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CHAPTER 6

SUGGESTED ANSWERS
EXERCISES
Exercise 6-1
Installment Accounts Recl, Jan. 1
Less Installment Accounts Recl, Dec. 31
Collections
Gross profit rate (10,000/40,000; 4,400/20,000)
Realized Gross Profit

2006 sales
P 400,000
100,000
P 300,000
25%__
P 75,000

2007 sales
P 200,000
40,000
P 160,000
22%__
P 35,200

Deferred Gross Profit, beg


Less Deferred Gross Profit,end P100,000 x 25%, P40,000 x 22%
Realized Gross Profit

2006 sales
P 100,000
25,000
P 75,000

2007 sales
P 44,000
8,800
P 35,200

Exercise 6-2
Deferred Gross Profit 2006 [(P150,000 - -0- ) x 42%]
Deferred Gross Profit 2007 [(P480,000 - P120,000) x 37.5%]
Deferred Gross Profit 2008 [(P750,000 - P650,000) x 40%]*
Realized Gross Profit
* 66 2/3 166 2/3 = 40%
P300,000 40% = P750,000

63,000
135,000
40,000
238,000

Exercise 6-3
(G) (1) P50,000 - P11,000
(E) (2)
P10,500 - (25% of P20,000) = P5,500/P25,000
(F) (3)
P50,000 x 22%
(H) (4) P1,100/22%
(B) (5)
P80,000 x 75%
(A) (6) P80,000 x 25%
(C) (7)
P28,200 + P91,800
(D) (8) P28,200/P120,000
(9)
2006 = P10,000 x 22% = P 2,200
2007 = P50,000 x 25% = 12,500
2008 = P45,000 x 23.5% = 10,575

P 39,000
22%
P 11,000
P 5,000
P 60,000
P 20,000
P120,000
23.5%
P 25,275

Exercise 6-4
1.
Deferred Gross Profit 2006
Deferred Gross Profit 2007
Deferred Gross Profit 2008
Realized Gross Profit
Deferred gross profit before adj.
Deferred gross profit after adj.
(Inst. contract recl x GP rate)
Realized gross profit

4,500
14,000
69,000
2006
P 8,000
__3,500
P 4,500

87,500
2007
2008
P26,000
P105,000
_12,000
P14,000

__36,000
P 69,000

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2.

page

Cash collections
2006 sales - P4,500 /35%
2007 sales - p14,000/30%
2008 sales - P69,000/40%
Total

Installment Contract Receivable, beg.


Less Installment Contract Receivable, end
Collections

P 12,857
46,667
172,500
P232,024
2006
P 22,857
10,000
P12,857

2007
2008
P86,667 P262,500
40,000
90,000
P46,667 P 172,500

Exercise 6-5
a.
b.
c.

d.

e.
f.

g.

h.

Installment Contracts Receivable


Installment Sales

250,000

Cash
Installment Contracts Receivable

120,000

Cost of Installment Sales


Inventory
50,000 / 250,000 = 20%

200,000

250,000
120,000
200,000

Inventory of Repossessed Merchandise


Deferred Gross Profit (P20,000 x 20%)
Loss on Repossession
Installment Contracts Receivable

14,500
4,000
1,500

Expenses
Cash

16,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit

20,000
16,000
250,000
200,000
50,000

Deferred Gross Profit


Realized Gross Profit
P120,000 x 20% = P 24,000

24,000

Realized Gross Profit


Expenses
Loss on Repossession
Income Summary

24,000

24,000

16,000
1,500
6,500

Exercise 6-6
a.
Installment Contracts Receivable
Installment Sales

600,000

b.

405,000

Cost of Installment Sales


Shipments on Installment Sales

600,000
405,000

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c.

d.

e.

f.

page

Cash
Installment Contracts Receivable

360,000
360,000

Repossessed Merchandise
Deferred Gross Profit (P40,000 x 32.5%)
Loss on Repossession
Installment Contracts Receivable

24,000
13,000
3,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit
195,000/600,000 = 32.5%

600,000

Deferred Gross Profit


Realized Gross Profit
P360,000 x 32.5% = P117,000

117,000

40,000
405,000
195,000

117,000

Exercise 6-7
Requirement 1
a.
Cash
Installment Contracts Receivable
Interest Revenue
b.

c.

1,400
1,240
160

Repossessed Merchandise
Deferred Gross Profit (P4,000 x 40%)
Loss on Defaults
Installment Contracts Receivable

2,000
1,600
400
4,000

Deferred Gross Profit


Realized Gross Profit (P1,240 x 40%)

496
496

Requirement 2
a.
Repossessed Merchandise
Deferred Gross Profit
Loss on Defaults
Exercise 6-8
Repossessed Merchandise (P13,500/120%)
Deferred Gross Profit (P15,000 x 20%/120%)
Loss on Repossession
Installment Contracts Receivable
Exercise 6-9
a.
Trade-In Merchandise
Installment Contracts Receivable
Installment Sales

2,000
1,600
3,600
11,250
2,500
1,250
15,000
180,000
420,000
600,000

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Estimated resale

P280,000

price
Less:
Reconditioning cost
Gross profit
Estimated
realizable value

P30,000
_70,000

__100,000
P 180,000

Selling price
Less Overallowance
(P300,000 P180,000)
Adjusted selling
price
b.
c.

d.

