Solution Chapter 7 PDF

Chapter 7
Problem I
1. 20x4: No Profit is recognized. P4,000 down payment is treated as a return of investment.
20x5 P750 is profit. P250 is treated as a return of investment.
Following years: Each annual installment f P1,000 is profit.
2. 20x4: P4,000 is profit.
20x5: P1,000 is profit.
20x6: P750 is profit, and P250 is treated as return of investment.
Following years: Each annual installment is P1,000 is treated as a return of investment.
3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales
20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.
Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.
P425 per year is treated as return of investment.
Problem II
1. Entries in 20x4:
Cash…………………………………………………………………….……….. 3, 500
Mortgage Notes Receivable ……………………………………………….. 20,500
Real Estate ……………………………………………………………. 9,000
Gain on Sale of Real Estate ……………………………………….. 15,000

Cash ……………………………………………………………………………… 500
Mortgage Notes Receivable ………………………………………. 500
Entry in 20x5:
Real Estate ………………………………………………………………………. 16,500
Loss on Repossession of Real Estate ……………………………………….. 3,500
Mortgage Notes Receivable ……………………………………… 20,000
2. Entries in 20x4
Cash ……………………………………………………………………………… 3, 500
Mortgage Notes Receivable ……………………………………………….. 20,500

Real Estate …………………………………………………………….. 9,000
Deferred Gross Profit on Installment Sales ………………............ 15,000

Cash ………………………………………………………………………………. 500
Mortgage Notes Receivable …………………………………..….. 500
Receipt P500 cash in 20x4 applicable to principal of note
Deferred Gross Profit on Installment Sales ………………………………... 2,500
Realized Gross Profit on Installment Sales………………………... 2,500
Gross Profit Percentages
15,000/24,000, or 62.5%
6.25% of P4,000 (collections in contract in 20x4)
Or P2,500
Entry in 20x5
Real Estate………………………………………………………………………... 16,500
Deferred Gross Profit on Installment Sales ………………………………….. 12,500
Mortgage Notes Receivable ……………………………………….. 20,000
Gain in Repossession of Real Estate ……………………………….. 9,000
Problem III
1.
a. Installment Contracts Receivable 19X8………………………………… 250,000
Installment Sales …………………………………………………… 250,000
b. Cash ………………………………………………………………………….. 120,000
Installment Contracts Receivable 19X8 ……………………… 120,000
c. Cost of Installment Sales ………………………………………………….. 200,000
Merchandise Inventory ………………………………………….. 200,000
d. Merchandise Repossessions ……………………………………………… 14,500

Deferred Gross Profit on Installment Sales 19X8 …………….. 4,000
Loss on Repossession ……………………………………………... 1,500
Installment Contracts Receivable, 19X8 ……………. 20,000
Gross Profit Percentages: 50,000/250,000, or 20%
Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000
Fair value of repossessed merchandise.. P 14,500
Less: Unrecovered cost:
Unpaid balance…………………………P 20,000
Less: Deferred Gross Profit
20% x P20,000…………………… 4,000 16,000
Loss on repossession……………………. P 1,500
e. Expenses ……………………………………………………………………… 16,000
Cash …………………………………………………………………. 16,000
2. Adjustment to Recognize Gross Profit on Installments Sales:
a. To set-up Cost of Installment Sales:
No entry (since perpetual inventory method is used)
b. To set-up Deferred Gross Profit on Installment Sales:
Installment Sales ……………………………………………………… 250,000
Cost of Installment Sales …………………………………. 200,000
Deferred Gross Profit on Installment Sales-20x4.. ……… 50,000
c. Adjustment to Recognize Gross Profit on Installment Sales:
Deferred Gross Profit on Installment Sales – 20x4…………..……. 24,000
Realized Gross Profit on Installment Sales – 20x4 ………. 24,000
Realized Gross Profit: 20% of P120,000 (collections),
or P24,000
d. Closing of nominal accounts.
Realized Gross Profit on Installment Sales – 20x4………………… 24,000
Expenses ………………………………………………………. 16,000
Loss on Repossessions ………………………………………. 1,500
Income Summary ……………………………………………. 6,500
To close the accounts for 20x4.
Problem IV
1.
January to December 31 20x4 20x5
(1) To record regular sales:
Accounts receivable 600,000 1,080,000
Sales 600,00 1,080,000
(2) To record installment sale:

Cash 60,000 144,000
Installment accounts receivable 300,000 336,000
Installment Sales 360,000 480,000
(3) To record cost of sales:

Periodic Method: No entry
Perpetual Method:
Regular Sales:
Cost of Sales 480,000 864,000
Merchandise inventory 480,000 864,000
Installment Sales:
Cost of installment sales 252,000 312,000
(4) To record collections:

Regular Sales:
Cash 144,000 360,000
Accounts receivable 144,000 360,000
Installment Sales:
Cash 108,000 204,000
Installment Accounts receivable –
20x2 72,000 72,000
Installment Accounts receivable –
20x3 60,000
Interest income 36,000 72,000
(5) to record payment of operating expenses:

Operating expenses 90,000 102,000
Cash 90,000 102,000
2.
Adjusting entries (end of the year):
(6) To recognize accrued interest receivable
Interest receivable 1,440 2,880
(7) To set-up Cost of Sales:

Periodic Method:
Perpetual Method: No entry
(7) To set-up Cost of Installment Sales:

Periodic Method:
Shipment s on installment sales 252,000 312,000
Perpetual Method: No entry
(8) To set-up Deferred Gross Profit

Installment sales 360,000 480,000
Deferred gross profit – 20x4 108,000
Gross profit rate – 20x4: P 108,000 / P360,000 = 30%.
Gross profit rate – 20x5: P168,000 / P480,000 = 35%.
(9) To record realized gross profit on installment

sales:
Deferred gross profit – 20x4 25,200 25,200
Realized gross profit 25,200 46,200
20x4: Realized gross profit on installment sales:

