10
Selling Price 160,000 Gross Profit rate = 40,000/160,000 = 25%
Cost 120,000
Gross Profit 40,000
Collections Amt. applied Amt..applied Balance of
To interest To principal Principal
October 31 160,000
Down payment 40,000 - 40,000 120,000
1st installment Nov. 30 8,000 1,200 6,800 113,200
2nd installment Dec. 31 8,000 1,132 6,868 106.332
TOTAL 56,000 2,332 53,668
Entries
a. Installment Contract Receivable 120,000
Cash 40,000
Land 120,000
Deferred Gross Profit 40,000
b. Cash 8,000
Installment Contract Receivable 6,800
Interest Income 1,200
c. Cash 8,000
Installment Contract Receivable 6,868
Interest Income 1,132
MC THERIES
1. A 6. B
2. B 7. C
3. C 8. B
4. D 9. A
5. C 10. A
MC- PROBLEMS
1. D 6. B 11. A 16. B 21. D 26. A
2. C 7. D 12. A 17. B 22. C 27. A
3. D 8. C 13. D 18. B 23. D 28. C
4. A 9. D 14. A 19. B 24. C 29. B
5. D 10. C 15. C 20. D 25. D 30. A
31. B
32. C
33. A