P720,000
120,000
P600,000

Cost of Installment Sales


Automobiles

500,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit

600,000

Deferred Gross Profit


Realized Gross Profit
P180,000 x 16 2/3% = P30,000

Exercise 6 - 10
Correct entry
Allowance for Doubtful Installment Contract Recl
Deferred Gross Profit ( P 10,000 x 25/125 )
Repossessed Merchandise
Installment Contract Receivable
Correcting Entry
Deferred Gross Profit
Repossessed Merchandise
Allowance for Doubtful Accounts
Exercise 6-11
Requirement 1
Oct. 31
Cash
Installment Contracts Receivable
Real Estate
Deferred Gross Profit
GP rate = P150,000/P750,000 = 20%
Nov. 30

Cash
Installment Contracts Receivable
Interest Revenue
550,000 x 1% = 5,500

500,000
500,000
100,000
30,000
30,000

1,450
2,000
6,550
10,000
2,000
6,550
8,550

200,000
550,000
600,000
150,000
11,500
6,000
5,500

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Dec. 31

page

Cash
Installment Contracts Receivable
Interest Revenue
P550,000 P6,000 = P544,000 x 1% = P5,440

31

Deferred Gross Profit


Realized Gross Profit
P200,000 + P6,000 + P6,000 = P212,000 x 20%
Requirement 2
Oct. 31
Cash
Installment Contracts Receivable
Real Estate
Deferred Gross Profit
GP rate = P150,000/P750,000 = 20%
Nov. 30

Dec. 31

31

11,440
6,000
5,440
42,400
42,400
200,000
550,000
600,000
150,000

Cash
Installment Contracts Receivable
Interest Revenue
P550,000 x 1% = P5,500

6,000

Cash
Installment Contracts Receivable
Interest Revenue
P550,000 P500 = P549,500 x 1% x = P5,495

6,000

500
5,500

Deferred Gross Profit


Realized Gross Profit
P200,000 + P500 + P505 = P201,005 x 20% = P40,201

505
5,495
40,201
40,201

Exercise 6-12
Recovery of cost
P400,000
25,000

Realized gross profit


none
P 75,000
100,000/year

2008
2009
2010
2011 2014

none
none
P 25,000
P100,000/year

P400,000
P100,000
P 75,000
none

2008
2009 2014

P170,000
P 42,500

P230,000
P 57,500

a.

2008
2009
2010 2014

b.

c.

Exercise 6-13
1. Installment payment = P1,260,000/5.6502 = P223,000
2. Journal entries
Jan. 1
Cash
Notes Receivable (P223,000 x 10)
Real Estate Sales
Discount on Notes Receivable

140,000
2,230,000
1,400,000
970,000

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Jan. 1
1

Dec. 31

31

31

Cost of Real Estate Sales


Inventory or Real Estate

c.

d.

850,000
850,000

Real Estate Sales


Cost of Real Estate Sales
Deferred Gross Profit
GP rate = P550,000/P1,400,000 = 39.29%

1,400,000
850,000
550,000

Cash
Notes Receivable

223,000

Discount on Notes Receivable


Interest Revenue
(P2,230,000 P970,000) x 12% = P151,200

151,200

Deferred Gross Profit


Realized Gross Profit
[P140,000 + (P223,000- P151,200)] x 39.29%

83,216

Exercise 6-14
Requirement 1
a.
Land
Land Improvements
Cash
b.

page

Cash
Installment Contract Receivable
Installment Sales
A 5 @ P400,000 = P2,000,000
B 8 @ P300,000 = 2,400,000
C 3 @ P200,000 =
600,000
Total
P5,000,000

223,000

83,216

13,440,000
3,360,000
16,800,000
750,000
4,250,000
5,000,000

Cost of Installment Sales


3,000,000
Land
Land Improvements
Cost of sales = 16,800,000/28,000,000 = 60% x P5,000,000 = P3,000,000
Land
= 13,440,000/16,800,000 = 80% x P3,000,000 = P2,400,000
Land imp.
= 3,360,000/16,800,000 = 20% x P3,000,000 = P 600,000

Cash
Installment Contract Receivable
Interest Revenue
Requirement 2
a.
Installment Sales
Cost of Installment Sales
Deferred Gross Profit
GP rate = 2,000,000/5,000,000 = 40%
b.
Deferred Gross Profit

151, 200

2,400,000
600,000

1,400,000
1,300,000
100,000
5,000,000
3,000,000
2,000,000
820,000

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Realized Gross Profit


(P750,000 + P1,300,000) x 40% = P820,000
Exercise 6-15
2005 Installment Accounts Receivable
Installment Sales

2006

820,000
4,700,000
47,000

Cost of Installment Sales


Inventory

2,585,000

Cash
Installment Accounts Receivable

2,585,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit

4,700,000

Installment Accounts Receivable


Installment Sales

4,500,000

Cost of Installment Sales


Inventory

2,610,000

Cash
Installment Accounts Receivable 2005
Installment Accounts Receivable 2006

3,885,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit

4,500,000

Deferred Gross Profit


Realized Gross Profit
2007

page

2,585,000
2,585,000
2,585,000
2,115,000
4,500,000
2,610,000
1,410,000
2,475,000
2,610,000
1,890,000
1,410,000
1,410,000

Installment Accounts Receivable


Installment Sales

5,800,000

Cost of Installment Sales


Inventory

3,074,000

Cash
Installment Accounts Receivable 2005
Installment Accounts Receivable 2006
Installment Accounts Receivable 2007