Collections applying as to principal..……………………………P 72,000
Multiplied by: Gross profit rate……………………………………. 30%
Realized gross profit…………………………………………………P 21,600
20x5: Realized gross profit on installment sales;

20x4 20x5
Collections – principal…………… P 72,000 P 60,000
Multiplies by: Gross profit %.......... ____30% ____35%
Realized gross profit……………… P 21,600 P 21,000 P 42,600
Closing entries:
(10) To close realized gross profit account:
Realized gross profit 21,600 42,600
Income summary 21,600 42,600
(11) To close other nominal accounts

Sales 600,000 1,080,000
Cost of sales 480,000 864,000
Operating expenses 90,000 102,000
(12) To close results of operations:

Retained earnings 89,040 231,480
Problem V
1.
Type of Sale Amount Ratio to Total Sales Allocated Cost
Regular Sales:
Cash sales P 225,000 P *146,250
Credit sales ___450,000 **292,500
Total regular sales P 675,000 675/1,800 P 438,750
Installment Sales _ 1,125,000 1,125/1,800 __731,250
Total Sales P 1,800,000 P 1,170,000
*P225,000/P1,800,000 x P1,170,000 = P146,250
**P450,000/P1,800,000 x P1,170,000 = P292,500
The allocation above was based on the assumptions that the markup for each type of sale is the
same. Normally, the selling prices of the merchandise are not the same for each type of sales.
2.
Amount based on Ratio to Total
Type of Sale Amount Cash Sales (100%) Sales Allocated Cost
Cash sales P 225,000 P 225,000 225/1,500 P 175,500
Credit sales 450,000 375,000* 375/1,500 292,500
Installment Sales 1,125,000 900,000** 900/1,500 __ 702,000
Total Sales P 1,500,000 P 1,250,000 P 1,170,000
*P450,000 / 120% = P375,000
**P1,125,000 / 125% = P900,000
3.
Type of Sale Amount Gross profit rate Cost ratio Allocated Cost*
Cash sales P 225,000 30% 70% P 157,500
Credit sales 450,000 36% 64% 288,000
Installment Sales 1,125,000 40% 60% _ _675,000
Total Sales P 1,800,000 P 1,170,000
* Amount of sale x cost ratio.
Problem VI
The entries are required under the periodic method:
Repossessed merchandise……………………………………...... 68,400
Deferred gross profit – 20x4………………………………............ 48,000
Loss on repossession………………………………………………... 3,600
Installment accounts receivable – 20x4……………………. 120,000
To record repossessed merchandise.
Repossessed merchandise……………………………………...... 12,000

Cash, etc (or various credits)……………………................ 12,000
To record reconditioning costs
The loss on repossession is computed as follows:

Estimated selling price after reconditioning costs.............. P 108,000
Less: Reconditioning costs……………………………………… P 12,000
Costs to sell and dispose…………………………………. 6,000
Normal profit (20% x 108,000)……………………………. __21,600 __39,600
Market value before reconditioning costs………………….. P 68,400
Less: Unrecovered cost
Installment accounts receivable – 20x4,
unpaid balance……………………………………... P120,000
Less: Deferred gross profit – 20x4 (P120,000 x 40%)..... __48,000 __72,000
Loss on repossession……………………………. P( 3,600)
Problem VII
The entry to record the sale of the new vehicle under the periodic method:
Trade-in Merchandise…………………………………............... 840,000

Over-allowance on trade-in merchandise…………………. 360,000
Cash………………………………………………………………….. 2,400,000
Installment accounts receivable – 20x4……………............ 3,360,000
Installment sales………………………………………....... 6,960,000
To record installment sales with trade-in.
Alternatively, the over-allowance on trade-in merchandise may also be treated as net of installment sales,
the entry would be as follows:
Cash………………………………………………………………….. 2,400,000
Installment accounts receivable – 20x4……………............ 3,360,000
Installment sales (net of over-allowance)…….............. 6,600,000
To record installment sales with trade-in.
The over-allowance is computed as follows:

Trade-in allowance………………………………….................. P1,200,000
Less: Market value before reconditioning costs:
Estimated resale price after reconditioning costs. P1,680,00
0
Less: Reconditioning costs……………………………….. 420,000
Costs to sell (5% x P1,680,000)…………………… 84,000
Normal profit (20% x P1,680,000)……………....... __336,000 __840,000
Over-allowance…………………………………………………… P 360,000
The gross profit rate on installment sales is computed as follows:

Installment sales……………………………………………………………...... P6,960,000
Less: Over-allowance………………………………………………………… ___360,000
Adjusted Installment Sales…………………………………………………… P6,600,000
Less: Cost of installment sales………………………………………………. __3,920,000
Gross profit………………………………………………………………………. P2,680,000
Gross profit rate (P2,680,000/P6,600,000)……………………………….. 40.60%
Further, the entry to record the reconditioning costs is as follows:

Cash, etc (or various credits)…………………….............. 420,000
To record reconditioning costs.
Incidentally, the realized gross profit on installment sales of the new merchandise for the year 20x4
is computed as follows:
Trade-in merchandise (market value before reconditioning costs)……… P 840,000

