Chapter 6

INSTALLMENT SALES

Introduction

Generally, the point of sale is the point of revenue recognition. And among the exceptions to the point of sale reali-
zation concept is the installment method. Under this method, income is recognized when collections are made, be-
cause the uncertainty of collecting accounts to be receive over an extended period of time may suggest the postpo-
nement of revenue recognition until the probability of collection can be reasonably estimated.

GROSS PROFIT RECOGNITION ON INSTALLMENT SALES

!
Installment sales may be regarded as calling for special treatment whereby gross ! profit is related to the periods in
which the installment receivables are collected rather than to the periods in which the receivable are created. The
inflow of cash (collections) rather than the time of sale become the criterion for revenue recognition. Accounting for
installment method or installment basis could be best illustrated by providing for the recognition of gross profit in
proportion to collections. Under this method, collections are regarded as both return of cost and realization of profit
in the ratio in which these two factors are found in the original sales price.

In applying the installment method in the accounts, the difference between the contract sales price and the cost of
goods sold is recorded as deferred gross profit. This balance is recognized as revenue periodically in the proportion
that the cash collections of the period bear to sales price. Stated differently, the original gross profit percentage on
the sales is applied to periodic collections in arriving at the amounts to be recognized as revenue. At the end of each
period a deferred gross profit balance remains on the books and is equal to the gross profit percentage applied to the
balance of installment receivables as of this date.

Gross Profit Rate

Since, collections become the criterion for revenue recognition in installment method of accounting, determination
of gross profit rate is an important factor to compute the realized gross profit to be reported for a period. Gross profit
rate may be computed based on the data provided. Normally, it may be computed by dividing the gross profit by the
installment sales.

However, if this formula is not applicable, gross profit rate may also be computed by dividing the deferred gross
profit (beginning) by the installment accounts receivable (beginning); or by dividing the deferred gross profit (end)
by the installment accounts receivable (end).

Realized Gross Profit

The installment method of accounting recognizes profits at the point of collections, thus realized profit is based on
amount collected. Ordinarily, realized gross profit may be computed by multiplying the gross profit rate by the
amount collected. It should be pointed out that in case of defaulted contract, collections should be net of any unpaid
balance on defaulted contract. However, if this formula is not applicable, realized gross profit may be computed by
determining the difference between the deferred gross profit (before adjustment) and deferred gross profit (after ad-
justment).

Deferred Gross Profit

As stated earlier, the installment method of accounting recognizes profits at the point of collection. If realized profit
is based on amount collected, the deferred gross profit is based on unpaid balance. The deferral of gross profit is, in
effect, the deferral of sales revenue accompanied by the deferral of cost of goods sold related to such sales revenue.
To compute the deferred gross profit at the beginning of a period (before adjustment), installment accounts receiva-
ble at the beginning of the period should be multiplied by the related gross profit rate; and the deferred gross profit
at the end of the period (after adjustment) is equal to installment accounts receivable multiplied by the related gross
profit rate.

Trade-Ins

In certain sales on the installment plan, companies will accept a trade-in as part of payment on a new contract. The
trade-in is recorded at the value allowed. Frequently, as a special sales inducement, an over allowance is given on
the trade-in, which is, in effect, a reduction in the sales price. Under such circumstances, the trade-in should be re-
corded at no more than the company would pay on its purchase; the difference between the amount allowed and the
value of the article to the company should bereported either as charge to an overallowance account or as a reduction
in installment sales. In either case, the gross profit on installment sales should be regarded as the difference between
the cost of goods sold and net sales, the total installment sales less any trade-in overallowance.

Defaults and Repossessions

Default on an installment contract and subsequent repossession of the goods sold calls for an entry on the books of
the seller that reports the merchandise reacquired, cancels the installment receivable together with the related defer-
red gross profit balance, and records the gain or loss on repossession. As in the case of goods acquired by trade-in,
the repossessed article should be recorded at an amount that will permit a normal gross profit on its resale.

Interest on Installment Contracts

Installment contracts frequently provide for a charge for interest on the balance due. The interest charge is ordinarily
payable with the installment payment that reduces the principal. Although interest is included in the payment, use of
the installment method requires that only that portion of a payment which reduces the principal balance of the in-
stallment contract receivable should be considered in computing the realized gross profit.
MULTIPLE CHOICE QUESTIONS

PROB. 6-1 (AICPA)

Cash collection is a critical event for income recognition in the

Cost recovery method Installment method

a. No No

b. Yes Yes

c. No Yes

d. Yes No

PROB. 6-1 Suggested answer (b)

The installment method is used when collection of the sales price is not reasonably assured. However, when the un-
certainty of collection is so great that even the use of the installment method is precluded, then the cost recovery
method may be used. Having no reasonable basis for estimating collectability would provide a great enough uncer-
tainty to use the cost recovery method.

PROB. 6-2 (AICPA)

The installment method of recognizing profit for accounting purposes is acceptable if

a. Collections in the year of sale do not exceed 30% of the total sales price.
b. An unrealized profit account is credited.
c. Collection of the sales price is not reasonably assured.
d. The method is consistently used for all sales of similar merchandise.
PROB. 6 —2 Suggested answer (c)
Generally, the profit on sale in the ordinary course of business is considered to be realized at the time of sale unless
it is uncertain whether the sale price will be collected. Thus, if collection of the sales price is not reasonably as-
sured, the installment method shall be used.

PROB. 6-3 (AICPA)

Under the installment sales method,

a. Revenue, costs, and gross profit are recognized proportionately to the cash that is received from the sale of the
product.
b. Gross profit is deferred proportionately to cash uncollected from sale of the product, but total revenue and costs
are recognized at the point of sale.
c. Gross profit is not recognized until the amount of cash received exceeds the cost of the item sold.
d. Revenues and costs are recognized proportionately to the cash received from the sale of the product, but gross
profit is deferred until all cash is received.
PROB. 6 -3 Suggested answer (b)
The installment method of accounting is used when there is a high degree of uncertainty regarding the collectability
of the sales price. Under this method, sales revenues and the related cost of goods sold are recognized in the period
of the sale. However, the gross profit is deferred to the periods in which cash is collected.
PROB. 6-4 (AICPA)
Under the cost recovery method of revenue recognition,

a. Income is recognized on a proportionate basis as cash is received sale of the product on the sale of the product.
b. Income is recognized when the cash received from the sale product is greater than the cost of the product.
c. Income is recognized immediately.
d. None of these.
PROB. 6 - 4 Suggested answer (b)
Under the cost recovery method, gross profit is deferred and recognized only when the cumulative receipts exceed
the cost ofthe asset sold. !

PROB. 6-5 (Intermediate Accounting by Kieso)

Which of the following are recognized each period under the cost method?

a.Costs only
b.Revenues only
c.Both costs and revenues
d.None of these
PROB. 6-5 Suggested answer (c)
Under the cost recovery method, revenue and cost are recognized during the production, but gross profit is deferred
until all costs are incurred.

PROB. 6-6 (AICPA)

Chris Co. sells equipment on installment contracts. Which of the following statements best justifies Chris' use of the
cost recovery method of revenue recognition to account for these installment sales?

a. The sales contract provides that title to the equipment passes to the buyer only when all payments have been
made.
b. No cash payments are due until one year from the date of sale.
c. Sales are subject to a high rate of return.
d. There is no reasonable basis for estimating collectability.
PROB. 6-6 Suggested answer (d)
Ordinarily, revenues should be accounted for when a transaction is completed, with appropriate provision for uncol-
lectible accounts. However, when there is no reasonable basis for estimating the degree of collectability, either the
installment method or the cost recovery method may be used. The cost recovery method recognizes profit only after
collections exceeded the cost, of the item sold.

PROB. 6 - 7 (AICPA)
Winner Co. is engaged in extensive exploration for water in Utah. If, upon discovery of water, Winner does not re-
cognize any revenue from water sales until the sales exceed the costs of exploration, the basis of revenue recognition
being employed is the

a. Production basis
b. Cash (or collection) basis
c. Sales (or accrual) basis
d. Cost recovery basis
PROB. 6-7 Suggested answer (d)
Under the cost recovery method, no profit of any type is recognized until the cumulative receipts (principal and in-
terest) exceed the cost of the asset sold
PROB. 6 - 8 (AICPA)
Leopard Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24
equal monthly amounts, which include 12% interest. What is the balance of an installment note receivable 6 months
after the sale?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.
PROB. 6-8 Suggested answer (c)
The balance of an installment note receivable equals the unpaid balance of !principal. The difference between the
gross receivable and the unpaid principal is the interest. Therefore, the balance of the note is equal to the present
value of the remaining payments discounted at the contract interest rate.