5,010,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit

5,800,000

Deferred Gross Profit 2005


Deferred Gross Profit 2006 P1,350,000 (P2,610,000-P2,475,000)
Deferred Gross Profit 2007

5,800,000
3,074,000
470,000
1,350,000
3,190,000
3,074,000
2,726,000
470,000
1,215,000
116,000

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page

Realized Gross Profit


2008

1,801,000

Installment Accounts Receivable


Installment Sale

6,100,000

Cost of Installment Sales


Inventory

3,111,000

Cash
Installment Accounts Receivable 2006
Installment Accounts Receivable 2007
Installment Accounts Receivable 2008

5,545,000

Installment Sales
Cost of Installment Sales
Deferred Gross Profit 2008

6,100,000

Deferred Gross Profit 2006


Deferred Gross Profit 2007
Deferred Gross Profit 2008 P3,355,000 P3,111,000
Realized Gross Profit

450,000
1,740,000
244,000

Gross Profit Recognized:


Full Accrual;
Cost Recovery Method

6,100,000
3,111,000
450,000
1,740,000
3,355,000
3,111,000
2,989,000

2005
P 2,150,000
0

2,434,000
2006
P 1,890,000
1,410,000

2007
P 2,726,000
1,801,000

2008
P 2,989,000
2,434,000

Exercise 6-16
Installment sales
Cost of Installment sales
Gross profit percentage
Cash collections:
2006 Sales
2007 Sales
2008 Sales
Realized gross profit on installment sales

2006
P 400,000
248,000
38%

2007
P 475,000
280.250
41%

2008
P 525,000
341,250
35%

128,000

232,000
114,000

28,000
218,500
162,750
80,250

112,000

COMPUTATIONS :
1
P 341,250 / . 65 = P 525,000
2

P 400,000 x . 62 = P 248,000

1 - (P 280,250 / P 475,000) = 41%

Gross profit recognized in 2008


All costs from 2006 sales are recovered
Cash received equals gross profit
All cost from 2008 sales are not recovered
Cash received goes to recover costs-gross profit
Gross profit reported in 2008 from 2006 sales
Costs of 2007 sales

P 80,250
28,000
0
P 52,250
P 280,250

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Costs recovered in 2005


Costs to be recovered in 2005
Cash received related to 2007 sales
5

Cash collections in 2006 do not exceed costs of sales


Realized gross profit in 2006 = P 0

Cash collections for 2006 sales ( P 128,000 + 232,000 )


Costs of 2006 sales
Realized gross profit in 2007

Exercise 6-17
Requirement 1
2007
Jan.
1
Cash
Notes Receivable (2,197,100 x 10)
Real Estate Sales
Discount on Notes Receivable (2,347,100 - 1,500,000)
1
Dec 31

31
31

2008
Dec. 31

Cost of Real Estate Sales (240,000 x 30)


Inventory of Real Estate
Real Estate Sales
Cost of Real Estate Sales
Deferred Gross Profit - Real Estate Sales
GP rate = 7,800,000/15,000,000 = 52%

page

114,000
166,250
P 218,500

P 360,000
248,000
P 112,000

1,500,000
21,971,000
15,000,000
8,471,000
7,200,000
7,200,000
15,000,000
7,200,000
7,800,000

Cash
Notes Receivable

2,197,100

Discount on Notes Receivable


Deferred Gross Profit - Real Estate Sales

1,350,000

Cash
Notes Receivable

2,197,100

31

Discount on Notes Receivable


Deferred Gross Profit - Real Estate Sales
(P13,500,000 - P2,197,100 + P1,350,000) x 10%
Requirement 2
Date
Cost
Collection
Jan. 01, 2007
7,200,000
1,500,000
Dec. 31, 2007
2,197,100
Dec. 31, 2008
2,197,100

Notes receivable (P21,971,000 - P2,197,100 - P2,197,100)


Less: Discount on notes receivable

2,197,100
1,350,000

2,197,100
1,265,300
1,265,300
Unrecovered Cost
5,700,000
3,502,900
1,305,800

P17,576,800

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(P8,471,000-P1,350,000- P1,265,300)
Deferred gross profit (P7,800,000 + P1,350,000 + P1,265,300)
Unrecovered cost

P 5,855,700
10,415,300

16,271,000
P 1,305,800

Exercise 6-18
Selling Price
Cost of Land
Gross Profit

P 10,000,000
4,000,000
P 6,000,000

Gross Profit rate ( 600 / 1,000 )


a) Full accrual method

60%
2008
2009 2010

P 6,000,000
none

b) Installment method
2008
2009
2010

Collections
Cost Recovery
P 400,000
P 160,000
300,000
120,000
___300,000
___120,000
P1,000,000
P 400,000

Gross Profit
P 240,000
180,000
___180,000
P 600,000

Collections
Cost Recovery
P 400,000
P 400,000
300,000
___300,000
____-___
P 400,000
P 1,000,000

Gross Profit
P
300,000
___300,000
P 600,000

c) Cost Recovery method


2008
2009
2010

PROBLEMS
Problem 6-1
1.
2007 - (P12,000* + P228,000) (P240,000 + P520,000 + P40,000)
2008 - (P1,500,000 - P975,000) P1,500,000
*P40,000 P24,000 P4,000 = P12,000
2.a.Installment Sales
Cost of Installment Sales
Deferred Gross Profit 2008
b.Deferred Gross Profit 2007 (520,000 x 30%)
Deferred Gross Profit 2008 (740,000 x 35%)
Realized Gross Profit
c.Sales
Realized Gross Profit
Cost of Sales
Gain or Loss on Repossession
Selling and Administrative Expenses
Income Summary
d.Income Tax
Income Tax Payable

