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INTEGRATED REVIEW 2: Advanced Financial Accounting and Reporting (AFAR) #3 | Installment Sales & Long-term Construction Contracts

Part I: Installment Sales (1-140) 1. Under the cost recovery method, A. The initial collections on the sale are treated as recovery of the cost of the inventory sold. Thus, no gross profit or interest income is recognized until total collections from the sale equals the cost of inventory sold. B. The initial collections on the sale are treated as recovery of the cost of the inventory sold. Thus, no gross profit is recognized until total collections from the sale equals the cost of inventory sold. However, interest income may nonetheless be recognized. C. A or B. D. None of these. (Millan, 2016) 2. Under the installment sales method, an “over allowance is” A. Treated as addition to the installment sale price when computing for the gross profit rate. B. Treated as reduction to the installment sale price when computing for the gross profit rate. C. Not accounted for D. None of these (Millan, 2016) 3. The excess of trade-in value over the fair value of a traded-in merchandise in a sale accounted for under the installment sales method represents A. Over allowance B. Under allowance C. No allowance D. Small allowance (Millan, 2016) 4. Merchandise received as trade-in is recognized at A. Fair value B. Original cost C. Current cost D. Any of these (Millan, 2016)

5. For purposes of applying the installment sales method, “fair value” is A. The appraised value of the repossessed property or traded-in merchandise B. The estimated selling price of the repossessed property or traded-in merchandise less reconditioning costs and normal profit margin, at date of repossession or date of trade-in. C. A or B D. None of these (Millan, 2016) 6. Oliver Co. uses the installment sales method. When an account had a balance of P8,400, 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 P2,400 as repossessed or for P3,000 if the company spend P300 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a A. P5,880 loss B. P6,000 loss C. P 600 gain D. P 180 gain (Dayag, 2015) 7. The Molino Furniture Company appropriately used the installment sales method in accounting for the following installment sale. During 2016, Molino sold furniture to an individual for P3,000 at a gross profit of P1,200. On June 1, 2016, this installment account receivable had a balance of P2,200 and it was determined that no further collections would be made. Molino, therefore repossessed the merchandise. When reacquired, the merchandise was appraised as being worth only P1,000. In order to improve its salability, Bengal incurred costs of P100 for reconditioning. Normal profit on resale is P200. What should be the loss on repossession attributable to this merchandise? A. P 220 B. P 620 C. P 320 D. P 880 (Dayag, 2015)

8. The Cindy, Inc. began operating at the beginning of the calendar year 2016 and, using the installment method of accounting, presented the following data for the first year: Installment sales Gross margin based on cost

P 400,000 66- ⅔%

Inventory, Dec. 31, 2016

80,000

General and administrative expenses

40,000

Accounts receivable, Dec. 31, 2016 320,000 The balance of the deferred gross profit account, end of 2016 should be: A. P192,000 B. P128,000 C. P96,000 D. P80,000 (Dayag, 2015) 9. Fryman Furniture uses the installment-sales method. No further collections could be made on an account with a balance of P18,000. It was estimated that the repossessed furniture could be sold as is for P5,400, or for P6,300 if P300 were spent reconditioning it. The gross profit rate on the original sale was 40%. The loss on repossession was: A. P4,500 B. P4,800 C. P12,000 D. P12,600 (Dayag, 2015) 10. EMC Motors, a dealer of motor vehicle, sales exclusively on installment basis. One of its customers, Mr. Ambo purchased a motorcycle for P45,375. The cost to EMC was P25,410. After making an initial payment of P6,050, Mr. Ambo defaulted on subsequent payments. EMC lost no time in repossessing the motor vehicle which, by this time, was appraised at a value of P12,650. EMC had to incur additional cost of repairs/remodelling of P1,650 before the motor vehicle was subsequently resold for P27,500 to Mr. Joey who made an initial payment of P6,875. How much profit was realized on the sale to Mr. Joey? A. P3,025 B. P3,300 C. P3,575 D. P3,850 (Dayag, 2015)