PROB. 6-9 (AICPA)

On January 2, 2016, Colt Co. sold land that cost P600,000 for P800,000, receiving a note bearing interest at 10%.
The note will be paid in three annual installments of P321,700 starting on December 31, 2016. 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 2016?

a. 0
b. 6,000
c. 8,000
d. 20,000
PROB. 6-9 Suggested answer (a) 0 !
Under the cost recovery method, no profit of any type is recognized until the cumulative receipts (principal and in-
terest) exceed the cost of the asset sold. The cost ofP600, 000 is not yet recovered 2016, thus no amount of revenue
will be recognized.

PROB. 6-10 (AICPA)

Several of Pitt, Inc.'s customers are having cash flow problems. Information pertaining to these customers for the
years ended March 31, 2016 and 2017 follows:

2016 __2017__
Sales 10,000 15,000
Cost of sales 8,000 9,000
Cash collections:
On 2016 sales 7,000 3,000
On 2017 sales 12,000

If the cost recovery method is used, what amount would Pitt report as gross profit

a. 2,000
b. 3,000
c. 5,000
d. 15,000
PROB. 6-10 Suggested answer (c) P5,000 !
Collections on 2016 sales (7,000 + 3,000) 10,000
Less cost of sales 2016 8,000 2,000
Collections on 2017 sales 12,000
Less cost of sales 2017 9,000 3,000
Total gross profit 5,000

The cost recovery method recognizes profit only after collections exceed the cost of sales, that is, when the full cost
has been recovered. Subsequent amounts collected are treated entirely as realized gross profit.

PROB. 6-11 (AICPA)

The following information pertains to a sale of real estate by South Co. to Nord. Co. dn December 31, 2016:
Carrying Amount 4,000,000
Sales Price:
Cash 600,000
Purchase money mortage 5,000,000 6,000,000

The mortgage is payable in nine annual installments of P600,000 beginning December 31, 2017, plus interest of
10%. The December 31, 2017 installment was paid as scheduled, together with interest of P540,000. South uses the
cost recovery method to account for the sale. What amount of income should South recognize in 2017 from the real
estate sale and its financing?
a. 1,140,000
b. 740,000
c. 540,000!
d. 0
PROB. 6-11 Suggested answer (d) P 0 !
Again, the cost recovery method recognizes profit only after collections exceed the cost of item sold, that is, when
thefull cost has been recovered. As of December 31, only PI, 200, 000 of the P4, 000, 000 cost has been recovered; !
thus, no income should be recognized

PROB. 6-12 (AICPA)

Hill Company began operations on January 1, 2016, and appropriately uses the installment method of accounting.
Data available for 2016 are as follows

Installment accounts receivable, 12/31/2016 500,000

Installment sales 900,000
Cost of goods sold, as percentage of sales 60%

Using the installment method, Hill's realized gross profit for 2016 would be
a. 360,000
b. 240,000
c. 200,000
d. 160,000
PROB. 6-12 Suggested answer (d) PI 60,000
Installment sales 900,000
! Less installment accounts receivable, 12/31/2016 500,000
2016 collections 400,000
! Multiply by gross profit on sales 40%
Realized gross profit,2016 160,000

Under the installment method of accounting, income is recognized when ! collections are made. The realized gross
income is equal to the collections multiplied by the gross profit rate on sales. Each collection on a contract is re-
garded as representing both a return of cost and a realization of gross profit in the ratio in which these two factors
are found in the original sales price. This method serves to spread the gross profit on installment sales over the full
life of the installment contract. Continuing expenses on an installment contract are matched against the gross profit
that is recognized in successive periods; the possible failure to realize the full amount of the gross profit in the event
of default by the buyer is anticipated.
PROB. 6-13 (AICPA)
Luge Co., which began operations on January 2, 2016, appropriately uses the installment method of accounting. The
following information is available for 2016: !

Installment accounts receivable

December 31, 2016 800,000
Deferred gross profit, Dec. 31 (before
Recognition of realized gross profit for 2016) 560,000
!Gross profit on sales 40%

For the year ended December 31, 2016, cash collections and realized gross profit on sales should be
Cash Realized
Collections Gross Profit
a. 400,000 320,000
b. 400,000 240,000
c. 600,000 320,000
d. 600,000 240,000
PROB. 6-13 Suggested answer (d) P600,000 P240,000
Installment sales (560,000/40%) 1,400,000
Less installment accounts Receivable 12/31/2016 800,000
Cash collections in 2016 600,000
Multiply by gross profit rate on sales 40%
Realized gross profit, 2016 240,000

Installment sales may be regarded as calling for special treatment where gross profit is related to the periods in
which the installment receivable are collected rather than to the periods in which the receivables are created The
inflows of cash rather than the time of sale become the criterion for revenue recognition. This is in line with realiza-
tion principle that in long-term installment sales, revenue is recognized at the point of collection, because there is
possibility of cancellation of the contract, and substantial collection costs may be incurred. When gross profit is
regarded as contingent upon ! collection of cash, there is stronger support for its recognition over the entire collec-
tion period.

Therefore, periodic collection, which is regarded as representing both a recovery of cost and a realization of gross
profit, must be multiplied by gross profit rate on sale to determine the realized gross profit for the period.
Due to year-end entry to adjust the deferred gross profit for purposes of recognizing the realized profit by debiting
Unrealized Gross Profit account md crediting Realized Gross Profit account, the gross profit rate on sales of prior
years installment sales may be computed by determining the ratio of unrealized gross profit with the installment ac-
counts receivable at the same period.

PROB. 6-14 (RPCPA)

The books of Paiyakan Company show the following balances on December 31, ! 2016:

Accounts receivable 313,750

Deferred gross profit (before adjustment) 38,000

Analysis of the accounts receivable reveal the following:

Regular accounts 207,500

2015 installement accounts 16,250
2016 installement accounts 90,000

Sales on an installement basis in 2015 were made at 30% above cost; in 2016, at 33 1/3% above cost. Expenses paid
was P1,500 relating to installement sales. How much is the net income on installment sales?
a. 11,000
b. 11,500
c. 16,000!
 d. 10,250
PROB. 6-14 Suggested answer (d) P 10,250!
Deferred goss profit (before adjustment) 38,000
Less deferred gross profit (after adjustment)
2015 Sales (16,250 x 30/130) ! 3,750
2016 Sales
(90,000 x 33 1/3/ 133 1/3) 22,500 26,250
Realized gross profit ! 11,750
Less expenses relating to installment sales 1,500
!Net income on installment sales 10,250

The computations of realized gross profit for a given period is not confined on the traditional computation by apply-
ing the gross profit percentage for the year in which the contract originated to the amounts collected on such con-
tracts. An alternative procedure for calculating realized gross profit is by calculating the amount of deferred gross
as of the end of the period reducing the deferred gross profit account to this balance. Therefore, the difference be-
tween deferred gross profit before adjustment and deferred gross profit after adjustment is the realized gross profit.

PROB 6-15 (RCPA)

A company uses the installment method of accounting to recognize income and pertinent data are as follows:

2014 2015 2016

Installment sales 300,000 375,000 360,000
Cost of sales 225,000 285,000 252,000
Balance of gross
Profit at year-end
2014 52.500 15,000 -
2015 54,000 9,000
2016 72,000

The balance of the receivable on December 31, 2016 is:

a. 270,000
b. 277,500
c. 279,000!
d. 300,000
PROB. 6-15 Suggested answer (b) P277,500
2015 2016
Installment sales 375,000(100%) 360,000 (100%)
Cost of sales 285,000( 76%) 252,000 ( 70%)
Gross profit 90,000( 24%) 108,000 ( 30%)
!
Installment rec. from 2015 sales (9,000/24%) 37,500
Installment rec. from 2016 sales (72,000/30%) 240,000
Total installment rec., 12/31/2016 277 500

In applying the installment method in the accounts, the difference between

the sales price and the cost of sales is recorded initially as deferred gross profit. This balance is recognized as rev-
enue periodically in the proportion that the cash collections of the period bear to the sales price. Stated differently,
the original gross profit percentage on the sale is applied to periodic collections in arriving at the amount to be rec-
ognized as revenue. At the end of each period, a deferred gross profit balance remains on the books and is equal to
the gross profit percentage applied to the balance of installment receivable as of this date.