30%
35%
1,500,000
975,000
525,000
156,000
259,000
415,000
2,120,000
415,000
1,650,000
4,000
660,000
221,000
77,350
77,350

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e.Income Summary
Income Tax

77,350

d.Income Summary
Retained Earnings
Requirement 3

143,650

77,350
143,650
Excellent Co.
Statement of Recognized Income and Expenses
For the Year Ended December 31, 2008

Sales
Cost of Sales
Gross Profit
Realized Gross Profit on Installment Sales
Total Realized Gross Profit
Less Loss on Repossession
Realized Gross Profit after Loss on Repossession
Selling and Administrative Expenses
Net Income before Income Tax
Income Tax
Net Income

P 2,120,000
_1,650,000
P 470,000
__415,000
P 885,000
____4,000
P 881,000
__660,000
P 221,000
77,350
P143,650

Problem 6-2
Requirement 1 Computation of gross profit rates
2006 sales
2007 sales
2008 sales

P22,500/P50,0000
P96,000/P240,000
100% - (P310,000/P500,000)

45%
40%
38%

Requirement 2 Income Statement


Reliance Sales Corp.
Statement of Recognized income and Expenses
For the Year Ended December 31, 2008

Sales
Cost of Sales:
Inventory, January 1
Purchases
Repossessed Mdse.
Cost of Goods Available
for Sale
Less Inventory, Dec. 31
Gross Profit
Less Deferred Gross Profit, including DGP on
repossessed merchandise
Realized Gross Profit on 2008 sales
Add Realized Gross Profit on 2006 & 2007 sales
Total

Regular
Sales
P 192,000

Installment
Sales
Total
P 500,000
P 692,000

P 30,000
455,000
__10,000
P495,000
__35,000

150,000
P 42,000

310,000
P 190,000

460,000
P 232,000

________
P 42,000

32,300
P 157,700

32,300
P 199,700
100,650
P 300,350

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Less Loss on Repossession [3,000-(3,600+4,000+1,900)]


Realized gross profit after loss on Repossession
Operating Expenses
Net Loss
Analysis of gross profit on installment sales:

3,500
P 296,850
300,000
P 3,150
2006

Installment sales
Installment contracts recl, beginning
Installment contracts recl, end
Defaulted installment contracts recl
Collections
Gross profit rate
Realized gross profit
Deferred gross profit
Requirement 3 -

2007

2008
P500,000

P 50,000
( 5,000)
( 8,000)
P 37,000
45%
P 16,650

P240,000
( 20,000)
( 10,000)
P210,000
40%
P84,000

(80,000)
(5,000)
P415,000
38%
P157,700

P 2,250

P 8,000

P 30,400

Reliance Corp.
Statement of Financial Position
December 31, 2008
Assets
Cash
Inst. Contracts Recl, 2008
Inst. Contracts Recl, 2007
Inst. Contracts Recl, 2006
Accounts Recl
Inventory
Other Assets

P 25,000
80,000
20,000
5,000
40,000
35,000
52,000

Total Assets

P257,000

Liabilities & Shareholders Equity


Accounts Payable
P 75,000
Deferred Gross Profit, 2008
30,400
Deferred Gross Profit, 2007
8,000
Deferred Gross Profit, 2006
2,250
Ordinary Share Capital
100,000
Retained Earnings
41,350
________
Total Liabilities &
Shareolders Equity
P257,000

Problem 6-3
1. Schedule of Cost of Goods Sold
Inventory, January 1
Purchases, including freight-in
Repossessed Merchandise
Cost of Goods Available for Sale
Less Inventory, December 31
Cost of Goods Sold

2. Schedule of Allocation of Cost of Goods Sold


Type of
Amount of
Amount Based
Sale
Sales
on Cash Sales
Cash
P 300,000
P 300,000
Charge
600,000
500,000
Installment
1,500,000
1,200,000

P 240,000
1,250,000
70,000
P1,560,000
260,000
P1,300,000

Ratio
60/400
100/400
240/400

Allocation of
CGS
P 195,000
325,000
780,000

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P2,400,000

P2,000,000

P1,300,000

3.
Fuji Products
Statement of Recognized Income and Expenses
For the Year Ended December 31, 2008
Cash
Charge
Installment
Sales
Sales
Sales
Sales
P300,000
P600,000
P 1,500,000
Cost of Sales
195,000
325,000
780,000
Gross Profit
P105,000
P275,000
P 720,000
Less Deferred Gross Profit, 2008 sales
460,800
Realized Gross Profit on 2008 sales
P105,000
P275,000
P 263,200
Add Realized Gross Profit on 2006 and 2007 sales
Total Realized Gross Profit
Less Loss on Repossession
Realized Gross Profit after loss on repossession
Operating Expenses, including bad debts
Net Income before Income Tax
Income Tax
Net Income

Total
P2,400,000
1,300,000
P1,100,000
460,800
P 639,200
P 169,500
P 808,700
51,000
P 757,700
465,000
P 292,700
102,445
P 190,255

Problem 6-4
1. Computation of gross profit rates
2006 sales
160,000/400,000
2007 sales
167,200/440,000
2008 sales
163,800/420,000
2.
a.

b.

