INSTALLMENT SALES

LLMENT 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 105,000 75,000
2012 Installment Sales 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 Matsons 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 275,000
2011 Inst. Sales 180,000 240,000
2010 Inst. Sales 125,000 120,000 150,000

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

m 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:

m 13
Marcum Co., which began operations on January 1, 2010, appropriately uses the installment
method of accounting. The following information pertains to Marcums 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 Marcums December 31, 2010 balance sheet should be

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

m 14
These data pertain to installment sales of Mickeys 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

a. P400,0000
b. P80,000
c. P100,000
d. P150,000

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

a. P400,0000
b. P80,000
c. P100,000
d. 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 Harts 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