Down payment…………………………………………………………………… 2,000,000
Installment collection (March 31 – December 31: P80,000 x 10 months) ___800,000
Total collections………………………………………………………………….. P3,640,000
Multiplied by: Gross profit rate in 20x4……………………………………….. ___40.60%
Realized gross profit on installment sales of new merchandise………… P1,477,840
Problem VIII
1. Entries assuming that monthly payments consist of P600 plus interest on the unpaid balance:
Oct. 31 Cash ……………………………………………………………………… 20,000
Mortgage Notes Receivable …………………………………………. 55,000
Real Estate ………………………………………………………. 60,000
Deferred Gross Profit on Installment Sales …………………. 15,000
Nov. 30 Cash ………………………………………………………………………. 1,150
Mortgage Notes Receivable ………………………………… 600
Interest Income …………………………………………………. 550
Interest Received: P55,00 at 12% for 1 month, or P550
Dec. 31 Cash ………………………………………………………………………… 1,144
Mortgage Notes Receivable ………………………………….. 600
Interest Income …………………………………………………… 544
Interest received: P54,400 (P55,000-P600) at 12% 1 month, or P544
31 Deferred Gross Profit on Installment Sales …………………………….. 4,240
Realized Gross Profit on Installment Sales …………………… 4,240
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P21,200 (collections applicable to principal in 19X3) or P4,240
2. Entries assuming monthly payments of P600 that include interest on the unpaid balance of the
contract:
Dec. 31 Cash ……………………………………………………………………… 20,000.00
Mortgage Notes Receivable ………………………………………… 55,000.00
Real Estate ……………………………………………………… 60,000.00
Deferred Gross Profit on Installment Sales ……………….. 15,000.00
Nov. 30 Cash ……………………………………………………………………… 600
Mortgage Notes Receivable ……………………………….. 50.00

Interest Income ………………………………………………… 550.00
Interest Received: P55,000 at 12% for 1 month or P550. Balance Payment, P600-P550, or P50,
is reduction in principal)
Dec. 31 Cash ………………………………………………………………………. 600.00
Mortgage Notes Receivable ………………………………… 50.50
Interest Received ……………………………………………… 549.50
Interest Received: P54,950. Balance Payment, P600.00-549.50, o P50.50, is reduction in

principal.
31 Deferred Gross Profit on Installment Sales ………………………… 4,020.10
Realized Gross Profit on Installment Sales ………………… 4,020.10
Gross Profit Percentage: 15,000/75,000, or 20%
Realized Gross Profit: 20% of P20,100.50 (collections applicable to principal in 19X3), or

P4,020.10
Problem IX
1. 6/30x4: Cash……………………………………………………………………………. 25,000
Notes Receivable …………………………………………………………… 125,000
Accumulated Depreciation (3.1/2[2% of P90,000]) …………………… 6,300
Depreciation Expense (1/2[2% of P90,000]) …………………………… 900
Land …………………………………………………………………… 10,000
Building ……………………………………………………………….. 90,000
Deferred Gross Profit on Sale of Property ……………………… 57,200
Deferred Gross Profit on Sale of Property ………………………………… 9,553
Realized Gross Profit on Sale of Property ………………………... 9,553
Amount realized: (P25,000/150,000) x 57,200
2. 6/30x5: Cash …………………………………………………………………………… 30,000

Notes Receivable …………………………………………………….. 30,000
Deferred Gross Profit on Sale of Property ………………………………. 11,440

Realized Gross Profit on Sale of Property ………………………… 11,440
Amount realized (P30,000/P150,000) x 57,200
6/30/x6 Cash …………………………………………………………………………. 50,000

Notes Receivable …………………………………………………… 50,000
Deferred Gross Profit on Sale of Property ……………………………… 19,067

Amount Realized: (P50,000/P150,000) X 57,200
6/30/x7 Cash ………………………………………………………………………….. 15,000

Notes Receivable …………………………………………………… 15,000
Deferred Gross Profit on Sale of Property ………………………………. 5,720

Amount Realized: (P15,000/P150,000) X 57,200
Problem X
Installment Contracts Receivable …………………………………………. 200,000
Installment Sales ……………………………………………………… 200,000
Cost of Installment Sales …………………………………………………….. 120,000
Merchandise Inventory ……………………………………………… 120,000
Cost of Sales: 60% of P200,000
Installment Sales ……………………………………………………………….. 200,000
Cost of Installment Sales …………………………………………… 120,000
Deferred Gross Profit on Installment Sales ……………………… 60,000
Cash ………………………………………………………………………………. 124,000
Installment on Contracts Receivable – 20x4……………………... 30,000
Deferred Gross Profit on Installment Sales -20x4 …………………………… 13,800
Deferred Gross Profit on Installment Sales-20x5 …………………………... 14,280
Deferred Gross Profit on Installment Sales -20x6 …………………………... 24,000
Realized Gross Profit on Installment Sales ……………………….………….. 52,080

Realized Gross Profit
20x4: 46% of P30,000 or P13,800
20x5: 42% of P34,000 or P14,280
20x6: 40% of P60,000 or P24,000
Problem XI
1. Calculation of gross profit percentage on installment sales
20x6: P88,000 gross profit on installment sales, 20x6, /P320,000 installment
sales 20x6 …………………………………………………………………………………. 27.5%
20x5: P45,000 deferred gross profit, 20x5, /P150,000 installment accounts
receivable 20x5 ………………………………………………………………………….. 30%
20x4: P9,600 deferred gross profit, 20x4 , /30,000 installment accounts
receivable 20x4 ………………………………………………………………………….. 32%
2.
WW EQUIPMENT, Inc.
Balance Sheet
December 31, 20x6
Assets
Cash ………………………………………………………………………………….................... P27,500
Installment Accounts Receivable 20x6 ………………………….. P 55,000
20x5 ………………………….. 12,000
20x4 ………………………….. 3,000 70,000
Accounts receivable …………………………………………………………………………. 17,000
Inventory ……………………………………………………………………………………….... 60,000
Other Assets ……………………………………………………………………………………... 40,000
Total Assets ……………………………………………………………………………………… P 214,500
Liabilities
Accounts payable ……………………………………………………………… P 40,000
Deferred Gross Profit 20x6 …………………………… P 15,125