3.
a.
b.

4.

Adjusting entries
Installment Sales
Cost of Installment Sales
Deferred Gross Profit 2008
Deferred Gross Profit 2006
Deferred Gross Profit 2007
Deferred Gross Profit 2008
Realized Gross Profit
2006 - (P110,000 P28,000 - P9,000 - P5,000) x 40% = P27,200
2007 - (P250,000 P92,000 - P2,800) x 38% = P58,976
2008 - (P420,000 P238,000) x 39% = P70,980
Correcting entries
Deferred Gross Profit 2006 (9,000 x 40%)
Deferred Gross Profit - 2007 (2,800 x 38%)
Operating Expenses
Inventory of Repossessed Merchandise(4,000 - 400 - 600)
Deferred Gross Profit 2006 (5,000 x 40%)
Operating Expenses
The indicated gain of P600 is ignored and deducted from the
market value of the repossessed merchandise.
Closing entries

40%
38%
39%
420,000
256,200
163,800
27,200
58,976
70,980
157,156

3,600
1,064
4,664
3,000
2,000
5,000

AA1 - Chapter 6 (2008 edition)


14

a.

b.
c.
d.

Realized Gross Profit


Operating Expenses
Income Summary

157,156

Income Tax
Income Tax Payable

21,987

Income Summary
Income Tax

21,987

Income Summary
Retained Earnings

40,833

Problem 6-5
(1)
Sept. 30

(2)

Oct. 31

Nov. 30

Dec. 31

Sept. 30
Oct. 31
Nov. 30
Dec. 31

(4)

Dec. 31
2006
Feb.

Problem 6-6

94,336
62,820
21,987
21,987
40,833

Cash
Installment Contract Receivable
Piano
Deferred Gross Profit
60/160 = 37.5%

48,000
432,000
300,000
180,000

Cash
Installment Contract Receivable
Installment Revenue

48,000

Cash
Installment Contract Receivable
Installment Revenue

48,000

Cash
Installment Contract Receivable
Installment Revenue

48,000

Date

(3)

page

45,840
2,160
46,069
1,931
46,300
1,700

Collection

Interest

Principal
Reduction

48,000
48,000
48,000
48,000

432,000 x .005 = 2,160


386,160 x .005 = 1,931
340,091 x .005 = 1,700

48,000
45,840
46,069
46,300

Principal
Balance
480,000
432,000
386,160
340,091
293,791

Deferred Gross Profit


69,828
Realized Gross Profit
48,000 + 45,840 +46,069 + 46,300 = 186,209 x 37.5% = 69,828
Repossessed Piano
Deferred Gross Profit
Loss on Repossession
Installment Contract Receivable

69,828

56,000
36,724
5,207
97,931

AA1 - Chapter 6 (2008 edition)


15

(1)

page

Sales 1,260,000 + (2,650,000 1.06)


Cost of Sales:
Inventory, beginning
Purchases

P3,760,000
P 580,600
2,093,000
P2,673,600
333,000

Less: Inventory end


Gross Profit
Gross Profit Rate (1,419,400 / 3,760,000 )
(2)
Installment
Time of Sale
1
2
3
4
5
6

Equivalent Cash
Sales Price
10,000
(10,600 1.06)
7,350
(10,000 - 2,650)
6,893.50
(7,350 - (530 - 73.50)
6,432.43
(6,893.50 -(530 - 68.93)
5,966.75
(6,432.43-(530 - 64.32)
5,446.42
(5,966.75- (530 - 59.67)
5,021.38
(5,496.42- (530 - 54.96)

Contract
Balance
10,600
7,950
(10,000 - 2,650)
7,420
(7,950 -530)
6,890
(7,420 - 530)
6,360
(6,890 - 530)
5,830
(6,360 -530)
5,300
(5,830 -530)

(3) Installment Sales Price


Less: Installment on contract
10,600 - (10,600 1.06)
Installment sales at cash sales price
Less: Downpayment
Collections
Less interest
Balance
Less: DGP 5,966.75 x 37.75%
Repossessed Sales
Repossessed Inventory
Net gain on defaults

(4) Cash Sales (1,260,000 x 37.75%)


Installment Sales:
Downpayment 662,500 x 37.75%
Installments on defaults 1,383.30 x 37.75%
Installment Collections

2,340,600
P1,419,400
3,760,000
37.75%

Interest
Revenue
-

Cash
Collection
2,650
(10,600 x 25%)
73.50
530
(7,350 x 1%)
(7,950 15)
68.93
530
(6,893.50 x 1%)
(7,950 15)
64.32
530
(6,432.43x 1%)
(7,950 15)
59.67
530
(5,966.75 x 1%)
(7,950 15)
54.96
530
(5,496.42 x 1%)
(7,950 15)
50.21
530
(5,021.38 1%)
(7,950 15)
P10,600.00
600.00
P10.000.00
P 2,650.00

P 1,590.00
206.70

1,383.30

4,033.60
P5,966.70

2,252.45
2,300.00
1,800.00

P6,352.45
P 385.75

475,650

250,093.75
522.20
P791,820.00

AA1 - Chapter 6 (2008 edition)


16

page

Less Interest (P2,650,000 - P10,600) /1.06 x .03716


Balance

92,528.40
P699,291.60
x 37.75%

263,982.60
P990,248.60

Realized Gross Profit


Problem 6-7
1. Total installment sales
Less Installment Receivable - Dec. 31
Total Collections in Sales

P3,450,000
1,594,600
P1,855,400

2.

