ARTS CPA Review

2F & 3F Crème Building, Abella St., Naga City

Tel No. (054) 472-9104; E-mail: artscparev@yahoo.com

PRACTICAL ACCOUNTING PROBLEMS II MARK FRANCIS G. NG, CPA

REVENUE RECOGNITION – INSTALLMENT SALES

COMPUTATION OF REALIZED GROSS PROFIT

1. Oxygen Company began operating on January 1, 2009 and appropriately uses the installment sales method
of accounting. The following data are available for 2009 and 2010:
2009 2010
Installment sales P1,500,000 P1,800,000
Gross profit on sales 30% 40%
Cash Collections from:
2009 sales P500,000 P600,000
2010 sales -- 700,000
The realized gross profit for 2010 is:
RELATIONSHIPS AMONG: INSTALLMENT SALES/ DEFERRED GP/ COLLECTIONS/ REALIZED GP
2. Gecko Company, which began operating on January 1, 2009, appropriately uses the installment method of
accounting. The following information pertains to its operations for the year 2009:

Installment sales P500,000

Regular sales 300,000
Cost of installment sales 250,000
Cost of regular sales 150,000
General and administrative expenses 50,000
Collection on installment sales 100,000
In its December 31, 2009 balance sheet, what amount should Gecko report as deferred gross profit?
COMPUTATION OF NET INCOME USING INSTALLMENT METHOD
3. Louis Company, which began operations on January 1, 2009, appropriately uses the installment method of
accounting. The following information pertains to Louis’ operations for the year 2009:
Installment sales P1,000,000
Regular sales 600,000
Cost of installment sales 500,000
Cost of regular sales 300,000
General and administrative expense 100,000
Collection on installment sales 200,000
The net income on December 31, 2009 is:
TREATMENT OF WRITE-OFF
4. Tamyra Company, which began operating in 2009, accounts for revenues using the installment method.
Tamyra’s sales and collections for the year were P60,000 and P35,000, respectively. Uncollectible accounts
receivable of P5,000 were written off during 2009. Tamyra’s gross profit rate is 30%. In its December 31,
2009 balance sheet, what amount should Tamyra report as deferred revenue?
TREATMENT OF INSTALLMENT A/R BALANCES
5. Draco Company, which began operations on January 1, 2009, appropriately uses the installment method of
accounting to record revenue. The following information is available for the years ended December 31,
2009 and 2010:
2009 2010
Sales P1,000,000 P2,000,000
Gross profit realized on sales made in:
2009 150,000 90,000
2010 -- 200,000
Gross profit percentage 30% 40%
What amount of installment accounts receivable should Draco report in its December 31, 2010 balance
sheet?
TREATMENT OF DOWNPAYMENT
6. On January 2, 2009, Brene Company sold a machine to Walter Company for P900,000, resulting in a gain
of P270,000. On that date, Walter 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, 2010. Brene
appropriately accounted for the sale under the installment method. Walter made a timely payment of the
first installment on January 2, 2010 of P325,000, which included accrued interest of P75,000. What amount
of deferred gross profit should Brene report at December 31, 2010?

DETERMINATION OF GROSS PROFIT RATES (GPR)

Warren Company
Warren Company sells residential lots on installment basis. The following data was taken from the
accounting records of the company as at December 31, 2009:
Installment accounts receivable, January 1 P755,000
Installment accounts receivable, December 31 840,000
Deferred gross profit, January 1 339,750
Installment sales 950,000
7. Refer to Warren Company. Compute the realized gross profit on December 31, 2009.
8. Refer to Warren Company. Compute the balance of the Deferred Gross Profit account on December 31,
2009.

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 REPOSESSIONS; COMPUTATION OF GAIN/LOSS ON REPOSSESSION
Milan Company
In August 2009, Milan Company 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 2009 reduced the principal of the note to P2,000,000. The buyer defaulted on the note at the beginning
of 2010, and the property was repossessed. The property had a fair market value of P1,150,000 at the
time of repossession.
9. Refer to Milan Company. Compute the gain (loss) on repossession if profit is recognized at the point of
sale.
10. Refer to Milan Company. Compute the gain (loss) on repossession if gross profit is recognized in proportion
to collections.

TIMELINE OF INSTALLMENT A/R

Suzanne Company
Suzanne Company sells locally manufactured jeeps on installment basis. Data presented below relates to
the company’s operations for the last three calendar years.
2010 2009 2008
Cost of installment sales P8,765,625 P7,700,000 P4,950,000
Gross profit rates on sales 32% 30% 28%
Installment accounts receivables, 12/31
From 2010 sales P9,728,125 -- --
From 2009 sales 3,025,000 P8,387,500 --
From 2008 sales -- 1,512,500 4,812,500
11. Refer to Suzanne Company. On December 31, 2010, how much is the total realized gross profit?
12. Refer to Suzanne Company. On December 31, 2010, how much is the deferred gross profit?