20x5 …………………………… 3,600
20x4 …………………………… 960 19,685
Total Liabilities P
59,685
Stockholders’ Equity
Capital Stock …………………………………………………………………….. P 100,000
Retained Earnings ……………………………………………….. P 68,400
Balance, Jan. 1, 20x6 ………………………………………. 13,585
Balance, Dec. 31, 20x6 ……………………………………………………. 54,185
Total Stockholder’s Equity ………………………………………………………

P154,815
Total Liabilities and Stockholder’s Equity ……………………………………. P 214,500
WW EQUIPMENT, Inc.
Income Statement
For Year Ended December 31, 20x6
Installment Regular Total

Sales Sales
Sales ………………………………………………………............ P320,000 P125,000 P445,000
Cost of goods sold:
Merchandise Inventory, Jan. 1 ………………P 52,000
Purchases ………………………….................. 350,000
Merchandise Available for sale ................. 402,000
Less: Merchandise Inv. Dec. 31 ………… 60,000 232,000 110,000 342,000
Gross Profit ……………………………………………………….. P88,000 P15,000 P103,000
Less: Deferred Gross Profit on 19X34 ………………………… 15,125 15,125
Realized Gross Profit on current year’s sales ………………. P78,875 P15,000 P87,875
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ………………. 50,040
Total Realized Gross Profit ……………………………………. P137,915
Operating Expenses …………………………………………... 151,500
Net Loss ………………………………………………………….. P 13,585
WW EQUIPMENT, Inc.
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
Deferred Gross profit on installment sales, 20x6

Installment contracts receivable, P320,000 less collections P265,000
Or P55,000; P55,000 x 27.5% ………………………………………………………… P 15,125
Realized Gross Profit:
20x6 20x5 20x4
Collections on Installment Contracts Receivable ………... P265,000 P138,000 P27,000
Installment sales gross profit percentage ………………….. 27.5% 30% 32%
Realized Gross Profit …………………………………………….. P 72,875 P 41,400 P 8,640
Installment Sales …………………………………………………… 320,000
Cost of Installment Sales …………………………………………. 232,000
Deferred Gross profit ……………………………………………… 88,000
Deferred Gross Profit, 20x6 ……………………………............... 72,875
Realized Gross Profit on Installment sales…………… 122,915
Income Summary ………………………………………………… 170,000
Shipment on Installment of Sales ……………………………… 232,000
Merchandise Inventory, Jan. 1, 20x6 ………………. 52,000
Purchases ……………………………………………… 350,000
Merchandise Inventory, Dec. 31, 20x6 …………………….. 60,000
Income Summary …………………………………… 60,000
Sales ………………………………………………………………. 125,000
Income Summary ……………………………………. 125,000
Realized Gross Profit on Installment Sales………..………... 122,915
Income Summary ……………………………………. 122,915
Income Summary ……………………………………………… 151,500

Operating Expenses ………………………………... 151,500
Retained Earnings …………………………………………….. 13,585
Income Summary …………………………………... 13,585
Problem XII
1. Calculation of gross profit percentage on installment sales
20x6: P190,000 gross profit on installment sales, 20x6, /P500,000 installment
sales 20x6 …………………………………………………………………………………… 38%
20x5: P96,000 deferred gross profit, 20x5, /P240,000 installment
accounts receivable 20x5 ………………………………………………………………. 40%
20x4: P22,500 deferred gross profit, 20x4 , /50,000 installment
accounts receivable 20x4 ………………………………………………………………. 45%
2.
Deferred Gross Profit, 20x6……………………………… 1,900
Deferred Gross profit, 20x5……………………………… 4,000
Deferred Gross Profit, 20x4……………………………… 3,600
Loss on Repossessions………………………….. 9,500
Cancellation of deferred gross profit,
balances upon repossessions:
20x6: 38% of P5,000, or P1,900
20x5: 40% of P10,000, or P4,000
20x4: 45% of P8,000, or P3,600
GG SALES CORPORATION
Income Statement
Installment Regular Total

Sales Sales
Sales ………………………………………………………............ P500,000 P192,000 P692,000
Cost of goods sold:
Merchandise Inventory, Jan. 1 …………… P 30,000
Purchases ………………………….................. 445,000
Repossessed Merchandise ……………….. 10,000
Merchandise Available for sale ................. 495,000
Less: Merchandise Inv. Dec. 31 ………… 35,000 310,000 150,000 460,000
Gross Profit ……………………………………………………….. P190,000 P42,000 P103,000
Less: Deferred Gross Profit on 20x6 sales (see schedule) 32,300 32,300
Realized Gross Profit on current year’s sales ………………. P157,700 P42,000 P199,700
Add: realized gross profit on prior years’ sales on
Installment basis (see gross profit schedule) ………………. 100,650
P300,350
Deduct loss on repossession …………………………………. 3,500
Total Realized Gross Profit ……………………………………. P296,850
Operating Expenses …………………………………………… 300,000
Net Loss ………………………………………………………….. P 3,150
Analysis of Gross Profit on Installment Sales
Schedule to Accompany Income Statement
Deferred gross profit on Installment sales – before defaults, 19X8:
Installment contracts receivable, P500,00, less collections, P415,000, or
P85,000; P85,000 x 38% ………………………………………………………. P 32,300
Realized Gross Profit:
20x6 20x5 20x4
Collections of Installment contracts receivable.. P415,000 P210,000 P 37,000
Installment sales gross profit percentage ……….. 38% 40% 45%
Realized gross profit …………………………………..P157,700 P 84,000 P 16,650
GG SALES CORPORATION
Balance Sheet
December 31, 20x6
Assets
Cash …………………………………………………………………………………... P 25,000
Installment Accounts Receivable 20x6 …………………P 80,000
20x5 ………………… 20,000

20x4 ………………… 5,000 105,000
Accounts receivable ………………………………………………………………….. 40,000
Inventory …………………………………………………………………………………. 35,000
Other Assets ……………………………………………………………………………… 52,000
Total Assets ……………………………………………………………………………….P