P1,855,400

Collections
GPR:
Total Selling price
Total Cost
GP
Total sales
RGP

P9,500,000
5,225,000
P4,275,000
9,500,000

45%__
P 834,930

3.

Installment Receivable - Dec. 31


GPR
Unrealized GP

P1,594,600
x 45%_
P 717,570

4.

Realized gross profit


Interest Income
Operating Expenses
Net Income before Income Tax
Income Tax
Net Income

P 834,930
520,300
(682,130)
P 673,100
235,585
P437,515

Problem 6-8
Sales (Schedule 1)
Cost of Sales (43% of Sales, Schedule 2)
Gross Profit
Less Sales Commission
Gross profit excluding Commission
Less DGP 4,373,200 / 8,060,000 x 5,370,000
Realized gross profit
Expenses:
Advertising
Sales Managers Salaries
Gen. Operating Expenses (2,360,000 x 1/ 4 )
Net loss

P 8,060,000
3,465,800
P 4,594,200
221,000
P 4,373,200
2,913,658
P 1,459,542
P730,000
900,000
590,000 2,220,000
P 760,458

Schedule 1 Sales
A 26 @ 150,000
B 32 @ 100,000
C 12 @ 80,000

Total Sales
Price
P3,900,000
3,200,000
960,000
P8,060,000

Cash
Received
P1,650,000
800,000
240,000
P2,690,000

Installment NR
Balance
2,250,000
2,400,000
720,000
5,370,000

AA1 - Chapter 6 (2008 edition)


17

page

Schedule 2 - Cost of Sales Rate


A
B
C

No. of lots
80
100
130
310

Unit
Sales Price
150,000
100,000
80,000

Cost of Land
Legal fees, etc.
Grading
Water & Sewerage
Paving expenses
General operating expenses (2,360,000 x 3/4)
Total cost
Total sales value
Cost of sales rate
Problem 6 - 9
2007 Inventory
Cash

P 4,800,000
600,000
2,250,000
1,849,000
2,663,000
1,770,000
P13,932,000
32,400.000
43%
45,200
45,200

Notes Receivable 2007 (32,000 + 62,000 + 3,600)


Discount on Notes Receivable - 2007 (7,167 + 3,600 )
Installment Sales

97,600

Cost of Installment Sales (45,200 - 2,000)


Inventory

43,200

Cash
Notes Receivable - 2007 (32,000 + 3,600)

35,600

Discount on Notes Receivable - 2007


Interest Revenue

2008

Total
Sales Value
P12,000,000
10,000,000
10,400,000
P32,400,000

10,767
86,833
43,200
35,600
3,600
3,600

Installment Sales
Cost of Installment Sales
Deferred Gross Profit - 2007

86,833

Deferred Gross Profit - 2007


Realized Gross Profit
43,633/86,833 = 50.25% x 32,000

16,080

Inventory
Cash

52,020

Notes Receivable - 2008 (160,000 + 50,000 + 5,500 - 26,000)


Discount on Notes Receivable 2008[8,043 + (5,500 - (7,167 - 5,579)]

89,500

43,200
43,633

16,080

52,020
11,955

AA1 - Chapter 6 (2008 edition)


18

page

Installment Sales

77,545

Cost of Installment Sales (52,020 - 8,000)


Inventory

44,020

Cash
Notes Receivable 2008 (89,500 - 60,000)
Notes Receivable 2007 (62,000 - 36,000)

55,500

Discount on Notes Receivable 2008 (5,500 - 1,588)


Discount on Notes Receivable 2007 (7,167 - 5,579)
Interest Revenue

3,912
1,588

Installment Sales
Cost of Installment Sales
Deferred Gross Profit - 2008

77,545

Deferred Gross Profit - 2008 (29,500 - 3,912 x 43.33%)


Deferred Gross Profit - 2007 (26,000 - 1,588 = 24,412 x 50.22%)
Realized Gross Profit
33,525/77,545 = 43.23%

11,062
11,267

Problem 6-10
2005
Jan. 1

2006
July 1

2007
Dec. 31

2008
Feb. 1

Feb. 1

44,020
29,500
26,000

5,500
44,020
33,525

23,329

Cash
Notes Receivable
Idle Plant
Deferred Gross Profit

2,000,000
5,000,000

Cash
Notes Receivable
Deferred Gross Profit

1,900,000

5,000,000
2,000,000

1,000,000
900,000

Cash
2,250,000
Deferred Gross Profit
400,000
Notes Receivable
Interest. Revenue
2,250,000 - (5,000,000 - 2,000,000 - 1,900,000) = 1,150,000
Cash
Notes Receivable
Interest Revenue

2,825,000

Deferred Gross Profit (2,000,000 + 900,000 - 400,000)


Gain on Sale of Idle Plant

2,500,000

1,500,000
1,150,000

2,500,000
325,000
2,000,000

AA1 - Chapter 6 (2008 edition)


19

page

Interest Revenue
500,000
(900,000 + 750,000 + 325,000 = 1,975,000 - 1,150,000 - 325,000 = 500,000)
MULTIPLE CHOICE
1.