PROB 6-16 (RCPA)

Taft Corp., which began business on January 1, 2016, appropriately uses the installment sales method of accounting.
The following data are available for December 31, 2016 and 2017:
 2016 2017
Balance of deferred gross profit on sales account:
2016 300,000 120,000
2017 - 440,000
Gross profit on sales 30% 40%

The installment accounts receivable at December 31, 2017 is

a. 1,000,000
b. 1,100,000
c. 1,400,000!
d. 1,500,000
PROB. 6-16 Suggested answer (d) P 1,500,000
Installment accounts receivable: !
2016 sales (120,000/30%) 400,000
2017 sales (440,000/40%) 1,100,000
Installment accounts receivable, 12/31,2017 1,500,000
Again, at the end of each period, a deferred gross profit balance is equal to the gross profit percentage applied to the
balance of installment receivable as of this date. It should be pointed out that gross profit percentage on sales differ
from period to period. In addition, the installment accounts receivable balance, a permanent account, as of a given
period relates to uncollected balances of installment sales from different periods of sales.

PROB 6-17 (RCPA)

Dolce Co., began operations on January 1, 2016, appropriately uses the installment method of accounting record
revenues. the following information is available for the years ended 2016 and 2017:

2016 2017
Sales 1,000,000 2,000,000
Gross profit realized on sales made in:
2016 150,000 60,000
2017 - 200,000
Gross profit percentage 30% 40%

What amount of installment accounts receivable should Dolce report in its December 31, 2017, balance sheet?
a. 1,225,000
b. 1,300,000
c. 1,700,000!
d. 1,775,000
PROB. 6-17 Suggested answer (c) P 1,700,000
2016 2017
Sales 1,000,000 2,000,000
Less collections from:
2016 sales
[(150,000=90,000)/30%] 800,000
2017 sales
(200,000/40%) 500,000
Total installment accounts
receivable, 12/31/2017 200,000 1,500,000
Again, in cognizant with the revenue realization principle (point of collections), the gross profit realized
in installment sales is normally computed by applying the gross profit percentage on sales with the
amount of collections during a period. Thus, to determine the amount collected from specific installment
sales, the realized gross profit at a given period should be divided by the respective gross profit percent-
age on sales. And as a permanent account, installment accounts receivable, as of a given date relates to
uncollected balances of installment sales from different periods of sales. Therefore, the total installment
accounts receivable at December 31, 2017 should be P1 700,000 (200,000 + 1,500,000).

PROB 6-18 (RCPA)

Pacific Corp. uses the installment method of reporting. The following data were gathered for its three years of opera-
tions:
2015 2016 2017
Installment sales 300,000 405,000 495,000
Cost of installment sales 210,000 243,000 321,750
Gross profit rate 30% 40% 35%
Balance of installment receivable,
Dec. 31:
2015 installment sales 180,000 135,000 60,000
2016 installment sales 300,000 195,000
2017 installment sales 390,000

In 2017, a customer defailted; accordingly, the merchandise with an estimated value of P15,000 was repossessed.
The sale was made in 2015 and the unpaid balance on the date of repossession was P22,500.
a. What is the total ralized gross profit in 2017?
a. 412,500
b. 183,750
c. 94,500!
d. 36,750
PROB. 6-18 Suggested answer (c) P 94,500
2015 2016 2017
Installment receivable, 12/31/16 135,000 300,000 495,000
Installment receivable, 12/31/17 60,000 195,000 390,000
Total credits 75,000 105,000 105,000
Less unpaid balance 22,500
Collections 52,500 105,000 105,000
Gross profit percentage 30% 40% 35%
Realized gross profit 15,750 42,000 36,750

The installment method of accounting is revenue recognition based at the point of collections. In other words, a pro-
portional amount of installment gross profit is realized as the installment receivable is collected. This amount is
equal to the gross profit margin associated with the receivablecollected. Thus, the total gross profit collected in
2017, regardless of the year of sale, in the amount of P94,500 (15,750 + 42,000 + 36,750) was reported as realized.

b. What is the amount of gain (loss) on repossession in 2017?

a. (7,500)
b. (750)
c. 6,000!
d. 3,000
PROB. 6-18 Suggested answer (b) P (750)
Fair value of repossessed merchandise 15,000
Less unrecovered cost (22,500 x 70%) 15,750
Loss on repossession (750)
If the customer defaults on an installment contract and no further collections can be made, the seller may repossess
the merchandise sold to satisfy the remaining indebtedness.
If the repossessed merchandise is recorded at a value less than the unrecovered cost (the difference between the
balance in installment contracts receivable account and the deferred gross profit account), a loss on repossession
will be reported. Conversely, if the value assigned to the repossessed merchandise is more than the unrecovered cost,
there is a gain. Any gain or loss on defaults and repossession is normally recognized on the income statementt as an
addition to or subtraction from the realized gross profit on installment sales
PROB 6-19 (RCPA)
The Cetral Plain Subdivision sells residential subdivision lots in installment. The following information was taken
from the accounting records of Central Plains Subdivision as at December 31, 2016:

Installment accounts receivable, 1/1/2016 755,000

Installment accounts receivable, 12/31/2016 840,000
Unrealized gross profit, 1/1/2016 339,750
Installment sales 950,000

How much is the realized gross profit in 2016?

a. 427,500
b. 339,750
c. 738,000!
d. 389,250
PROB. 6-19 Suggested answer (d) P 389,250

Installment accounts receivable, 1/1/2016 755,000

Add installment sales 950,000
Total 1,705,000
Less installment accts. receivable , 12/31/2016 840,000
Collections in 2016 856,000
Multiply by gross profit rate on sale (339,750/ 755 ,000) 45%
Realized gross profit in 2016 389,250
Again, since at the end of each period, deferred gross profit balance is equal to the gross profit rate ap-
plied to the balance of installment receivables as of that date; an alternative procedure of calculating the
gross profit rate.

PROB 6-20 (RCPA)

Rosson Corp., which began business on January 1, 2016, appropriately uses the installment sales method of account-
ing for income tax reporting purposes. The following data are available for 2016:

Installment accounts receivable, 12/31/2016 200,000

Installment sales for 2016 350,000
Gross profit on sales 40%

Under the installment sales method, what would be Rosson’s deferred gross profit at December 31, 2016?
a. 120,000
b. 90,000
c. 80,000!
d. 60,000
PROB. 6-20 Suggested answer (c) P 80,000
Installment accounts receivable, 12/31/2016 200,000
Multiply by gross profit rate on sales 40%
Deffered gross profit, 12/31/2016 80,000
Again, under the installment method of accounting, a deferred gross profit balance that remains on the books at the
end of a period is equal to the gross profit percentage applied to the balance of installment receivable as of this date.

PROB 6-21 (RCPA)

Karr Co. began operations on January 1, 2016 and appropriately uses the installment method of accounting. The
following information pertains to Karr’s operations for 2016:

Installment sales 800,000

Cost of installment sales 480,000
General and administrative expenses 80,000
Collections on installment sales 300,000

The balance in the deferred gross profit account at December 31, 2016 should be
a. 120,000
b. 150,000
c. 200,000!
d. 320,000
PROB. 6-21 Suggested answer (c) P 200,000
Installment sales, 2016 800,000
Less collections on installment sales 300,000
Installment accounts receivable, 12/31/2016 500,000
Multiply by gross profit rate on sales
[(800,000 - 480,000)/ 800,000] 40%
Deferred gross profit, 12/31/2016 200,000
Normally, the gross profit rate on sales may be determined by dividing the gross profit by sales. And since, deferred
gross profit is the unrealized portion, the same should be applied to the uncollected portion of the total principle
sales. This is in conformity with the point of collection revenue recognition.

PROB. 6-22 (RPCPA)

The Brownout, Inc., began operating at the start of the calendar year 2016, uses the instalment method of accoun-
ting:

Installment sales 400,000

Gross margin on cost 66 2/3%
Inventory, December 31, 2016 80,000
General & administrative expense 40,000
Accounts receivable, December 31, 2016 320,000

The balance of the deferred gross profit account at December 31, 2016 should be:

a. 192,000
b. 128,000
c. 96,000
d. 80,000
PROB. 6-22 Suggested answer (b) P 128,000
Accounts receivable, 12/31/2016 320,000
Multiply by gross profit rate on sales
(66 2/3% / 166 2/3%) 40%
Deferred gross profit, 12/31/2016 200,000
If under the point of collection revenue recognition principle, realized gross profit relates to collections during the
period, the deferred gross profit relates to the amount to be collected in the future, and of course, with application of
the related gross profit rate on sales.