11. The following information are obtained from the books of accounts of E Inc. on June 30, 20x5: deferred gross profit balance of P202,000 and total collections on installment sales of 440,000. Gross profit rate is cost plus 25%. E uses the installment method of accounting. What is E’s total installment sales for 20x5? A. 1,450,000 B. 1,010,000 C. 1,440,000 D. 1,560,000 (CPAR, 2017) 12. The B computer store stared its operation in January 1, 20x6. During the year, it had cash sales of P6,875,000 and installment sales of P16,500,000. B imposes a mark up on cost of 25% for cash sales and 50% for installment sales. During 20x6 installment receivable balance amounted to P6,600,000. How much is the realized gross profit for 20x6? A. 2,200,000 B. 3,575,000 C. 3,300,000 D. 4,675,000 (CPAR, 2017) 13. On January 1, 1999, Tom Bravo sells 20 acres of farmland for P6,000,000 taking in exchange a 10% interest bearing note. Tom Bravo purchased the farmland in 1984 at a cost of P5,000,000. The note will be paid in three installments of P2,412,690 each December 31,1999, 2000, and 2001. How much must be deferred gross profit at the end of 1999 under the installment method of revenue recognition? A. 1,000,000 B. 697,885 C. 637,462 D. 597,885 (CPAR, 2017) 14. Revenues and gains are generally recognized when: A. cash has been received. B. cash has been received and they have been earned through substantial completion. C. they are realized or realizable and a contract has been signed. D. they are realized or realizable and have been earned through substantial completion. (CPAR, 2017)

15. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be recognized by the A. consignor when the goods are shipped to the consignee. B. consignor when the consignee has sold the goods. C. consignee when the goods are shipped to the third party. D. consignee when cash is received from the customer. (CPAR, 2017) 16. When using the installment sales method, A. gross profit is deferred until all cash is received, but revenues and costs are recognized in proportion to the cash collected from the sale. B. gross profit is recognized only after the amount of cash collected exceeds the cost of the item sold. C. total revenues and costs are recognized at the point of sale, but gross profit is deferred in proportion to the cash that is uncollected from the sale. D. revenue, costs, and gross profit are recognized proportionally as the cash is received from the sale of product. (CPAR, 2017) 17. The cost recovery method is A. used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible. B. the most common method of accounting for real estate sales. C. similar to percentage-of-completion accounting. D. never acceptable under generally accepted accounting principles. (CPAR, 2017) 18. In this method, the probability of recovering product or service costs is remote. A. Cash method B. Installment method C. Profit recovery method D. Cost recovery method (CPAR, 2017) 19. In this method, each collection on a contract is regarded 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. A. Cash method B. Installment method

C. Profit recovery method D. Cost recovery method (CPAR, 2017) 20. May either be cash sales and credit sales. The time of sale (or the full accrual method) of revenue recognition is applied to this particular type of sales. A. Installment sales B. Regular sales C. Time of sale D. Special sales (CPAR, 2017) 21. 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 (Punzalan, 2016) 22. Under the cost recovery method of revenue recognition, A. Income is recognized on a proportionate basis as cash is received on the sale of the product B. Income is recognized when the cash received from the sale of the product is greater than the cost of the product C. Income is recognized immediately D. None of these (Punzalan, 2016) 23. Which of the following are recognized each period under the cost recovery method? A. Costs only B. Revenues only C. Both costs and revenues D. None of these (Punzalan, 2016)

For Items #24-25, use the following information: Presented below are the information taken from the books of Kooler Co. 2016 Sales: Regular P125,000 Installment 62,500 COGS: Regular 75,000 Installment 31,250 Operating Expenses 25,000 Collections on accounts from: Regular sales Installment sales-2016 Installment sales-2017

100,000 37,500

2017 P187,500 100,000 112.500 45,000 31,250

137,500 25,000 62,500

24. The total realized gross profit on installment sales for 2017 is A. P 46,875 B. P 93,750 C. P114,375 D. P 87,500 25. Refer to No. 24, the net income for 2017 is A. P 78,125 B. P 93,750 C. P 98,750 D. P 90,625 (PRIA Handout 2018) (Items #26-28, confusing format, not sure if items are under 2016 or 2017) For Items #26-28, use the following information: The following selected accounts appeared in the trial balance of Abenson Sales as of December 31, 2016: Installment receivable-2016 P 15,000; Installment receivable-2017 P 200,000; Beginning inventory P 70,000; Purchases P 555,000; Repossessions P 3,000; Regular sales P 385,000; Installment sales P425,000; Deferred gross profit-2016 P 54,000; Additional information: January 1,2017, Installment receivable-2016 P 120,000; Ending inventory of new and repossess merchandise P 95,000; Gross profit rate on regular sales 30%. Repossessions was made during the year. It was a 2016 sale and the corresponding uncollected account at the time of repossession was P 7,750.