257,000
Liabilities
Accounts payable ……………………………………………………. P 75,000
Deferred Gross Profit 20x6 ………………………………. P 30,400
20x5 ………………………………. 8,000
20x4 ………………………………. 2,250 40,650
Total Liabilities P 115,650
Stockholders’ Equity
Capital Stock …………………………………………………………. P100,000
Retained Earnings ………………………………………. P 44,500
Balance, Jan. 1, 20x6 ……………………………… 3,150
Balance, Dec. 31, 20x6 …………………………… 41,350
Total Stockholder’s Equity …………………………………………. 141,350
Total Liabilities and Stockholder’s Equity ……………………….. P 257,000
4. Installment Sales ……………………………………………………………….. 500,000
Cost of Installment Sales ……………………………………………….. 310,000
Deferred Gross Profit, 20x6 …………………………………………….. 190,000
Deferred Gross Profit, 20x6 …………………………………………………… 157,500
Realized Gross Profit on Installment Sales… ………………………… 258,350

Income Summary ……………………………………………………………… 185,000
Shipment on Installment Sales ……………………………………………… 310,000
Merchandise Inv, January 1, 20x6 ……………………………………. 30,000
Purchases …………………………………………………………………. 455,000
Repossessed Merchandise …………………………………………….. 10,000
Merchandise Inv, December 31, 20x6……..………………………………. 35,000
Income Summary ……………………………………………………….. 35,000
Sales …………………………………………………………………………….... 192,000
Income Summary ………………………………………………………… 192,000
Realized Gross Profit on Installment Sales………………………………….. 258,350
Income Summary ……………………………………………………….. 258,350
Income Summary ……………………………………………………………… 3,500
Loss on Repossession ……………………………………………………. 3,500
Income Summary ……………………………………………………………… 300,000
Operating Expenses …………………………………………………….. 300,000
Retained Earnings ……………………………………………………………… 3,150
Income Summary …………………………………………………………. 3,150
Problem XIII
1.
Deferred gross profit – 20x4……….……………………………………. 8,407.00
Realized Gross Profit on Installment Sales (20x4 – 20x6)….. 172,852.50
Computation of GP rates:
20x4: P247,000/P380,000 = 65%, cost rate; GP rate = 100% - 65% = 35%

Calculation of collections in 20x6:
20x4: Beginning balance P 24,020
20x5: P344,460 (beginning balance) – P67,440 (ending balance) –
P2,200 (write-offs on default) 274,820
20x6: P602,000 (sales) – P410,090 (ending balance) 191,910
Calculation of realized gross profit:
20x4: 35% x P24,020 P 8,407.00
20x5: 34% x P274,820 93,438.80
20x6; 37% x P191,910 71,006.70
Total P172,852.50
2. Deferred gross profit 20x5……………………………………………………… 748.00
Inventory of Repossessed Merchandise………………………………. 748.00
To reduce by 20x5 deferred gross profit related to defaulted contract and requiring
cancellation, 34% of P2,200 (P5,400 sales price- P3,200 collections to date);
inventory now reported at P2,200 (balance of installment contract), less P748 or
P1,452.
Loss on repossession…………………………………………………………….. 381.00
Inventory of repossessed merchandise……………………………….. 381.00
To reduce inventory to “market” as follows: to realize a gross profit of 37% on a

resale estimated at P1,700, the repossessed merchandise should be reported at a
value of 63% of P1,700, or P1,071; the inventory then requires a further write-down
of P381 (P1,452 – P1,071)
Repossessed merchandise could be recorded at its resale value less the usual gross profit margin on
sales. Recording the merchandise at P1,452 will result in the realization of less than the normal profit
margin on the resale of the goods in the subsequent period. if expenses of the resale exceed P248
(P1,700 – P1,452), the later period would actually have to absorb a loss as a result of such valuation.
Recording the goods at resale value reduced by the company’s usual profit margin on sales is
recommended, for such practice will charge the next period with no more than the utility of the goods
carried forward.
Problem XIV – HH Instruments
1. Installment Contracts Receivable ……………………………………. 1,600.00
Merchandise Inventory (Piano) ……………………………… 1,000.00
Deferred Gross Profit on Installment Sales ………………… 600.00
Cash ……………………………………………………….......................... 160.00

Installment Contracts Receivable …………………………… 160.00
2. Cash …………………………………………………………........................ 160.00

Interest Income …………………………………………………… 14.40
Installment Contracts Receivable ……………………………. 145.60
Cash ……………………………………………………………...................... 160.00

Interest Income ……………………………………………………. 11.47
Installment Contracts Receivable ……………………………… 148.53
3. Deferred Gross Profit on Installment of Sales ………………………….. 225.45

Realized Gross Profit on Installment of Sales ………………… 225.45
Gross Profit Percentage: 37.5% (P600/P1,600)
Realized Gross Profit for 20x4: 37.5% of 601.19
(sum of payments on installment contract)
4. Merchandise Inventory (piano) …………………………………………... 560.00

Deferred Gross Profit on Installment of Sales ……………………........... 374.55
Loss on Repossessions ………………………………………………………. 64.36
Installment Contracts Receivable ……………………………… 998.81
Deferred Gross profit cancelled upon repossession:
37.5% of P998.81 (balance in installment contracts
receivable account) or P 374.55
Problem XIV – Big Bear

20x4:
Installment receivables 250,000
Inventory 150,000
Deferred gross profit 100,000
Cash 80,000
20x5:
Cash 120,000

Realized gross profit 50,000
20x6:
Cash 50,000

Inventory 210,000
Cash 135,000

Gross profit deferred at sale = 30% x P300,000 = P90,000.