PROB. 6-23 (RPCPA)

Quincy Enterprises uses the installment method of accounting and has the following data at year –end:

Gross margin on cost 66 2/3%

Unrealized gross profit 192,000
Cash collections including down payments 360,000

What was the total amount of sale on installment basis?

a. 480,000
b. 552,000
c. 648,000
d. 840,000
PROB. 6-23 Suggested answer (d) P 840,000

Unrealized gross profit 192,000

Divide by gross profit rate on sales
(66 2/3% /166 2/3%) 40%
Uncollected portion of installment sales 480,000
Add collections including down payment 360,000
Total amount of installment sales 840,000

In installment sales, the total amount of sales on installment basis is composed of uncollected portion (in-
stallment accounts receivable account) and the amount collected, and for purposes of computing the realized
gross profit and unrealized gross profit, the related gross profit percentage to be based on sales.

PROB. 6-24 (AICPA)

Lane Co., which began operations on January 1, 2016, appropriately uses the installment method of accounting. The
following information pertains to Lane’s operations for the year 2016:

Installment sales 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

The deferred gross profit account in Lane’s December 31, 2016 balance sheet should be

a. 150,000
b. 320,000
c. 400,000
d. 500,000
PROB. 6-24 Suggested answer (c) P400,000

Installment sales 1,000,000

Less collections on installment sales 200,000
Installment accounts receivable, 12/31/2016 800,000
Multiply by gross profit rate on sales
[(1,000,000 - 500,000)/ 1,000,000)] 50%
Deferred gross profit, 12/31/2016 400,000

Realization principle means that revenue should be recognized when it is already earned regardless when it is
received. Accordingly, the point of sale is the point of revenue realization. The point of collection revenue
 recognition principle, which is an exception to the rule of point of sale, is applicable to the installment
method of accounting, where profit may be realized only when collected, and therefore, any amount uncol-
lected during the period, the related profit will be deferred.

In view of the foregoing, the deferred gross profit in question relates to installment sales only and not to regu-
lar sales, where revenue should be recognized when it is already earned regardless when received. Thus,
transactions that pertain to regular sales were ignored for purposes of computing the deferred gross profit at
a given period.

PROB. 6-25 (AICPA)

Since there is no basis for estimating the degree of collectability, Astor Co. Uses the installment method of revenue
for the following sales:

2017 2016
Sales 900,000 600,000
Collections from:
2016 sales 100,000 200,000
2017 sales 300,000 -
Accounts written off:
2016 sales 150,000 50,000
2017 sales 50,000 -
Gross profit percentage 40% 30%

What amount should Astor report as deferred gross profit in its December 31, 2017 balance sheet for the 2016 and
2017 sales?

a. 150,000
b. 160,000
c. 225,000
d. 250,000
PROB. 6-25 Suggested answer (d) P250,000

2017 2016
Sales 900,000 600,000
Collections (300,000) (200,000)
(100,000)
Write offs (50,000) (50,000)
(150,000)
Installment accounts receivable, 12/31/17 550,000 100,000
Multiply by gross profit rate 40% 30%
Deferred gross profit, 12/31/17 220,000 30,000

If realized gross profit relates to collections applied to gross profit rate, deferred gross profit relates to in-
stallment accounts receivable applied to gross profit rate. To arrive at the correct balance of installment ac-
counts receivable, it should be pointed out that any items which will affect the receivable account balance
should be considered in the computations before the same will be applied to gross profit rate. Thus, the defer-
red gross profit should be P250,000 (220, + 30, 000

PROB. 6-26 (RPCPA)

These data pertain to instalments 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%
• Collection after down payment: 40% in the year of sale, 35% in the year after sale, and 25% in the third
year.

a. The realized gross profit in year 1 is:

a. 109,357
b. 73,474
c. 99,190
d. 114,825
PROB. 6-26 a. Suggested answer (b) P 73,474

Down payment (20% x 545,000) 190,000

Installments (545,000 x 80% x 40%) 174,000
Total collections in Year I 283,400
Multiply by gross profit rate 35/135
Realized gross profit in Year I 73,474

Normally, realized gross profit is determined by multiplying the gross profit rate on sale by the total collection du-
ring the period. The gross profit rate provided by the problem in Year I is 35% on cost, however, the gross profit rate
to be used in the installment method of accounting should be on sales, thus the above computations.

b. The unrealized gross profit for installment sales made during Year 2, as of the end of Year 2 is:
a. 97,689
b. 131,880
c. 141,112
d. 114,063
PROB. 6-26 b. Suggested answer (a) P 97,689

Installment sales - Year 2 785,000

Less down payment (20%) 157,000
Balance 628,000
Less collections year of sale (40% x 628,000) 251,200
Receivable bal. - Year 2 sales at the end of Year 2 376,800
Multiply by gross profit rate 35/135
Unrealized gross profit at the end of Year 2 97,689

The unrealized gross profit in question refers to installment sales made in Year 2. Therefore, to compute for the un-
realized portion of sales, gross profit rate on sales should be applied to the uncollected portion at the end of Year 2,
known as installment accounts receivable balance at Year 2.

c. The installment accounts receivable at the end of Year 3 is:

a. 652,722
b. 621,640
c. 602,991
d. 685,358
PROB. 6-26 c. Suggested answer (b) P621,640

Year 2 Year 3
Installment sales 785,000 968,000
Down payment (20%) (157,000)(193,600)
 Balance 628,000 774,400
Collections:
Year of sale (40%) (251,200) (309,760)
Year after sale (35%) (219,800) -----------
Installment accounts
receivable, end of Year 3 157,000 464,640

Again, as a permanent account, installment accounts receivable, as of a given date relates to uncollected balances
of installment sales from different periods of sales. Since the question being asked is the installment accounts recei-
vable at the end of Year 3, the uncollected portion of installment sales from different year of sales at the end of Year
3 should be considered in the computations. It should be pointed out that the installment sales in Year I was fully
collected, thus no longer considered. In view of the foregoing, total installment account receivable at the end of Year
3 should be P621, 640 (157 000 + 464,640).

d. The unrealized gross profit at the end of Year 3 is:

a. 211,047
b. 161,166
c. 198,574
d. 217,574
PROB. 6-26 d. Suggested answer (b) P161,166

Installment accounts receivable, end of Year3 (c)

Multiply by gross profit rate on sales
Unrealized gross profit, end of Year 3

Again, the unrealized gross profit at the end of Year 3 pertains to the uncollected portion of installment sales
from different year of sales at the end of Year 3 and could be determined by applying the gross profit rate on
sales.

PROB. 6-27 (Adapted)

When asset that have been sold and accounted for by the installment method are subsequently repossessed and re-
turned to inventory, they should be recorded on the books at

a. Selling price
b. The amount of the installment receivable less associated deferred gross profit
c. Net realizable value
d. Net realizable value minus normal profit
PROB. 6-27 Suggested answer (d)
Repossessed merchandise returned to inventory should usually be recorded at their net realizable value minus nor-
mal profit. Net realizable value is the selling price minus costs of completion, reconditioning, and disposal. Sales
profit was deducted because it will be recognized upon resale.

PROB. 6-28 (Adapted)

The method most commonly used to report defaults and repossessions is
a. Provide no basis for the repossessed asset thereby recognizing a loss.
b. Record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
c. Record the repossessed merchandise at book value, recording no gain or loss.
d. None of these
PROB. 6-28 Suggested answer (b)
Default on an installment contract and subsequent repossession of the goods sold calls for an entry on the books of
the seller that reports the merchandise reacquired at its fair value at the date of repossession, cancels the installment
receivable together with the related deferred gross profit balance, and records the gain or loss on repossession if
appropriate.

