Advanced Financial Accounting

INSTALLMENT SALES
Problem Solving

1. The ABC Company recognizes profit on credit sales on installment basis. At the end of 2021, before the
accounts are adjusted, the ledger shows the following:

Installment Accounts receivable 2020 337,500

Installment Accounts receivable 2021 525,000
Deferred gross profit 2020 185,000
Deferred gross profit 2021 272,500
Regular Sales 1,500,000
Cost of Regular Sales 960,000

Each year the gross profit on installment sales was 8% lower than the regular sales. In 2021, the gross profit
on installment sales was 4% higher than 2020.

How much is the total realized gross profit in 2021?

2. Appliance Company reports gross profit on the installment basis. The following data are available:

2018 2019 2020

Installment sales 240,000 250,000 300,000

Cost of goods – installment sales 180,000 181,250 216,000
Gross profit 60,000 68,750 84,000

Collections

2018 installment contracts 45,000 75,000 72,500

2019 installment contracts 47,500 80,000
2020 installment contracts 62,500

Defaults
Unpaid balance of 2018 installment contracts 12,500 15,000
Value assigned to repossessed merchandise 6,500 6,000
Unpaid balance of 2019 installment contracts 16,000
Value assigned to repossessed merchandise 9,000

1. What is the realized gross profit before loss on repossession for 2020?

2. What is the loss on repossession for 2020?

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 3. Nikko Company, which began operations on January 5, 2018, appropriately uses the installment method of
revenue recognition. The following information pertains to the operations for 2018 and 2019:
2018 2019

Sales 300,000 450,000

Collections from :
2018 sales 100,000 50,000
2019 sales - 150,000
Accounts written off from
2018 sales 25,000 75,000
2019 sales - 150,000
Gross profit rates 30% 40%

What amount should be reported as deferred gross profit on December 31, 2019?

4. On November 1, 2020, Speed Motor which maintains a perpetual inventory records sold a new automobile
to Rapids for P6,800,000. The cost of the car to the seller was P5,205,000.

The buyer paid 30% down and received P640,000 allowance on an old car traded, the balance being payable
in equal monthly instalment payments commencing the month of sale.

The monthly amortization was P240,000 inclusive of 12% interest on the unpaid amount of the obligation.

The car traded-in has a wholesale value of P960,000 after expending reconditioning cost of P180,000.

After paying three instalments, the buyer defaulted and the car was subsequently repossessed. When
reacquired, the car was appraised to have a fair value of P2,400,000.

How much is the realized gross profit on instalment sales during 2020?

5. On January 1, 2020, an entity sold a car to a customer at a price of P400,000 with a production cost of
P300,000. It is the entity’s policy to employ installment method to recognize gross profit from installment
sales.

At the time of sale, the entity received cash amounting to 25% of the selling price and old car with trade-in
allowance of P50,000. The said old car has fair value of P150,000. The customer issued a 5-year note for
the balance to be payable in equal annual installments every December 31 starting 2020. The note payable is
interest bearing with 10% rate due on the remaining balance of the note.

The customer was able to pay the first annual installment and corresponding interest due. However, after the
payment of the second interest due, the customer defaulted on the second annual installment which resulted
to the repossession of the car sold with appraised value of P110,000. On December 31, 2021, the
repossessed car was resold for P140,000 after reconditioning cost of P10,000.

1. What is the entity’s realized gross profit for the year ended December 31, 2020?

2. What is the loss on repossession for the year ended December 31, 2021?

3. What is the realized gross profit from the sale of the repossessed merchandise on December 31,
2021?
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