Installment sales reviewer problems and solutions-2021-2022 PDF

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Installment sales reviewer problems and solutions-2021-2022...

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Chapter 4

Installment Sales Installment sales problems have appeared very often in the CPA exam. Therefore, candidates should be familiar with the accounting techniques applicable to this topic. When a sale is made on the installment basis, the buyer usually makes a down payment and promises to pay the balance in regular installments over a specified period of time. Profit on installment sales is recognized only when earned. Although there are several theoretical points at which the profit can be assumed to be earned, for CPA examinations purposes, the choice is generally limited to the installment method. Installment Method Under this method, income is recognized only when collections are made. Problems requiring the use of the installment method of recognizing income have appeared quite regularly in the CPA exam. The following are the typical problems often encountered in the CPA exam: 1. 2. 3. 4.

Computation of Gross Profit Rate for each year of sales. Computation of Realized Gross Profit for each year of sales. Computation of Deferred Gross Account balance at the end of year. Computation of Gain or Loss on repossessions.

Computation of Gross Profit Rate To compute the realized gross profit in proportion to the collections made, it is necessary to determine the gross profit rate for each year’s operations. The following are the formulas in computing gross profit rate: Current year sales: Gross Profit Rate =

Gross Profit Installment Sales

Prior year sales: Gross Profit Rate =

Deferred Gross Profit (Beg.) – Prior Year Sales Installment Accounts Receivable (Beg.) – Prior Year Sales

Computation of Realized Gross Profit Once the gross profit rates are known, it is possible to compute the realized gross profit based on cash collections. The formula to be used is:

Realized Gross Profit =

Collections (excluding interest) x Gross Profit Rate (based on sale)

Missing Factors. In as much as the realized gross profit under the installment method depends upon cash collections of receivables, it is important that the amounts collected must be known. However, in some problems, the collections are not specifically stated. Such collections must be reconstructed from related information available from the data given. The candidate should remember the following format in computing the collections:

Installment accounts receivable – beginning Installment accounts receivable – end Total credits Credit for repossessions (unpaid balance) Credit for installment A/C written off Credit representing collections Computation of Deferred Gross Profit, End

Current Year Sales xx (xx) xx (xx) (xx) xx

Prior Year Sales xx (xx) xx (xx) (xx) xx

To compute the balance of Deferred Gross profit at the end of the year, the following formula may be used: Installment Account Receivable – End x GPR = Deferred Gross Profit – End Or Deferred Gross Profit – before adjustment Less: Realized gross profit Deferred Gross Profit - End

xx xx xx

Computation of Gain or Loss on Repossession If a customer does not make an installment payment at the specified time, it is necessary to repossess the merchandise in order for the seller to minimize his loss. The gain or loss on repossession is computed as follows: Fair value of repossessed merchandise Less: Unrecovered cost Unpaid balance Less: deferred gross profit (unpaid balance x GP rate) Gain (loss) on repossession

xx xx xx

The fair value of repossessed merchandise at the time of repossession should be before reconditioning cost and before adding a normal gross profit from sale of repossessed merchandise.

xx xx

Trade In This type of installment sales used by car dealers, whereby an old car is received as down payment from the buyer for sale of the new car. Usually the old car traded-in is overvalued to induce the trade-in. for problem solving purposes the overvaluation is computed using a formula below: Trade-in value allowed on the old car Pxx Less: Actual value Estimated selling price Pxx Less: Normal gross profit from the sale of used car Pxx Reconditioning costs xx xx xx Overallowance on the old car Pxx The overallowance is treated as a deduction from the selling price of the new car. When there is overallowance on the old car traded-in, the gross profit rate is computed as follows: Gross profit ÷ Net Sales (net of overallowance) The realized gross profit is also computed as follows: Collections (cash + actual value of old car) x GPR

PROBLEMS 1. Oro Company began operations on January 1, 2012 and appropriately uses the installment sales method of accounting. The following data are available for 2012 and 2013:

Installment sales Gross profit on sales Cash collections from: 2012 sales 2013 sales

2012 2013 P1,500,000 P1,800,000 30% 40% 500,000 -

600,000 700,000

The realized gross profit for 2013 is: a. b. c. d.