PROB. 6-29 (RPCPA)

The following selected accounts appeared in the trial balance of Union Sales as of December 31, 2016:

Debit Credit
Installment receivable, 2015 15,000
Installment receivable, 2016 200,000
Inventory, 12/31/2015 70,000
Purchases 555,000
Repossession 3,000
Installment sales 425,000
Sales (regular) 385,000
Unrealized gross profit, 2015 54,000

Additional information:

Installment receivable, 2015 sales as of

December 31, 2015 120,000
Inventory of new and repossessed
merchandise as of December 31, 2016 95,000
Gross profit percentage on regular
sales during the year 30% on sales
Repossession was made during the year. It was a
2015 sale and the corresponding uncollected
account at the time of repossession 7,750

a. The gross profit realized on collections for installment sales in 2015 was:
a. 47,250.00
b. 50,737.50
c. 43,762.50
d. Answer not given
PROB. 6-29 a. Suggested answer (c) P43,762.50

Installment receivable, 2015 sales, 12/31/2015 120,000.00

Less installment receivable, 2015 sales, 12/31/2016 15,000.00
Total credits 105,000.00
Less defaulted contract 7,750.00
Collections, 2016 97,250.00
Multiply by gross profit on sales (54,000/ 120,000) 45%
Gross profit realized on collections, 2015 sales 43,762.50

Default on an installment contract and repossession of the item sold calls for an entry on the booksof the seller that
reports the merchandise reacquired, cancels the installmentaccounts receivable together with the related deferred
gross profit balance, and records the gain or loss on the on repossession. Normally, the difference between thein-
stallment receivable balance at December 31, 2015 and December 31, 2015 represents the collections for the peri-
od; however, due to the defaulted contract identified in 2015 sales, it simply represents the total credits. Therefore,
to properly compute for the total collections for the period,the defaulted contract should be deducted therefrom.

b. The gross profit realized on collections for installment sales in 2016 was:
a. 87,075.00
b. 88,672.50
c. 85,500.00
d. Answer not given
PROB. 6-29 b. Suggested answer (c) P85,500

Installment sales, 2016 P425,000

Less cost of installment sales:
Inventory, 12/31/2015 70,000
Purchases 555,000
Repossessed merchandise 3,000
Total goods for sale 628,000
Less inventory of new and
Repossessed merchandise, 12/31/2016 95,000
Total cost of goods sold 533,000

Less cost of goods sold,

Regular sales (385,000 x70%) 269,500 263,500
Gross profit on installment sales 161,500

Installment sales, 2016 425,000

Less installment receivable, 2016 200,000
Collections, 2016 sales in 2016 225,000
Multiply by gross profit rate, installment sales
(161,500/ 425,000) 38%
Gross profit realized on collections from 2016 salesin 2016 85,500

The total cost of goods sold in the amount of P533,000 consists of both regular and installment sales. Since the rev-
enue recognition principle applicable for regular sales is point of sales; while that for installment sales is point of
collection, it is proper to eliminate first the cost of goodssoldfor regular sales from the total cost of goods sold for
purposes of computing the gross profit rate on installment sales.

c. The loss on repossession made on a 2015 sale was:

a. 1,262.50
b. 487.50
c. 1,805.00
d. Answer not given
PROB. 6-29 c. Suggested answer (a) P1,262.50

Value of repossessed merchandise 300,000

Less unrecovered cost (7,750 x 55%%) 4,262.50
Loss on repossession 1,262.50

As in the case of goods acquired by trade-in, a repossessed article should be recorded at an amount that will permit-
for reconditioning cost and a normal gross profit on its resale. Cancellation of the installmentaccounts
receivable,accompanied by cancellation of deferred gross profit, should be recorded on the books of the seller that
reports the
merchandise reacquired. When perpetual inventories are maintainedrepossessed goods are debited to the inventory
balance; when periodic inventories are employed, repossessions are recorded in a separatenominal account and this
balance is added to purchases in calculatingcost of goods sold. Based on previous computations, the gross profit
rateon sales of 2015 installment sales is 45%, therefore, the ratio of cost to be recovered to sales should be 55%;
thus, the unrecovered cost is P4,262.50.

PROB. 6-30 (AICPA)

On December 31, 2016, Mill Co. sold construction equipment to Drew, Inc. For P1,800,000. The equipment had a
carrying amount of P1,200,000. Drew paid P300,000 cash on December 31, 2016 and signed a P1,500,000 note bea-
ring interest at 10% payable in five annual instalments of P300,000. Mill appropriately accounts for the sale under
the instalment method. On December 31, 2017, Drew paid P300,000 principal and P150,000 interest. For the year
ended December 31, 2017, what total amount of revenue should Mill recognize from the construction equipment and
financing?

a. 250,000
b. 150,000
c. 120,000
d. 100,000
PROB. 6-30 Suggested answer (a) P250,000

Collection applying to principal 300000

Multiply by gross profit on sales
((1,800,000-1,200,000)/1,800,000)) 33 1/3%
Realized gross profit, 2017 100,000
Interest income, 2017 150,000
Total amount of revenue, 2017 250,000

Again, under the installment method of accounting, any amount collected represents a combination of cost recov-
eryand profit realization. Realized profit may be determined using the gross profit rate on sales applied to amount of
collections during the period.

Installment contracts frequently provide for a charge for interest onbalance due. The interest charge is ordinarily
payable with the installment payment that reduces the principal. Although interest is included in the payment, use of
the installment method requires that only portion of payments applying to principal should be considered incomput-
ing the grossprofit realized.

The arrangement forperiodic payment of interest generally takes one of thefollowing forms:

1. Interest is computed on the balance of the principal owed betweeninstallment periods, known as long-end
interest.
2. Interest is computed on the amount of the installment due, from thedate the contract was entered into until
the date of the installment payment, known as short-end interest.
3. Periodic payments are equal in amount and represent interest on the balance of the principal owed be-
tween installment periods, the remainder a reduction in the principal balance
4. Interest through out the payment period is computed on the original principal.

PROB. 6-31 (RPCPA)

Abenson Trading Co. sells household furniture both in cash and in installment basis. For each installment sale, a sale
contract is made whereby the following terms are stated:

a. A down payment of 25% of the installment price is required and the

balance payable in 15 equal monthly installment.
b. Interest of 1% per month is charged on the unpaid cash sale price equivalent at each installment.
c. The price on installment sales is 110% of the cash sales price.

For accounting purposes, installment sales are recorded at contract price. Any unpaid balances on defaulted contracts
are being charged to uncollectible accounts expense. Sales of defaulted merchandise were credited to uncollectible
accounts expense. Interest are recognized in the period earned. For its first year of operations ending December 31,
2016, the books of the company show the following:

Cash sales 378,000

Installment sales 794,970
Merchandise inventory, January 1 174,180
Purchases 627,891
Merchandise inventory, December 31 108,630
Cash collections on installment contracts:
Down payment 198,750
Installment payments (include interest of
P27,758.52). Average 6 monthly
Installments on all contracts except on
Defaulted contracts. 238,023

A contract amounting to P3,300 was defaulted after paying three (3) monthly instalments.

a. The gross profit rate based on total sales at cash price equivalent is:
a. 33.75%
b. 36.34%
c. 40.88%
d. 37%
e. Answer not given
PROB. 6-31 a. Suggested answer (d) 37%

Cash sales 387,000

Cash sales price of installment
Sales (794,970/ 1106) 722,700
Total sales at cash price equivalent 1,100,700
Less cost of sales
Mdse. inventory, 1/1 174,180
Purchases 627,891
Goods available for sale 802,071
Less Mdse. inventory, 12/31 108,630 693,441
Gross profit 407,259

Gross profit rate on sales= 407,259/1,100,700 =37%

Based on the foregoing information, the price on installment is 110% ofcash sales price, thus to compute the cash
sales price equivalent of installment sales 794,970/ 110% =722,700, and the total sales at cashprice equivalent
should be composed of both cash sales price equivalent of installment sales and cash sale.

b. The total interest earned for the first four month in the defaulted contracts is:
a. 80.85%
b. 72.07%
c. 60.94%
d. 69.30%
 e. Answer not given
PROB. 6-31 b. Suggested answer (c) P60.94

Installment sales price 3,300.00

Less down payment (25%) 825.00
Balance payable in equal installments 2,475.00
Divide by number of payments 15
Monthly equal installment payment 165.00

Collections Interest Principal Balance

Cash price
Equivalent
(3,300/110%) 3,000.00
1st month:
D/P, 25% 825.00 2,175.00
2nd month 165.00 21.75 143.25 2,031.75
3rd month 165.00 20.32 144.68 1,887.07
4th month 165.00 18.87 146.13 1,740.94
Total 60.94 434.06

Again, installment contracts frequently provide for a charge for intereston the balance due. The interest charge is
ordinarily payable with theinstallment payment that reduces the principal. However, it should be pointed out that
based on the foregoing, the interest of 1% per month is charge on the unpaid cash sale price equivalent at each in-
stallment, thusthe total interest earned on defaulted contract is P60.94.

c. The realized gross profit for the year 2016 is:

a. 291,355.95
b. 151,335.35
c. 249,674.52
d. 161,789.16
e. Answer not given
PROB. 6-31 c. Suggested answer (a) P291,355.95

Cash sales 378,000.00

Down payment - installment sales 198,750.00
Installment payments applying to principal on non-
defaulted contracts (238,023.00-27,758.52) 210,264.48
Installment payments applying to principal on
defaulted contract (b) 434.06
Total collections applying to principal at cash price
Equivalent787,448.54
Multiply by gross profit rate (a) 37%
Realized gross profit, 2016 291,355.95

Since the underlying revenue recognition principle for installment sales is the point of collection and the inclusion of
interest in the amount collected is just a normal case, realized gross profit is equal to total collections applying
toprincipal applied to related gross profit rate on sales.