Gross profit earned at collection = (P135,000/P300,000) x P90,000 = P40,500
(Or cash collected x GP% =P135,000 x 30% = P40,500)
Problem XV – Tappan Industrial

(1) Reasonably assured - accrual basis should be used: full gross profit recognized in the year of the sale.
Determination of selling price:
PVn = R(PVAFn/i) Table IV
PVn = P187,500 x 4.3553 n = 6, i = 10%
PVn = P816,619 (rounded)
Gross profit on sale:

Sales P816,619
Cost of sales 637,500
Gross profit P179,119
Interest revenue--4 months: P816,619 x 10% x 4/12 = _ 27,221
Total income for 20x5 = P179,119 + P27,221 = P206,340
(2) No reasonable assurance – assume the use of installment sales method
Installment sale: Gross profit (P179,119/P816,619) = 22% rounded
Gross profit earned in 20x5 (P0 x 22%) P 0
Interest revenue 27,221
Total income for 20x5 P 27,221
Multiple Choice Problems

1. c
20x4: P1,200,000 x 30% = P 360,000
20x5: P1,400,000 x 40% = 560,000 P920,000
2. d – [P225,000 + (P120,000/40%)]
3. b (P36,000 ÷ 24%) + (P198,000 ÷ 30%) = P810,000.

4. d
Installment Accounts Receivable, December 31, 20x5: DGP, 12/31/20x5 / GP%
20x4 Sales: P120,000/ 30% P 400,000
20x5 Sales: P440,000/ 40% 1,100,000
P 1,500,000
5. b – [(P1,000,000 – P200,000) x (P1,000,000 – P600,000)/P1,000,000 = P320,000
6. b [(P1,400,000 – P980,000) ÷ P1,400,000] x P840,000 = P252,000.
7. c P1,200,000 – P720,000 = P480,000 gross profit (40% gross profit rate)

P480,000 – (P288,000 ×.4) = P364,800.
8. c P300,000 + P50,000 = P350,000
P350,000 – P245,000 = P105,000 gross profit (30% gross profit rate)
(P300,000 – P100,000) x 30% = P60,000.
9. c P1,800,000 – P1,080,000 = P720,000 (40% gross profit rate)

P720,000 – (P825,000 x 40%) = P390,000.
10. a – assume the use of installment sales method. It should be noted that if the collectability is highly
uncertain or extremely uncertain, the use of cost recovery method is preferable.
P8,000 x (P30,000 – P24,000)/P30,000 = P1,600
11. b –
20x4: P500,000 x 30% = P 150,000
20x5: P600,000 x 40% = 240,000 P390,000
12. d – same with No. 4

13. b
Installment Accounts Receivable, end of 20x4 P 320,000
x: Gross profit rate (66 2/3 / 166 2/3) _____40%
Deferred Gross Profit, end of 20x4 P 128,000
14. b
20x4: P150,000 – (P568,620 x 10%) = P93,138.
20x5: (P568,620 – P93,138) x 10% = P47,548.
15. d
Realized Gross Profit on Installment Sales in 20x6:
20x4 sales: P10,000 x 22%P 2,200
20x5 sales: P50,000 x 25% 12,500
20x6 sales: P45,000 x P28,200 / (P28,200+P91,800) 10,575
P 25,275
Realized Gross Profit on Sales in 20x5 P 10,500

Less: Realized Gross Profit in 20x5 for 20x5 sales: (P20,000 x 25%) 5,000
Realized Gross Profit in 20x5 for 20x4 sales P 5,500
Divided by: Collections in 20x5 for 20x4 sales P 25,000
Gross Profit % for 20x4 sales 22%
16. a
Installment Sales Method:
20x3 Sales: P240,000 x 25/125P 48,000
20x4 Sales: P180,000 x 28/128 39,375
Realized Gross Profit on Installment SalesP 87,375
Cost Recovery Method:
20x3 Cost: P480,000 / 1.25 P384,000
Less: Collections in 20x3 140,000
Collections in 20x4 240,000
Unrecovered Cost, 12/31/20x4 P 4,000
Under the cost recovery method, no income is recognized on a sale until the cost of the item sold
is recovered through cash receipts. All cash receipts, both interest and principal portions, are applied
first to the cost of the items sold. Then, all subsequent receipts are reported as revenue. Because all
costs have been recovered, the recognized revenue after the cost recovery represents income
(interest and realized gross profit). This method is used only when the circumstances surrounding a
sale are so uncertain that earlier recognition is impossible.
17. a
(1) Gain or Loss on repossession:
Estimated selling price P 1,700
Less: Normal profit (37% x P1,700) 629
Market value of repossessed merchandise P 1,071
Less: Unrecovered Cost:
Unpaid balance – 20x3 P 2,200
Less: DGP – x3 (P2,200 x34%) 748 1,452
Loss on repossession P( 381)
(2) Realized gross profit on installment sales:

20x2 Sales: (P24,020 – P 0) x 35% P 8,407.0
20x3 Sales: (P344,460 – P67,440 – P2,200) x 34% 93,438.8
20x4 Sales: (P602,000 – P410,090) x 37% 71,006.7
Realized gross profit on installment sales P 172,852.5
18. c
Deferred Gross Profit, end (12/312/20x4: IAR, end of 2004 x GP %)
20x2 Sales: P 0
20x3 Sales: (P67,440 x 34%. 22,929.6
20x4 Sales: (P410,090 x 37%) 151,733.3
P174,662.9
19. a – refer to No. 16 for discussion.
Cost, January 1, 20x4 P 60,000
Less: Collections including interest – 20x4 32,170
Unrecovered Cost, December 31, 20x4 P 27,830
20. b (P300,000 ÷ P750,000) x P250,000 = P100,000

[(P270,000 ÷ P900,000) x P300,000] + P100,000 = P190,000.
21. d [P5,600 x (1 – .40)] – (P2,100 – P140) = P1,400.
22. d P8,400 – P5,880 = P2,520