P720,000 520,000 460,000 280,000

2. Roco Corp., which began business on January 1, 2013, appropriately uses the installment sales method of accounting for income tax reporting purposes. The following data are available for 2013: Installment accounts receivable, 12/31/2013 Installment sales for 2013 Gross profit on sales

P200,000 350,000 40%

Under the installment method, what would be Roco’s deferred gross profit at December 31, 2013? a. b. c. d.

P20,000 90,000 80,000 60,000

3. Gray Co., which began operations on January 1, 2013, appropriately uses the installment method of accounting. The following information pertains to Gray operations for the 2013: Installment sales Regular sales Cost of installment sales

P500,000 300,000 250,000

Cost of regular sales General and administrative expenses Collections on installment sales

150,000 50,000 100,000

In its December 31, 2013 statement of financial position, what amount should Gray report as deferred gross profit? a. b. c. d.

P250,000 200,000 160,000 75,000

4. Filstate Co. is a real estate developer that began operations on January 2, 2013. Filstate appropriately uses the installment method of revenue recognition. Filstate sales are made on the basis of a 10% downpayment, with the balance payable over 30 years. Filstate gross profit percentage is 40%. Relevant information for Filstate first year of operations is as follows: Sales P16,000,000 Cash collections 2,020,000 The realized gross profit and deferred gross profit at December 31, 2013 are: a. b. c. d.

P808,000 and P5,592,000 5,040,000 and 808,000 5,600,000 and 808,000 808,000 and 6,400,000

5. Long Co., which began operations on January 1, 2013, appropriately uses the installment method of accounting. The following information pertains to Long’s operations for the year 2013: Installment sales Regular sales Cost of installment sales Cost of regular sales General and administrative expenses Collections on installment sales What is the total comprehensive income on December 31, 2013? a. b. c. d.

P400,000 200,000 300,000 100,000

P1,000,000 600,000 500,000 300,000 100,000 200,0000

6. Kiko Co. began operations on January 1, 2013 and appropriately uses the installment method of accounting. The following information pertains to Kiko’s operations for 2013: Installment sales Cost of installment sales General and administrative expenses Collections on installment sales

P800,000 480,000 80,000 300,000

The balance in the deferred gross profit account at December 31, 2013 should be: a. b. c. d.

P120,000 150,000 200,000 320,000

7. Tayag Corp., which began operations in 2013, accounts for revenues using the installment method. Tayag’s sales and collections for the year were P60,000 and P35,000, respectively. Uncollectible accounts receivable of P5,000 were written off during 2013. Tayag’s gross profit rate is 30%. On December 31, 2013, what amount should Tayag report as deferred revenue? a. b. c. d.

P10,500 9,000 7,500 6,000

8. Laya Corp., which began operations on January 2, 2013, appropriately uses the installment sales method of accounting. The following information is available for 2013: Installment accounts receivable, December 31, 2013 Deferred gross profit, December 31, 2013 (before recognition of realized gross profit for 2013) Gross profit on sales

P800,000 560,000 40%

For the year ended December 31, 2013, realized gross profit on sales should be: a. b. c. d.

P320,000 340,000 320,000 240,000

9. Dulce Co., which began operations on January 1, 2012, appropriately uses the installment method of accounting to record revenues. The following information is available for the years ended December 31, 2012 and 2013:

Installment sales Gross profit realized on sales made in: 2012 2013 Gross profit percentages

2012 2013 P1,000,000 P1,800,000 150,000 30%

90,000 200,000 40%

What amount of installment accounts receivable should Dulce report in its December 31, 2013, statement of financial position? a. b. c. d.

P1,225,000 1,300,000 1,700,000 1,775,000

10. On January 2, 2012, Black Co. sold a used machine to White, Inc. for P900,000, resulting in a gain of P270,000. On that date, White paid P150,000 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, 2013. Black appropriately accounted for the sale under the installment method. White made a timely payment of the first installment on January 2, 2013, of P325,000, which included accrued interest of P75,000. What amount of deferred gross profit should Black report at December 31, 2013? a. b. c. d.

P150,000 172,500 180,000 225,000

11. White Plains, Inc. sells residential lots on installment basis. The following data was taken from the accounting records of the company as at December 31, 2013: Installment accounts receivable, January 1 Installment accounts receivable, December 31 Deferred gross profit, January 1 Installment sales

P755,000 840,000 339,750 950,000

Complete (1) the realized gross profit on December 31, 2013 and (2) the balance of the Deferred Gross Profit account on December 31, 2013. a. b. c. d.