PROB. 6-32 (Adapted)

Joker Corp. had been using the cash method to account for income since its first year of operation in 2016. All sales
are made on a credit with note receivable given by the customer. The following information was made available for
the first two years of operations:
2016 2017
Notes receivable, 2016 216,000 144,000
Notes receivable, 2017 240,000
Discount - Notes Receivable, 2016 28,668 22,316
Discount - Notes Receivable, 2017 32,172
Income - collection on principal 128,000 200,000
Income - interest 14,400 22,000
Cost of goods purchased 200,560 208,080

Cost of goods purchased includes increase in inventory of goods on hand Of 20,000 in 2016 and P32,000 in 2017.
A. How much is the realized gross profit for the year ended 2016 (rounded to the nearest peso)?
a. 21,000
b. 46,588
c. 54,707
d. 60,814
PROB. 6-32 a. Suggested answer (c) P54,707

Notes receivable 2017, 12/31/2017 216,000

Less discount on notes receivable2017, 12/31/2017 28,668
Net 187,332
Add collection on principal 2017 128,000
Total sales 2017 315,332
Less cost of sales:
Cost of goods purchased 2017 200,560
Less increase in inventory 2017 20,000 180,560
Gross profit 134,772

Gross profit rate on 2017 sales (134,772/ 315,332) 42.74%

Collections on principal 128,000
Multiply by gross profit rate 42.74%
Realized gross profit, 201 54,707

Generally, notes receivable are initially recorded at their present value, which may be defined as the sum of future
receipts discounted to thepresent date at an appropriate rate of interest. When a note is exchanged for property,
goods, or services, he present value equals the currentcash selling price of the items exchanged. The differencebe-
tween thepresent value and the amount to be collected at the due date or maturitydate is charged for interest.

In recording receipt of a note, Note Receivable is debited for the face amount of the note. When the face amount
differs from the present value, as in the case of non-interest bearing notes, the difference is recorded as apremium or
discount and amortized over the life of the note. And at theend of the year, any unamortized discount on non-interest
bearing note would be deducted from note receivable on thebalance sheet.

In computing revenues and expenses when records are incomplete (showing a list of increases and decreases in as-
sets and liabilities), the basic rule provides that all increases are added and all decreases are deductedexcept the
changes in some items like merchandise inventory in the computation of cost of sales, thus increase in inventorywas
deductedforpurposes of determining the cost of sales as shown above

B. How much is the realized gross profit for the Year ended 2017 (rounded to the nearest peso)
a. 93,272
b. 97,080
c.104,397
d. 113,659
PROB. 6-32 b. Suggested answer(a) P93,272

Notes receivable (net), 2016, 12/31/2016

(216,000-28,668) 187,332
Less notes receivable (net), 2016, 12/31/2017 (144,000-22,316) 121,684
Collections of notes receivable, 2016 during 2017 65,648

Notes receivable 2017, 12/31/2017 240,000

Less discount on notes receivable 2017,12/31/2017 32,172
Net 207,828
Add collection on principal 2017 (200,000-65,648) 134,352
Total sales 2016 342,180
Less cost of sales:
Cost of goods purchased 2017 208,080
Less increase in inventory 2017 32,000 176,080
Gross profit 166,100

Gross profit rate on 2017 sales (166,100/ 342, 180) 48.54%

Realized gross profit, 2016 sales

(65,648 x 42.74%) 28,058
Realized gross profit, 2017 sales
[(200,000-65,648) x 48.54%] 65,214
Total realized gross profit in 2017 93,272

It should be pointed out that the totalamount of P200.000 collected in 2017 is composed of collections from 2016
sales and 2017 sales. Thus, realized gross profit for each year of sale is equal to collections from specific year sale
applied to gross profit rate on respective sale.

PROB. 6-33 (AICPA)

On January 1, 2016, Rex co. sold a used machine to Lake, Inc. for P525,000. on this date, the machine had a depre-
ciated cost of P367,500. Lake paid P75,000 on January 1, 2016 and signed a P450,000 note bearing interest at 10%.
The note was payable in three annual installments of P150,000 beginning January 1, 2017. Rex appropriately ac-
counted for the sale under the installment method. Lake made a timely payment of first installment on January 1,
2017 of P195,000, which included interest of P45,000 to date of payment. At December 31, 2017, Rex had deferred
gross profit of:
a. 105,000
b. 99,000!
c. 90,000
d. 76,500
PROB. 6-33 Suggested answer (c) P90,000

Installment sales 525,000

Less collectionS:
Down payment 75,000
Payment applying to principal
(195,000- 45,000) 150,000 225,000
Installment accts. Receivable 300,000
Multiply by gross profit rate on sales
((525,000-367,500)/ 525,000) 30%
Deferred gross profit, 12/31/2017 90,000

Again, for purposes of computing the deferred gross profit which relates toinstallment accountsreceivable balance at
the end of the period, where periodic payments are equal in amount and represent interest on the balance of the
principal owed between installment periods, the remainder a reductionin the principal balance, the amount applying
to interest should be deductedfrom the total amount collected to determine the appropriate amount to beapplied to
principal, and the same will reduced the installment sales/installment accounts receivable.

PROB. 6-34 (AICPA)

On January 2, 2016, Blake Co. sold a used machine to Cooper Inc. for P900,000 resulting to a gain of P270,000. On
that date, Cooper paid P 150,000 cash and signed a P750,000 note bearing interest at 10%. The note was payable in
three annual installments of P250,000 beginning January 2, 2017. Blake appropriately accounted for the sale under
the installment method. Cooper made a timely ! payment of the first installment on January 2, 2017, of P325,000,
which included accrued interest of P75,000. What amount of deferred gross profit should Blake report at December
31, 2017?
a. 150,000
b. 172,500
c. 180,000
d. 225,000
PROB 6-34 Suggested answer (a) 150,000
Gross profit 270,000
Divide by selling price 900,000
Gross profit rate 30%

Total gross profit 270,000

Less realized gross profit From down payment
(150,000 x 30%) 45,000
Balance 225,000
Less realized gross profit from 1 installment
(250,000x 30%) 75,000
Deferred gross profit, December 31, 2017 150,000

Again, installment method of accounting is a method of recognizing revenue at the point of collection; thus realiza-
tion of which is based on the amount collected. Accordingly, any amount not yet collected is the basis in
determining the deferred gross profit.

PROB. 6-35 (AICPA)

On January 2, 2016, Easy Pay Co. sold a plant to Menchie Co. for P1,500,000. On that date, the plant's carrying
amount was P1,000,000. Menchie gave Easy Pay P300,000 cash and a P1,200,000 note payable in four annual in-
stallments of P300,000 plus 12% interest. Menchie made the first principal and interest payment of P444,000 on
December 31, 2016. Easy Pay uses the installment method of revenue recognition. In its 2016 income statement,
what amount of realized gross profit should Easy Pay report?
a. 344,000
b. 200,000
c. 148,000
d.100, 000
PROB. 6-35 Suggested answer (b) 200,000

Gross Profit (1,500,000 – 1,000,000) 500,000

Divide by selling price 1,500,00
Gross Profit Rate 33 1/3%

Amount paid at the date of sale 300,000

Add amount applying to principal at Dec. 31, 2016 300,000
Total collections applying to principal 600,000
Multiply by gross profit rate 33 1/3%
Realized gross profit 200,000

The installment method recognizes income on sale as the related receivable is collected. In case, collections include
interest, it is the amount applying to principal which is the basis in determining the realizedprofit.