2008
Inst. Sales
8,765,625 68%
Inst. Rec. beg.
Inst. Rec. end
Collections
GPR

2
3
4

A
B
C

2007

P12,890,625
(9,728,125)
P 3,162,500
x 32%
P 1,012,000

P8,387,500
P1,512,500
(3,025,000) __________
P5,362,500
P1,512,500 P10,037,500
x 30%
x 28%
P1,608,750 P 423,500 P3,044,250

Deferred gross profit before adjustment


Deferred gross profit after adjustment
2007 - P16,250 x 30/130
2008 - P90,000 x 33 1/3 /133 1/3
Realized gross profit
Operating expenses
Net income

P38,000
P 3,750
22,500

Downpayment (P545,000 x .2)


Inst. Collections (P545,000 x 8 x .40)
Collections in year 1 on Year 1 Inst. Sales
Realized gross profit for Year 1
Installment sales - Year 2
Less Collections in Year 2
DP (P785,000 x .20)
Installment collection (P785,000 x .80 x .40)
Balance, end of Year 2

26,250
P11,750
1,500
P10,250
P109,000
174,400
P283,400
x 35/135
P 73,474
P785,000

P157,000
251,200

Unrealized GP on Year 2 installment sales at the end of Year 2

408,200
P376,800
x 35/135
P 97,689

Inst. Accts. Rec., end of year 3


On year 3 installment sales (P968,000 x .80 x .60)
On Year 2 installment sales (P785,000 x .80 x .25)
Total installment accounts receivable, end of Year 3

P464,640
157,000
P621,640

Total installment accounts receivable, end of Year 3


Total unrealized gross profit at end of Year 3

10

2006

P621,640
x 35/135
P161,166

AA1 - Chapter 6 (2008 edition)


20

page

11

2007 - 100% - (31,250/62,500) = 50% x P25,000


2008 - 100% - (45,000/100,000) = 55% x P62,500
Total

P12,500
34,375
P46,875

12

Sales - regular
Cost of sales - regular
Gross profit - regular
Realized gross profit (see D1)
Total gross profit
Selling expenses
Net income

P187,500
112,500
P 75,000
46,875
P121,875
31,250
P 90,625

13. D

P610,750 x 60%

P366,450

14

P306,520 x 40%

P122,608

15

2006 sales - P17,400 x 36%


2007 sales - P(205,400 - P200 - P25,800) x 39%
Total

16

Selling price
Cost (P200 x 61%)
Gain from sale of repossessed merchandise

17

(P344,460 - P67,440 - P2,200) x 34%

18

Market value of repossessed ref (P1,700 x 63%)


Unrecovered cost (P2,200 x 66%)
Loss on repossession

19

2006 sales - 100% - (247/380) = 35% x P24,020


2007 sales - see 6-17
2008 sales - 100% - (379,260/602,000 = 37%
37% x (P602,000-P410,090)
Total

P 6,264
69,966
P76,230
P 200
122
P 78
P93,438.80
P1,071
1,452
P 381
P

20

( P100,000 - P12,500 - P6,250) x 50%

21

( 375,000 - 150,000) x 45%*


*Installment sales
Invty. Beg.
P 62,500
Purchases
435,000
Repossessions
2,500
Mdse. Avail for sale
500,000
Less Invty. End
75,000
CGS
425,000
Cost of Regular sale ( 312,500 x 70% )
218,750
Gross profit on Installment sales
Gross profit rate on Installment sales (168,750/375,000) = 45%

8,407.00
93,438.80

71,006.70
P172,852.50
P40,625
P101,250
P 375,000

206,250

AA1 - Chapter 6 (2008 edition)


21

22

(3,750 - (6,250 x 50%)

23

2006 sales - P108,750 x 25%


2007 sales - P120,000 x 27.5%
2008 sales - P 93,750 x 28%
Total

24

Value assigned to repossessed merchandise:


2006 sales
2007 sales
Unrecovered cost
2006 sales - P22,500 x 75%
2007 sales - P24,000 x 72.5%
Loss on repossession

page

P625 loss
P27,187.50
33,000.00
26,250.00
P86,437.50
P 9,000
13,500
P16,875
17,400

P22,500
34,275
P11,775

25

2006 sales - P24,000 x 39%


2007 sales - (P300,000 - P60,000 - P10,000) x 42%
2008 sales - (P480,000 - P320,000 - P5,000) x 40%
Total

P 9,360
96,600
62,000
P167,960

26

2007 sales - P4,500 - (P10,000 x 58%)


2008 sales - P3,500 - (P5,000 x 60%)
Net gain (loss) on repossession

27

P360,000 x 33 1/3%

28

Loss = P8,000 - (P15,000 x 60%)

29
30

C
A

(P800,000 - P250,000 - P300,000 - P15,000) x 40%


(P75,810/42%) + P75,810

P94,000
P256,310

31

2006 sales - P35,800 x 32.26%


2007 sales - (P155,000 - P42,000) x 40%
2008 sales - (P256,310 - P100,500) x 42/142
total

P 11,550
45,200
46,085
P102,835

32

(P120,000 - P15,000 - P7,750) x 45%

33

Inventory, Dec. 31, 2007


Purchases
Repossessions
Cost of goods available for sale
Less Inventory, Dec. 31, 2008
Cost of goods sold
Less Cost of goods sold on regular sales (P385,000 x 70%)
Cost of installment sales
Gross profit rate on installment sales [100% - (263,500/425,000)]
Realized gross profit - (P425,000 - P200,000) x 38%

P 70,000
555,000
3,000
P628,000
95,000
P533,000
269,500
P263,500
38%
P85,500

34

A.