(P3,000 – P300) – P2,520 = P180 gain.
23. b P24,000 – P7,200 = P16,800

P16,800 – P13,500 = P3,300 loss.
24. d (P2,000,000 – P1,500,000) ÷ P2,000,000 = 25%
25. a (P800,000 x .25) – P90,000 = P110,000,
26. d P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
27. a (P3,000,000 – P2,100,000) ÷ P3,000,000 = 30%.
28. d (P1,200,000 × .30) – P120,000 = P240,000.
29. a P1,050,000 × .30 = P315,000

P900,000 – [(P1,200,000 + P1,050,000) × .30] = P225,000.
30. c (P3,600,000 – P2,400,000) ÷ P3,600,000 = 33 1/3%

(P3,600,000 × .20) + [(3,600,000 × .80) × 4/12)] = P1,680,000
P1,680,000 × 33 1/3% = P560,000.
31. b [(P3,600,000 × .20) + (P3,600,000 × .80 x 8/12] – P2,400,000 = P240,000.

32. a P0.
33. c
Sale: Installment receivables 4,500,000
Inventory 3,600,000
Payment: Cash 500,000
Balance Sheet:
Installment receivables (4,500,000 – 500,000) P 4,000,000
Deferred gross profit (900,000 – 100,000) 800,000
Installment receivables (net) P 3,200,000
34. b
12/15/x5 Cash [(P4,500,000 – P500,000)/2 = P2,000,000] 2,000,000
Installment receivables 2,000,000
Deferred gross profit [P2,000,000 x (900/4,500)] 400,000
Balance sheet:
Deferred gross profit: P800,000 400,000 = P400,000
Realized gross profit of P400,000 would be reported in the income statement.
35. b – refer to No. 16 discussion.

Cost, January 1, 20x4…………………………………………………………….P 500,000
Less: Collections including interest – 20x4……………………….P241,269
Collections including interest – 20x5……………………… 241,269 482,538
Unrecovered Cost, December 31, 20x5……………………………………….P 17,462
36. c
Trade-in allowance P43,200
Less: MV of trade-in allowance:
Estimated resale price after reconditioning costs P36,000
Less: Reconditioning costs 1,800
Normal profit (15% x P36,000) 5,400 28,800
Over-allowance P 14,400
Installment sales P122,400

Less: Over-allowance 14,400
Adjusted Installment Sales P108,000
Less: Cost of Installment Sales 86,400
Gross profit P 21,600
Gross profit rate: P21,600/P108,000 20%
Realized gross profit:

Down payment P 7,200
Trade-in (at market value) 28,800
Installment collections:
(P108,000 – P28,800 – P7,200) / 10 mos. X 3 mos. 21,600
Total collections in 2008 P 57,600
x: Gross profit rate 20%
Realized gross profit P 11,520
37. a - Costs not yet recovered.
38. c
Cost, 20x4 P 30,000
20x4 cost recovery (20,000)
Remaining cost, 12/31/x4 P 10,000
20x5 collection 15,000
Gross profit – 20x5 P 5,000
39. d
Cost P 30,000
20x4 cost recovery ( 20,000)
20x5 cost recovery ( 10,000)
Remaining cost 0
The entire P20,000 payment received in 20x6 is recognized as gross profit.
40. d
Sale: Installment receivables 55,000
Inventory 30,000
Payment: Cash 20,000

Balance Sheet:
Installment receivables P55,000 – 20,000 P 35,000
Deferred gross profit ( 25,000)
Installment receivables (net) P 10,000
41. a
Sale: Installment receivables 55,000
Inventory 30,000
2008: Cash 20,000

Cash 15,000
2009: Deferred gross profit 5,000
Balance Sheet:
Installment receivables P 20,000
Deferred gross profit ( 20,000)
Installment receivables (net) P 0
42. c - P300,000 (20x4 sales) + P500,000 (20x5 sales) = P800,000
43. a Gross profit % = (P900,000 P450,000)/P900,000 = 50%

20x4: 50% x P300,000 = P150,000
44. c
20x4 sales: Gross profit % = (P900,000 P450,000)/P900,000 = 50%
50% x P300,000 received in 2010 = P150,000
20x5 sales: Gross profit % = (P1,500,000 P900,000)/P1,500,000 = 40%

40% x P400,000 received in 2010 = P160,000
Total: P150,000 + P160,000 = P310,000
45. c
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P 300,000
Deferred gross profit = P450,000 – P150,000 (x4 collections)
- P150,000 (x5 collections) = 150,000
Net installment receivable for 20x4 sales = P 150,000
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000

Deferred gross profit = P600,000 – P200,000 (x5 collections) = 400,000
Net installment receivable for 20x5 = P 600,000
Total = P 750,000
46. a
Installment receivable = P200,000
Deferred gross profit = P80,000 (P200,000 x 40%)
Fair value = P75,000
Repossessed inventory P 75,000

Deferred gross profit P 80,000
Loss on repossession (plug) P 45,000
Installment receivable P 200,000
47. b - P450,000 cost P300,000 collections = P150,000 unrecovered costs

48. b
20x4 sales: Cost = P450,000; P300,000 collected in each year 20x4-20x6. P300,000 of cost
recovered in 20x4, the other P150,000 of cost recovered in 20x5, so P150,000 of
gross profit recognized in 20x5, leaving P300,000 recognized in 20x6.
20x5 sales: Cost = P900,000; P500,000 collected in 20x5, P400,000 collected in 20x6. P500,000 of
cost recovered in 20x5, the other P400,000 of cost recovered in 20x5, so P0 of
gross profit recognized in 20x6.
Total: P300,000 + P0 = P300,000
49. d
20x4 Sales: Installment receivables = P900,000 – P300,000 (x4 collections)
- P300,000 (x5 collections) = P 300,000
Deferred gross profit = P450,000 – P0 (all x4 collections to cost
recovery - P150,000 (P150,000 of x5
collections to cost recovery) = 300,000
Net installment receivable for 20x4 sales = P 0
20x5 Sales: Installment receivables = P1,500,000 – P500,000 (x5 collections)= P1,000,000

Deferred gross profit = P600,000 – P0 (all x5 collections to
cost recovery) = P 600,000
Net installment receivable for 20x5 = P 400,000
Total = P 400,000
50. b – same with No. 59.