(1) P389,250; and (2) P378,000 (1) 427,500; and (2) 389,250 (1) 330,750; and (2) 427,000 (1) 378,000; and (2) 339,750

12. In August, 2012, Mega World Inc. sold condominium units costing P1,440,000 for P2,400,000 receiving P350,000 cash and a mortgage note for the balance payable in monthly installments. Installment received in 2010 reduced the principal of the note to a balance of P2,000,000. The buyer defaulted on the note at the beginning of 2013, and the property was repossessed. The property had a fair market value of P1,150,000 at the time of repossession. Compute the gain (loss) on repossession if (1) profit is recognized at the point of sale and (2) gross profit is recognized in proportion to collections. a. b. c. d.

(1) P(850,000); and (2) P(50,000) (1) (850,000); and (2) (450,000) (1) 850,000; and (2) (450,000) (1) (50,000); and (2) 50,000

13. Sarao Motors sells locally manufactured jeeps on installment basis. Data presented below related to the company’s operations for the last three calendar years:

cost of installment sales Gross profit rates on sales Installment accounts receivable, 12/31: From 2013 sales From 2012 sales From 2011 sales

2013 2012 2011 P8,765,625 P7,700,000 P4,950,000 32% 30% 38%

9,728,125 3,025,000

8,387,500 1,512,500

4,812,500

On December 31, 2013 how much is the (1) total realized gross profit and (2) deferred gross profit? a. b. c. d.

(1) P3,044,250; and (2) P4,020,500 (1) 3,044,250; and (2) 4,125,000 (1) 3,733,750; and (2) 4,020,500 (1) 6,993,250; and (2) 4,020,500

14. Polo Company appropriately uses the installment sales method of recognizing revenue. On December 31, 2013, the accounting records show unadjusted balances of the following: Installment accounts receivable – 2011 Installment accounts receivable – 2012 Installment accounts receivable – 2013 Deferred gross profit – 2011

P12,000 40,000 130,000 10,500

Deferred gross profit – 2012 Deferred gross profit – 2013 Gross profit rates: 2011 2012 2013

28,900 96,000 35% 34% 32%

For the year ended December 31, 2013, compute (1) total realized gross profit and (2) the total cash collections in 2013: a. b. c. d.

(1) P182,000; and (2) P135,400 (1) 76,000; and (2) 233,000 (1) 158,000; and (2) 368,400 (1) 106,000; and (2) 97,600

15. Bally Company, which began operations on January 2, 2013 appropriately, uses the installment method of revenue recognition. The following data pertains to the company’s operations for the 2013: Installment sales Cost of installment sales Collections on installment sales Installment accounts receivable written off

P1,000,000 500,000 150,000 50,000

What is the balance of Deferred Gross Profit account – 2013 on December 31, 2013? a. b. c. d.

P500,000 150,000 400,000 320,000

16. Nike Company, which began operations on January 5, 2012, appropriately uses the installment method of revenue recognition. The following information pertains to the company’s operations for 2012 and 2013:

Sales Collections from: 2012 sales 2013 sales Accounts written off from 2012 sales 2013 sales Gross profit rates

2012 2013 P300,000 P450,000 100,000 -0-

50,000 150,000

25,000 -030%

75,000 150,000 40%

What amount should Nike Company report as deferred gross profit in its December 31, 2013 statement of financial position? a. b. c. d.

P75,000 80,000 112,000 125,000

17. The following accounts appeared in the accounting records of Adidas Sales Company as of December 31, 2013: Installment accounts receivable – 2012 Installment accounts receivable – 2013 Inventory, December 31, 2012 Purchases

P15,000 200,000 70,000 555,000

Repossessions Installment sales Regular sales Deferred gross profit - 2012

P3,000 425,000 385,000 54,000

Additional information: Installment accounts receivable – 2012, January 1, 2013 Inventory of new and repossessed merchandise, December 31, 2013 Gross profit rate on regular sales

P120,00 95,000 30%

Repossession was made during the year, 2013. It was a 2012 sale and the corresponding uncollected balance at the time of repossession was P7,200. Compute (1) the total realized gross profit for 2013 and the (2) loss on repossession: a. b. c. d.