PROB. 6-36 (AICPA)

Watson Co. sold some machinery to the Finney Co. on January 2, 2016. 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, 2016. What amount of interest income
should be included in Watson's 2017 income statement (the second year of the contract)?
a. 12,500
b. 39,624
c. 25,000
d. 34,885
PROB. 6-36 (b) 39,624
Collections 10%Int. Principal Balance

Selling price 473,850

1st installment 125,000 47,385 77,615 396235
2nd installment 125,000 39,624

In case of long-term installment sales, collections shall be appliedfirst to interest and the balance to principal.

PROB. 6-37 (AICPA)

Baker Co. is a real estate developer that began operations on January 2, 2016. Baker appropriately uses the install-
ment method of revenue recognition. Baker's sales are made on the basis of a 10% down payment, with the balance
payable over 30 years. Baker's gross profit percentage is 40%. Relevant information for Baker's first two years of
operations is as follows:
2017 2016
Sales 16,000,000 14,000,000
Cash Collection 2,020,000 1,400,000
A. At December 31, 2016, Baker's deferred gross profit was

a. 5,040,000
b.! 5,600,000
c.8,400,000
d.12,600,000
PROB. 6-37 a. Suggested answer (a) P5,040,000
Installment sales, 2016 14,000,000
Less cash collections 1,400.000
Installment accounts receivable, 12/31/2016 12,600,00
Multiply by gross profit percentage 40%
Deferred gross profit 5,040,000

As mentioned earlier, the deferred gross profit at the end of the period is equal to the installment accounts receiv-
able in the same applied to gross profit rate on sales. Without any qualification profitpercentage is based on sales.

B. Baker's realized gross profit for 2017 was

a. 6,400,000
b. 2,020,000
c. 1,212,000
d. 808,000
PROB. 6-37 b. Suggested answer (d) P808,000
Cash collections in 2017 2,020,000
Multiply by gross profit rate on sales 40%
Realized gross profit, 2017 808,000

Normally, realized gross profit is equal to cash collections at a given period applied to gross profit rate on sales.

PROB. 6-38 (RPCPA)

Romer Realty bought two adjoining lots (Lot A and B) with total a area of 1,600 sq. m.. Lot A was bought for P
160,000 in 2009 and Lot B was bought for ! P240,000 in 2012. Romer Realty re-subdivided the two lots and made a
400 sq. m. lot out of the original two lots by taking 200 sq. m. from each to make Lot C. The cost of Lot C was by
allocating a portion of the cost of the original two lots. ! Romer Realty build a house on Lot C at a cost of P 152,000.
It was completed on June 30, 2016, and had an estimated useful life of 20 years.

The three lots and house were sold during 2014 on the following terms:
Lots Date of Sale Sales Price Down Payment Balance
A March 31 171,428 51,248 120,000
B Oct. 31 240,000 80,000 160,000
C and House June 30 420,000 180,000 240,000
 Balance payable in equal installments
Lot A P 12,000 every 3 months
Lot B P20,000 every 2 months
Lot C & House P 40,000 every 6 months

Installment payment is to be applied first to accrued interest and the balance to a reduction of principal. The rate of
interest is 10% per annum on the carrying balance of the principal. After repeated demand from the buyer of Lot C
and house, he failed to meet the installment due on June 30, 2016, and the property was repossessed.
A. The realized gross profit from the sale of the lots and house on December 21, 2016 are:
Lot A Lot B Lot C & House Total
a. 23,733.33 25,333.33 78,300.00 127,366.66
b. 24,333.33 24.533.33 86,700.00 135,566.66
c. 23,732.58 24,333.33 83,200.00 131,256.91
d. 24,733.33 25,333.33 86,500.00 136,566.66
PROB. 6-38 a. Suggested answer (c) P23,732.58 P24,333.33 P83,200.00
Lot C &
Lot A Lot B house
Sales price 171,428 240,000 420,000
Acquisition cost 160,000 240,000
Allocated cost (40,000) (60,000) 100,000
Cost of house 152,000
Total 120,000 180,000 252,000
Gross profit 51,428 60,000 168,000
Gross profit rate 30% 25% 40%

Lot A:
Collections Interest Principal Balance
S/ price 171 ,428.00
D/P 51,428.00 51,428.00 120,000.00
June 30 12,000.00 3,000.00 9,000.00 1 11,000.00
Sept, 30 12,000.00 29775.00 9,225.00 101,775.00
Dec. 31 12,000.00 2,544.38 9,455.62 92 319.38

Total 8,319.38 79,108.62

Lot B:
Collections Interest Principal Balance
S/ price 240,000.00
D/P 180,000.00 180,000.00 160,000.00
Dec. 31 20,000.00 2,666.67 17,333.33 142,666.67
Total 2,667.67 97,333.33

Lot C & house:

Collections Interest Principal Balance
S/ price 420,000
D/P 180,000 180,000 240,000
Dec. 31 40,000 12,000 28,000 212,000
Total 12,000 208,000

Lot A (79,108.62 x 30%) 23,732.58

Lot B (97,333.33 x 25%) 24,333.33
Lot c & house (208,000 x 40%) 83.200.00
Total realized gross profit, 12/31/2016 131,265.91

Again, in some instances where the interest is included in the total amount collected, it is proper to determine first
the related interest at that date to be deductedfrom-the total collections to determine the amount applying to princi-
pal, which is composed of cost recovered and profit realized. But it should be pointed out that in the information
given above, the 10% interest is per annum, therefore, the related interest for the period should be appropriately
determined. And in cases like this, realized gross profit is equal to collections applying to principal applied to gross
profit rate on sales.

B. The gain (loss) on repossession of Lot C and house on June 30, 2016 is:
a.119,650
b. 117,200
c. (17,200)
d. (21,611)
PROB. 6-38 b. Suggested answer (b) PI 175200
Cost of Lot C and house 252,000
Less accumulated depreciation - house
(152,000/ 20 years) 7,600
Book value, date of repossession 244,400
Less unrecovered cost:
Total cost (152,000 + 100,000) 252,000
Less Cost recovered (208,000 x 60%) 124,800 127,200
Gain on repossession 117,200

Similar with the case ofgoods acquired by trade-in, a repossessed article should be recorded at an amount that will
permitfor reconditioning and a normal gross profit on its resale. However, based on the limited information in the
problem that no valuefor this kind was provided, it was assumed that the book value may be used instead.
Ordinarily, conservatism would suggest that no more than the unrecovered
cost be assigned to the repossessed merchandise. Because ofthat, no gain would be reported at the time of the repos-
session; recognition ofany gain would await the sale of the repossessed merchandise. Any gain or loss on defaults
and repossession is normally recognized on the income statement as an addition to or a subtraction from the real-
ized gross profit on installment sales. In view of these, although the question did not specify whether the resulting
gain is to be recognized or not, the gain on repossession is PI 17,200.

PROB. 6-39 (RPCPA)

The Zonyo Company on October 1, 2016, sold article "A" for P4,000, costing P2,700. Article "B", a used article was
accepted as down payment and the balance on a monthly installment payment of P200 starting November 1, 2016 P
1,200 was allowed on the article traded-in. The company estimates reconditioning cost of P80 on this article and a
sales price of P1,100 after such reconditioning. The company normally expects 20% gross profit on sale of used
articles. The company employs the perpetual method of inventory.
On April 1, 2017, the customer defaulted in the payment of installment. Article "A" which was sold was repos-
sessed; its value to the seller is P1,350 allowing for reconditioning cost and a normal gross profit on resale

A. The amount of realized gross profit in 2016 is:

a. 300
b. 400
c. 315
d. 415
e. 350
PROB. 6-39 a.Suggested answer (a) 300

Trade-in value (Article "B") 1,200

Less actual value: 1,100
Resale price
Less: reconditioning cost 80
normal gross profit
(20%x 1,100) 220 300 800
Overallowance 400

Sales price (Article "A") 4,000

Less overallowance 400
Adjusted sales price 3,600 (100%)
Less cost of goods sold 2,700 (75%)
Gross profit 900 (25%)

Down payment (actual value of Art. "B )

[1,100 (80 - 220)) 800
Installment payments(Nov. Dec.) (200 x 2) 400
Total collections, 2016 1,200
Multiply bygross profit 25%
Realized gross profit,2016 300

The trade-in is recorded at the value allowed. The difference between the trade-in value and actual value (the value
ofthe old merchandise tradedin after the provisions of expected reconditioning cost and a normal gross profit upon
its resale) of the article traded-in may result to under or overallowance. Underallowance is an addition to sales
price of the merchandise accepted as trade-in; while overallowance is either a charge to overallowance account or
a reduction from installment sales account, When the periodic inventory system is used, trade-ins are recorded in a
separate nominal account, Trade-In Merchandise, and this balance is added to purchases in determining cost of
goods sold at the end ofthe period.