26. The gross profit realized on collections for installment sales in 2016 was A. P 47,250 B. P 50,737.50 C. P 43,762.50 D. P 7,750 27. Refer to No. 26, the gross profit realized on collections for installment sales in 2017 was A. P 87,075 B. P 88,672.50 C. P 85,500 D. P 263,500 28. Refer to No. 26, The loss on repossession made on a 2016 sale was A. P 1,262.50 B. P 487.50 C. P 1,805 D. P 7,750 (PRIA Handout 2018) For Items #29-30, use the following information: These data pertain to installment sales of Mickey’s Store: ■ Downpayment, 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 sale, and 25% in the third year. 29. The realized gross profit in Year 1 is: A. 109,357 B. 73,474 C. 99,190 D. 114,825 30. The unrealized gross profit for installment 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

(Punzalan, 2016) 31. Chris Co. sells equipment on installment contracts. Which of the following statements best justifies Chris’s 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 (Punzalan, 2018) 32. Winner Co. is engaged in extensive exploration for water in Utah. if, upon discovery of water, Winner does not recognize 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 (Punzalan, 2018) 33. 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 remaining monthly payments discounted at 12%. (Punzalan, 2018) 34. 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. (Punzalan, 2018)

35. 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. B. C. D.

1 and 2 1 and 3 1 and 4 3 and 4 (Punzalan, 2018)

36. 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 (Punzalan, 2018) 37. 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 bearing interest at 10%, payable in five annual installments of P300,000. Mill appropriately accounts for the sale under the installment 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 sale and financing? A. 250,000 B. 150,000 C. 120,000 D. 100,000 (Punzalan, 2018) 38. On January 1, 2016, Rex Co. sold a used machine to Lake, Inc. for P525,000. On this date, the machine had a depreciated cost of P367,500. Lake paid P75,000 cash 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 accounted 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 a deferred gross profit of A. 105,000 B. 99,000 C. 90,000 D. 76,500 (Punzalan, 2018) 39. The books of Harry Co. show the following balances on December 31, 2016: Accounts Receivable Deferred Gross Profit (before adjustment)

P313,750 38,000

Analysis of the accounts receivable reveal the following: Regular accounts 2015 installment accounts 2016 installment accounts

P207,500 16,250 90,000

Sales on an installment basis in 2015 were made at 30% above cost; in 2016, at 33 ⅓ above cost. Expenses paid was P1,500 relating to installment sales, how much is the net income on installment sales? A. P11,000 B. 11,500 C. P16,000 D. 10,250 (Dayag, 2015) 40. On September 30, 2015, Barry bought a car for P3,600,000. A downpayment of P1,600,000 was made with the balance due in 10 monthly installments, the first to be made at the end of october. Barry is to make monthly payments of P200,000 plus interest on the unpaid balance at 12%. What is the total collection on January 31, 2016? A. P200,000 B. 214,000 C. P216,000 D. 218,000

(Dayag, 2015) 41. Under the installment sales method, A. revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product. B. gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues 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 proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received. (K, W & W) 42. Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the: A. Installment sales method. B. Cost recovery method. C. Point of sales method. D. Completed contract method. (S, S & T) 43. When assets that sold and accounted for by the installment method are subsequently repossessed and returned 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. (Gleim) 44. Pie 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 an installment notes receivable balance six 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% (AICPA 1192T-9)

45. 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 P1,000 as repossessed, or for P1,300 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 (Punzalan, 2018) For Items #46-47, use the following information: Baker Co. is a real estate developer that began operations on January 2, 2016. Baker appropriately uses the installment 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: Sales 2017 - P16,000,000 Sales 2016 - P14,000,000 Cash Collections 2017 - P2,020,000 Cash Collections 2016 - P1,400,000 46. At Dec. 31, 2016, Baker’s deferred gross profit was A. 5,040,000 B. 5,600,000 C. 8,400,000 D. 12,600,000 47. Baker’s realized Gross Profit for 2017 was A. 6,400,000 B. 2,020,000 C. 1,212,000 D. 808,000 (Punzalan, 2018) For Items #48-50, use the following information: QR Appliances sells home theater set both on installment and cash basis. Mr. X purchased a set from QR Appliances on March 30, 2015 for P367,500 which has a cost of P289,800. A used set is accepted as down payment, P89,600 being allowed on the trade in. The used set can be resold for P112,140 after reconditioning cost of P5,362. The company expects to make a 20% Gross Profit on the sale of the of used set. The balance of the sale is to be paid on a 10 month

installment basis starting May 1, 2015. Mr. X defaulted payment starting November 1, 2015 and the set was immediately repossessed...