(1) P129,510; and (2) P960 (1) 129,510; and (2) 1,464 (1) 245,000; and (2) 960 (1) 85,500; and (2) 1,464

18. Mango Company, which sells appliances started operations on January 10,2013 operates on a calendar year basis, and uses the installment method of revenue recognition. The following data were taken from the 2010 and 2011 accounting records: 2012 2013 Installment sales P480,000 P620,000 Gross profit rates based on cost 25% 20% Cash collection on 2012 sales 130,000 240,000 Cash collection on 2013 sales 160,000 What is the amount of realized gross profit to be recognized on December 31,2013? a. P124,500 b. P100,000

c. P92,000 d. P74,667 19. Lacoste Corporation has been using the cash method of revenue recognition. All sales are made on account with notes receivable given by the customers. The income statement for 2013 presented the following data: Revenues – collection on principal P32,000 Revenues – interes 3,600 Cost of goods purchases (includes 45,200 inventory of goods on hand P2,000) The balances due on the notes on December 31 were as follows: Notes receivable P62,000 Unearned interest income 7,167 Assuming the use of the installment method of revenue recognition, what is the realized gross profit on December 31,2013? a. P16,080 b. P25,586 c. P18,060 d. P43,633 20. Sta. Lucia Realty Corporation sells residential subdivision lots on installment basis. The following data were taken from the company’s accounting records as of December 31,2013. The company uses a uniform gross profit rate: Installment accounts receivable: January 1,2013 P1,510,000 December 31,2013 1,680,000 Unrealized gross profit – January 1,2013 679,500 Installment sales – 2012 1,180,000 Installment sales - 2013 1,900,000 How much is the gross profit realized during the year 2013? a. P778,500 b. P679,500 c. P756,500 d. P630,500 21. The following information pertains to a sale of real estate by RR Co. to SS Co. on December 31,2012: Carrying amount P2,000,000 Sales price: Cash P300,000 Purchase money mortgage 2,700,000 3,000,000 The mortgage is payable in nine annual installments of P300,000 beginning December 31,2013 plus interest of 10%. The December 31,2013 installment was paid as scheduled,

together with interest of P270,000. RR uses the cost recovery method to account for the sale. What amount of income should RR recognize in 2013 from the real estate sale and its financing? a. P570,000 b. P370,000 c. P270,000 d. P0 22. Action Inc. sold a fitness equipment on installment basis on October 1,2013. The unit cost to the company was P60,000 but the installment selling price was set at P85,000. Terms of payment included the acceptance of a used equipment with a trade-in value of P30,000. Cash of P5,000 was paid in addition to the traded-in equipment with the balance to be paid in ten monthly installments due at the end of each month commencing the month of sale. It would require P1,250 to recondition the used equipment so that it could be resold for P25,000. A 15% gross profit was usual from sale of used equipment. The realized gross profit from the 2013 collections amounted to a. P4,000 b. P34,000 c. P10,000 d. P8,000 23. M & J Corp. which sells goods on installment basis, recognizes at year end gross profit on collections which is consisted of cost and gross profit. It reported the following: January 1 December 31 Installment receivables 2011 P120,100 0 2012 1,722,300 P337,200 2013 0 2,050,450 Sales and cost of sales for the three years are as follows: 2011 2012 2013 Sales P1,900,000 P2,610,000 P3,010,0000 Cost of sales 1,235,000 1,425,000 1,896,300 In 2013 the company repossessed merchandise with resale value of P8,500 from customers who defaulted in payments. The sales were made in 2012 for P27,000 on which P16,000 was collected prior to default. As collections are made, the company debits cash and credits installment receivable. For default and repossessions, the company debits installment receivable. The amount of adjustment on the inventory of repossessed merchandise to the extent of the unrealized gross profit was a. Zero b. A decrease of P6,240 c. A decrease of P2,500

d. A decrease of P3,740 24. On October 2013, Haybol Realty Co. sold to Mae Balay a property for P500,000 which is carried in its books for P250,000. The company received P100,000 on the date of the sale and a mortgage note for P400,000 payable in twenty (20) semiannual installments of P20,000 plus interest on the unpaid principal at 16% per annum. The realized profit to be recognized by Haybol Realty Corp. in 2013 if gross profit is recognized periodically in proportion to collections would be a. P50,000 b. P100,000 c. P60,000 d. P250,000 25. 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 P192,000 Cash collection including down payments 360,000 What was the total amount of sale on installment basis? a. P480,000 b. P648,000 c. P552,000 d. P840,000 26. The Brownout, Inc. began operating at the start of the calendar year 2013 uses the installment method of accounting: Install...