B. The amount of loss on repossession is:

a. 415
b. 315
c. 300
d. 450
e. 350
PROB. 6-39 b. Suggested answer (e) P350
Adjusted sales price (a) 3,600
Less collections until 4/1/09:
Down payment (value of Art. B) 800
Installment payments (Nov.-Mar.) (200 x 5) 1,000 1,800
Unpaid balance, 4/1/2017 1,800
Value of repossessed merchandise l,000
[80 + (1,350 x 20%)] - 1,350
Less unrecovered cost:
Unpaid balance 1,800
Less normal profit (l ,800 x 25%) 450 1,350
Loss on repossession (350)
PROB. 6-40 (AICPA)
Wood Corp. has a normal gross profit on installment sales of 30%. A 2015 sale resulted in a default early in 2017. At
the date of default, the balance of the installment receivable was P8,000, and the repossessed merchandise had a fair
value of P4,500. Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on reposses-
sion should be

a. 0
b. 1,100 loss
c. 1,100 gain
d. 2,500 loss
PROB. 6-40 Suggested answer (b) l, 100 loss
Value of repossessed merchandise 4,500
Less unrecovered cost:
Unpaid balance 8,000
Less normal profit (8,000 x 30%) 2,400 5,600
Loss on repossession (1,100)

PROB. 6-41 ( AICPA)

Gentry Co. uses the installment sales method. When an account had a balance of P3,500, no further collections
could be made and the dining room set was repossessed. At that time, it was estimated that the dining room set could
be sold for P 1,000 as repossessed, or for P 1,300 if the company spent P125 reconditioning it. The gross profit rate
on this sale was 70%. What is the gain or loss on repossession?

a. 2,450 loss
b. 2,500 loss
c. 300 gain
d. 125 gain
PROB. 6-41 Suggested answer (d) 125 gain
Value of repossessed merchandise 1,175
(1,300 125)
Less unrecovered cost:
Unpaid balance 3,500
Less normal profit (3,500 x 70%) 2,450 1,050
Loss on repossession (125)

PROB. 6-42 (Adapted)

The Samsing Music Corp. sells musical instruments on installment. On October l, 2016, Samsing sold a karaoke
costing P15,000 for P24,000. It has been the policy of Samsing to require its customers a down payment of P2,400
for this kind of instrument and the balance to be paid on installment with an annual interest of 12% starting October
31, 2016. Periodic payments are equal in amount and represent interest on the balance of the principal owed between
installment periods, the remainder a reduction in the principal balance.

The karaoke was repossessed in February 2017, when the customer defaulted after paying a total of P9,600. It was
estimated that the karaoke had a depreciated cost of P8,400 when repossessed. The Samsing Music Corp. uses per-
petual inventory account and enters the total deferred gross profit at the time of sale. How much is the total realized
gross profit from this sale (rounded to the nearest peso)?
a. 2,411
b. 3,312
 c. 4,356
d. 4,500
PROB. 6-42 Suggested answer (b) P3,312
Collections Interest Principal Balance
S/price 24,000.00
Down/P 2,400.00 2,400.00 21,600.00
Oct. 1,800.00 216.00 1,584.00 20,016.00
Nov. 1,800.00 200.16 1,599.84 18,416.16
Dec. 1,800.00 184.16 1,615.84 16,800.32
Jan. 1,800.00 168.00 11632.00 15,168.32
Total 9,600.00 768.32 8,831.68

Collections applying to principal 8,831.68

Multiply by gross profit rate on sales 37.5%
((24,000 – 15,000)/ 24,000]
Realized gross profit 3,312

Again, the realized gross profit in this case is equal to the collections applying 'to principal applied to the gross
profit rate on sales. The clown Payment of P2,400 was assumed to have been included in P9,600 totalpayment at the
date ofrepossession, because if this amount (down payment will be assumed not to have been included in the total
amount paid, realized gross profit would be P4,225.47 (11,267.92 x 37.5%) which is none of the choices given.

PROB. 6-43 (AICPA)

Lang co. uses the installment method of revenue recognition. The following data pertain to Lang's installment sales
for the year ended December 31, 2016 and 2017:

2016 2017
Installment receivables at year end on 2016 sales 60,000 30,000
Installment receivables at year end on 2017 sales 69,000
Installment sales 80,000 90,000
Cost of sales 40,000 60,000

What amount should Lang report as deferred gross profit in its December 31, 2017 balance sheet?
a. 23,000
b. 33,000
c. 38,000
d. 43,000
PROB 6-43 Suggestedanswer (c) P 38,000

2016 2017
Gross profit rate:
2016 sales (P40,000/ 80,000) 50%
2017 sales (P30,000/ 90,000) 33 1/3%
Deferred gross profit , 12/31/2017:
2016 sales (P30,000 x 50%) 15,000
2017 sales (P69,000 x 33 1/3/0/0) 23,000
Total 38,000

As mentioned earlier, the deferred gross profit at the end ofthe given period is equal to the installment accounts re-
ceivable in the same period appliedto gross profit rate on sales.
PROB. 6-44 (Adapted)
On October 1, 2017, Surplus Co. sold equipment on installment basis. The equipment costs the company an amount
of P600,000, but the installment selling price was set at p 850,000. The terms of payment included the acceptance of
a used equipment with the balance to be paid in ten (10) monthly due at the end of each month commencing the
month of sale. It would require P12,500 to recondition the used equipment so that it could be sold for P250,OOO. A
15% gross profit was usual from sale of used equipment. What is the realized gross from the 2017 collections?
a. 70,588
b. 80,000
c. 100,000
d. 340,000
PROB 6-44 Suggested answer (b) 80,000

Trade-in value 300,000

Less actual value: 250,000
Resale price
Less: reconditioning cost 12,500
normal gross profit
(15% x 250,000) 37,500 50,000 200,000
Overallowance 100,000

Installment sales (850,000 100,000) 750,000

Less cost of installment sales 600,000
Gross profit (20%) 150,000

Down payments:
Cash 50,000
Actual value of traded in equipment 200,000 250,000
Add Installment collected
(750,000 -250,000/ 10 x 3) 150,000
Total collections 400,000
Multiply by adjusted GPR 20%
Realized gross profit 80,000

The excess of trade in value over the actual value of merchandise traded in (overallowance) is usually treated as
deduction from the installment sales account, thereby changing the gross profit rate.

PROB. 6-45 (Adapted)

In its first year of operations, Giant Corp. reported cost of goods sold in the amount of P 900,000 and sales were as
follows:
Mark-up on cost Sales
Cash basis 25% 250,000
Charge basis 33 1/3% 400,000
Installment basis 50% 600,000

If collections on installment sales during the year amounted to P240,000, how much was the total gross profit real-
ized at the end of the year?
a. 50,000
b. 60,000
c. 80,000
d. 230,000
PROB 6-45 Suggested answer (d) 230, 000
 Cash basis (250,000 x 25/125) 50,000
Charge basis (400,000 x 33 1/3 / 133 1/3) 100,000
Installment basis (240,000 x 50/150) 80,000
Total realized gross profit 230,000

Note that the installment method of accounting recognizes profits at the point of Collections, therefore, the realized
gross profit is based on the amount collected.

PROB. 6-46(IFRS)
According to IAS 18, Revenue, which two of the following criteria must be satisfied before revenue from the sale of
goods should be recognized in profit or loss?
1. Revenue can be measured reliably
2. Managerial control over the goods sold has been relinquished.
3. Ownership has been transferred to the buyer
4. The outcome of the transaction is certain.

a. 1 and 2
b. 1 and 3
c. 1 and 4
d. 3 and 4
PROB. 6-46 Suggested answer (a) 1and 2

18 sets out five criteria that needed to be met before revenue from the sale ofgoods shall be recognized;
1.The amount ofrevenue can be measured reliably.
2.Seller no longer has management involvement or effective control over the goods.
3.The significant "risks and rewards'" of ownership have been transferred from the seller to the buyer.
4.It is probable 'that paymentfor the goods will be received by the entity
5. The cost incurred or to be incurred, in relation to the transaction, can be measured reliably.