(7,750 x 55%) - 3,000

P1,262.50

P(1,300)
500
P (800)
P120,000
P1,000

P43,762.50

AA1 - Chapter 6 (2008 edition)


22

page

35

Cash sales
Charge sales (P180,000/120%)
Installment sales (P446,400/124%)
Total sales - cash basis

P 90,000
150,000
360,000
P600,000

36

Inventory, beginning
Delivered cost of purchases
Repossessed merchandise
Cost of goods available for sale
Less Inventory, end
Cost of goods sold

P52,500
393,000
15,000
P460,500
70,500
P390,000

Cost of installment sales - P390,000 x 360/600

P234,000

37

C
Installment recl, beg
Installment sales
Installment recl, end
Defaulted recl
Collections

38

2006
P 74,000

2007
P123,000

( 15,000)
( 18,000)
P 41,000

( 45,000)
( 21,000)
P 57,000

Sales price of Article A


Less Overvaluation on trade -in
Sales price
Reconditioning cost
Normal profit
Market value of trade-in
Allowed trade-in value
Adjusted sales price
Cost of Article A
Gross profit
Gross profit rate
Realized GP - (P80,000 + P40,000) x 25%

39

Inst. recl balance, Dec. 31, 2007 (P360,000 - P120,000)


Installment payment, Jan. 1 - Mar. 1 (P20,000 x 3)
Inst. recl balance, April 1
Cost percentage
Unrecovered cost
Market value of repossessed mdse. (P13,500 - P800 - P2,700)
Loss on repossession

2008
P446,400
( 270,000)
---___
P176,400

P400,000
P110,000
( 8,000)
( 22,000)
P 80,000
120,000

40,000
P360,000
270,000
P 90,000
25%
P30,000
P240,000
60,000
P180,000
x 75%
P135,000
100,000
P 35,000

AA1 - Chapter 6 (2008 edition)


23

40

41

42

page

Expected loss (125,000 x 4%*)


Less: Loss on default 2008
Recovery from sale of repossessed merchandise
Balance of allowance for defaulted contracts; Dec. 31, 2008
*Loss on default
P 250
in 2007 on 2007
sales
Loss on default
3,750
in 2008 on 2007
sales
Recovery on
P 800
sale
of
repossession in
2008
Repossessed
200
Merchandise on
hand
Expected loss
Sales
Rate of loss as
a % of sales
Inst. contract recl beg.
Less: Inst. Contract recl, end
Inst. Contract recl written off
Collections
Gross profit rate
Realized gross profit

P5,000
P1,500
175

P 4,000

1,000
P 3,000
P75,000
4%
P31,500
P2,000
3,750

Lot A (791,086.20 x 30%)


Lot B (973,333.30 x 25%)
Lot C and House (P2,080,000 x 40%)
Realized gross profit
Schedule of Collection
Lot A
3/31 - Initial balance
3/31 - Down payment
6/30 - P120,000 - (P1,200,000 x 2.5%)
9/30 - P120,000 - (P1,110,000 x 2.5%)
12/31- P120,000 - (P1,017,750 x 2.5%)
Lot B
10/31 Initial balance
10/31 Down payment
12/31 P200,000 (P1,600,000 x 1.667%)
Lot C
6/30 Initial balance
6/30 Down payment

1,325
P3,675

5,750
P25,750
x 40%
P10,300
P 237,325.80
243,333.30
832,000.00
P1,312,659.10

Principal
P514,280.00
90,000.00
92,250.00
94,556.20
P791,086.20
P800,000.00
173,330.30
P973,333.30
P1,800,000.00

Balance
P1,714,280.00
1,200,000.00
1,110,000.00
1,017,750.00
923,193.80
P2,400,000.00
160,000
1,426,666.70
P4,200,000
2,400,000

AA1 - Chapter 6 (2008 edition)


24

page

12/31- P400,000 (P2,400,000 x 5%)

280,000.00
P2,080,000.00

2,120,000

Allocation of Cost & GP rates:


Lot A P1,600,000 x 6/8
Lot B - P2,400,000 x 6/8
Lot C: Farm A P400,000
B P600,000
House - P1,520,000

Cost
P1,200,000
1,800,000

SP
P1,714,280
2,400,000

GP
P514,280
600,000

%
35%
25%

2,520,000

4,200,000

1,680,000

40%

43

Unpaid balance upon default


Less: DGP (P2,120,000 x 40%)
Unrecovered cost
Market value [P2,520,000 (P1,520,000 20)]
Gain on repossession

44

8,000,000 (8,000,000 x 20%) = 6,400,000 x 3% =


6,400,000 (642,957.30 192,000) x 3%
Collections to be applied on interest

45

Downpayment
1st inst. 642,957.30 - 192,000
2nd inst. 642,957.30 - 192,000
Total collections (P8,000,000 - (2,500,000 + 3,560,000) / 8,000,000]
Realized gross profit

P2,120,000
848,000
P1,272,000
2,444,000
P1,172,000
P192,000.00
178,471.30
P370,471.30
P1,600,000.00
450,957.30
464,486.00
P 2,515,443.30
x 24.25%
P 609,995.00