EXTRACTION OF INSTALLMENT SALES DATA FROM TOTAL SALES DATA - COMPREHENSIVE

Andrew Company
The following accounts appeared in the accounting records of Andrew Company as of December 31, 2010:
Installment accounts receivable, 2009 P15,000
Installment accounts receivable, 2010 200,000
Inventory, December 31, 2009 70,000
Purchases 555,000
Repossessions 3,000
Installment sales 425,000
Regular sales 385,000
Deferred gross profit - 2009 54,000

Additional information:
Installment accounts receivable - 2009, January 1, 2010 P120,000
Inventory of new and repossessed merchandise, December 31, 95,000
2010
Gross profit rate on regular sales 30%
Repossession was made during the year 2010. It was a 2009 sale and the corresponding uncollected
balance at the time of repossession was P7,200.

13. Refer to Andrew Company. Compute the total realized gross profit on installment sales for 2010.
14. Refer to Andrew Company. Compute the total realized gross profit on both regular and installment sales for
2010.

GPR BASED ON COST

15. Marcko Company, which sells appliances, started operations on January 10, 2010, operates on a calendar
year basis, and uses the installment method of revenue recognition. The following data were taken from
the 2009 and 2010 accounting records:
2009 2010
Installment sales P480,000 P620,000
Gross profit rates based on cost 25% 20%
Cash collections on 2009 sales 130,000 240,000
Cash collections on 2010 sales -- 160,000
What is the amount of realized gross profit to be recognized on December 31, 2010?

CASH METHOD TO INSTALLMENT METHOD

16. Leona Company 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 2010 presented the following
data:
Revenues - collection on principal P32,000
Revenues - interest 3,600
Cost of goods purchased (includes inventory of goods on hand of 45,200
P2,000)
The balance 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, 2010?

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 TREATMENT OF TRADE-IN TRANSACTIONS
17. Aaron Company sold a fitness equipment on installment basis on October 1, 2010. 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 pain 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 the used equipment. The realized gross profit from the 2010 collections was

REPOSSESSED MERCHANDISE
18. Mabon Company which sells goods on installment basis, recognizes at year end gross profit on collection which
consisted of cost and gross profit. It reported the following:
January 1 December 31
Installment Receivables
2008 P120,100 P0
2009 1,722,300 337,200
2010 0 2,050,450

Sales and cost of sales for the three years are as follows:
2008 2009 2010
Sales P1,900,000 P2,160,000 P3,010,000
Cost of sales 1,235,000 1,425,000 1,896,300
In 2010 the company repossessed merchandise with resale value of P8,500 from customers who defaulted in
payments. The sales were made in 2009 for P27,000 on which P16,000 was collected prior to default. As
collections are made, the company debits cash and credits installment receivable. The amount of adjustment on
the inventory of repossessed merchandise to the extent of the unrealized gross profit was a decrease of

COMPUTATION FOR DEFERRED GP, END

19. Taariq Company started operations on January 1, 2009 selling home appliances and furniture on installment
basis. For 2009 and 2010, the following represented operational details.
In Thousand Pesos
2009 2010
Installment sales P1,200 P1,500
Cost of installment sales 720 1,050
Collections on installment sales
2009 630 450
2010 0 900
On January 7, 2010, an installment sale account in 2009 defaulted and the merchandise with a market value of
P15,000 was repossessed. The related installment receivable balance as of date of default and repossession was
P24,000. The balance of the unrealized gross profit as of the end of 2010 was

EXTRACTION OF GROSS PROFIT RATE (GPR) – COMPREHENSIVE

20. On January 1, 2009, Baback Company commenced its sales of gas stoves. Separate accounts were set
for installment and cash sales, but perpetual inventory record was not kept. On the installment sales a down
payment of 1/3 was required, with the balance payable in 18 equal monthly installments. The transaction of the
company are as follows:
2009 2010
Sales:
New gas stoves for cash P27,000 P37,000
New gas stoves for installment
(including the 1/3 cash down payment) 235,000 330,000
Purchases 193,000 215,000
Physical inventories at December 31:
New gas stoves at cost 45,500 60,000
Cash collection on installment contracts, exclusive of down
payments:
2009 sales 54,000 77,000
2010 sales -- 70,000
The realized gross profit for the year 2010 that would be reported on the income statement amounted to:

INSTALLMENT SALES – VARIOUS CONCEPTS

Jabari Company
The data below are taken from the records of Jabari Company which sells appliances exclusively on the
installment basis.
2008 2009 2010
Installment Sales P365,500 P417,800 P610,750
Gross Profit Rate 36% 39% 40%
The balance in the Installment Accounts Receivable controlling accounts at the beginning and end of 2010 were:
2010
From Sales Made In: January 1 December 31
2008 P17,400 P --
2009 205,400 25,800
2010 -- 305,520
There was one repossession recorded during 2010, it related to a 2009 sale. The repossessed appliance was sold
at its fair value of P200, which equaled the uncollected balance in the customer’s installment accounts receivable.
21. Refer to Jabari Company. The total realized gross profit on prior year sales on December 31, 2010 was:
22. Refer to Jabari Company. How much is the gain (loss) from the sale of the repossessed appliance?

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 Mr. Manuel is a dealer in appliance who sells on an installment basis. A refrigerator which originally cost P924
was sold by him for P1,650 to Mr. santos who made a down payment of P220, but defaulted in subsequent
payments. Mr. Manuel repossessed the refrigerator at an appraised value of P460. To improve its salability, he
expended P60 for reconditioning. He was able to sell the refrigerator to Mr. Reyes for P1,000 at a down payment
of the first installment of P250.
23. Refer to Manuel, Santos, and Reyes. The realized gross profit from the first installment sale to Mr. Santos was:
24. Refer to Manuel, Santos, and Reyes. The realized gross profit from the second installment sale to Reyes was:
25. The Baden Company appropriately used the installment sales method in accounting for the following installment
sale. During 2010, Baden sold furniture to an individual for P3,000 at a gross profit of P1,200. On June 1, 2010,
this installment account receivable had a balance of P2,200 and it was determined that no further collections
would be made. Baden therefore repossessed the merchandise. When reacquired, the merchandise was appraised
at being worth only P1,000. In order to improve its salability, Baden incurred costs of P100 for reconditioning.
What should be the loss on repossession attributable to this merchandise?
26. Akihiro Company reports gross profit on the installment basis. The following data are available:
2008 2009 2010
Installment sales P240,000 P250,000 P300,000
Cost of goods - installment sales 180,000 181,250 216,000
Gross profit P60,000 P68,750 P84,000

Collections:
2008 installment contracts P45,000 P75,000 P72,500
2009 installment contracts -- 47,500 80,000
2010 installment contracts -- -- 62,500

Defaults:
Unpaid balance of 2008 installment P12,500 P15,000
contracts

Value assigned to repossessed 6,500 6,000

merchandise
Unpaid balance of 2009 installment 16,000
contracts
Value assigned to repossessed 9,000
merchandise
The total realized gross profit after loss on repossession for 2010 is:

Jabilo Company
Jabilo Company makes all sales on installment contracts and accordingly reports income on the installment basis.
Installment contracts receivables are accounted for by years. Defaulted contracts are recorded by debiting Loss
on Repossession account and crediting the appropriate Installment Contract Receivable account for the unpaid
balance at the time if default. All repossessions and trade-ins are recorded at realizable values. The following
data relate to the transactions during 2009 and 2010:
2009 2010
Installment sales P150,000 P198,500
Installment contract receivable, Dec. 31:
2009 sales 80,000 25,000
2010 sales -- 95,000
Purchases 100,000 120,000
New merchandise inventory, Dec. 31 at cost 10,000 26,000
Loss on repossessions* -- 6,000
*unpaid balance of repossessed merchandise from 2009 sale
The company auditor disclosed that the inventory taken on December 31, 2010 did not include a certain
merchandise received as a trade-in on December 2, 2010 for which an allowance was given. The realizable value
of the merchandise is P1,500 which was also the allowance on the trade-in. No entry was made to record this
merchandise on the books at the time it was received. In 2010, a 2009 contract was defaulted and the
merchandise was repossessed. At the time of default, the repossessed merchandise had a fair value of P2,500.
The repossessed merchandise was neither recorded nor included in the physical inventory on December 31,
2010.
27. Refer to Jabilo Company. The total realized gross profit at December 31, 2010 is:
28. Refer to Jabilo Company. The adjusted gain (loss) on repossession is:
29. The books of Pacey Company show the following account balances on December 31, 2010:
Accounts receivable P313,750
Deferred gross profit (before adjustment) 38,000

Analysis of the accounts receivable reveals the following:

Regular accounts P207,500
2009 installment accounts receivable 16,250
2010 installment accounts receivable 90,000

Sales on installment basis in 2009 were made at 30% above cost, and in 2010 at 33 1/3% above cost. Expenses
paid relating to installment sales were P1,500. How much is the net income on installment sales?
30. Fabrizio Company employs the perpetual inventory basis in the accounting for new cars. On August 15, 209, a
new car costing P165,000 and with a list price of P220,000 was sold to Ms. Castro. The company granted Ms.
Castro an allowance of P85,000 on the trade-in of her old car, the current value of which was estimated to be
P81,700; the balance of P135,000 was payable as follows: P35,000 cash at the time of purchase and twenty
monthly payments of P5,000 starting September 1, 2009. On April 1, 2010, Ms. Castro defaulted in the payment
of the March 1, 2010 installment. The new car sold was repossessed, and its value to the seller was P40,000. The
total realized gross profit for December 31, 2009 and the gain (loss) on repossession on December 31, 2010 are:

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