51. c
Note: Since the collectibility of the note is reasonably assured, the accrual basis should be applied.
Therefore, full gross profit is recognized in the year of sale.
Gross profit on sale:
Sales (P187,500 x 4.3553) P816,619
Cost of sales 637,500
Gross profit (realized) P179,119
52. c
Total Income for 20x4:
Gross profit (realized) – No. 51 P179,119
Interest revenue—4 months: P816,619 x 10% x 4/12.. _ 27,221
Total income for 20x4 P206,340
53. b
Gross profit (realized) – already recognized in 20x4 P 0
Interest revenue – 8 months in Year 1 (P81,662* x 8/12) P 54,441
4 months in Year 2 (P71,078* x 4/12) 23,693 78,134
Total Income for 20x5 P 78,134
*Schedule of Discount Amortization/Interest Income computation:
(1) (2) (3) (4)

Face Net Discount
Amount Unamortized Amount Amortization
Year of Note1 Discount (1) – (2) 10% × (3)
1 P1,125,000 P308,3813 P 816,6192 81,6625
2 937,500 226,7194 710,781 71,078
1
P187,500 x 6 years = P1,125,000; every year P187,500 should be deducted on the previous
balance.
2
The present value of sales/receivables: P187,500 x 4.3553 = P816,619
3
P1,125,000 – P816,619
4
(2) – (4)
5
Discount amortization give rise to recognition of interest revenue/income.
54. a
Note: Since the collectibility of the note cannot be reasonably assured, the installment sales method
should be applied. Also, if the there is high degree of uncertainty as to collectibility, the cost recovery
method may be used.
Installment sale: Gross profit (P179,119/P816,619) 22% (rounded)
Gross profit earned in 20x4 (P0* x 22%) P 0

* no collections in 20x4.
55. a
Gross profit earned in 20x4 (P0* x 22%) P 0
Interest revenue (refer to No. 52 27,221
Total income for 20x4. P 27,221
56. d
Collections in 20x5 (August 31, 20x5) P 187,500
Less: Interest revenue/income from September 1, 20x4 to
August 31, 20x5 (refer to schedule of amortization in No. 53) 81,662
Collection as to principal P 105,838
x: Gross Profit % (refer to No. 54) 22%
Gross profit realized in 20x5 P 23,284
Add: Interest revenue/income for 20x5 (refer to No. 53) 78,134
Total Income for 20x5 P 101,418
57. d*
Resale Value P 8,500
Less: Normal profit for 20x6 - year of repossession
[(P3,010,000 – P1,896,300)/P3,010,000] x 8,500 3,145
Market Value of Repossessed Merchandise P 5,355
Less: Unrecovered Costs – 20x5
Defaulted balance* (P27,000 – P16,000) P 11,000
Less: DGP [(P2,160,000 - P1,425,600)/P2,160,000] x
P11,000 ___3,740 __7,260
Loss on repossession P( 1,905)
Entry made:
Inventory of RM* 11,000
IAR-20x5 11,000
Correct Entry (Should be):

Inventory of RM (at MV) 5,355
DGP-20x5 3,740
Loss on repossession 1,905
IAR-20x5 11,000
Correcting Entry:
DGP-20x5 3,740
Loss on repossession 1,905
Inventory of RM 5,645**
58. d
20x4: P24,000 – P0 = P24,000 collections x 39%P 9,360
20x5: P300,000 – P60,000 – P10,000 defaults = P230,000 x 42% 96,600
20x6: P480,000 – P320,000 – P5,000 defaults = P155,000 x 40% 62,000
Realized gross profit on installment sales in 20x6 P167,960
59. b
20x5 Sales 20x6 Sales Net
Market Values P 4,500 P 3,500
Less: Unrecovered Cost:
IAR, unpaid balances P10,000 P 5,000
x: Cost Ratio 50% 5,800 60% 3,000
Gain (loss) P (1,300) P 500 P( 800)
60. c
Installment Sales P 3,600,000
Less: Over-allowance:
Trade-in allowance P1,500,000
Less: MV of Trade-in Merchandise:
Estimated Resale Price P 1,400,000
Less: Normal profit (25% x P1,400,000) 350,000
Reconditioning costs 150,000 900,000 600,000
Adjusted Installment Sales P 3,000,000
Less: Cost of I/S 2,500,000
Gross Profit P 500,000
Gross profit rate: P500,000/ P3,000,000 16 2/3%
x: Collections –Trade-in merchandise (at MV) P 900,000
RGP on I/S in 20x4 P 150,000
Theories
1. True 6. True 11. False 16. True 21. c 26. a 31. c
2 True 7. True 12. True 17. True 22. d 27. b 32. c
.
3 False 8. True 13. True 18. b 23. d 28. d 33. c
.
4 False 9. True 14. True 19. c 24. c 29. b 34. b
.
5 True 10 False 15, True 20. c 25. b 30. d 35. b
. ,
36. c 41. d
37. d 42. c
38. b 43. c
39. b 44. c
40. d 45.

Solution Chapter 7 PDF

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Solution Chapter 7 PDF

Caricato da

Copyright:

Formati disponibili

Chapter 7

20x5 P750 is profit. P250 is treated as a return of investment.

Following years: Each annual installment f P1,000 is profit.

2. 20x4: P4,000 is profit.

20x5: P1,000 is profit.

20x6: P750 is profit, and P250 is treated as return of investment.

Following years: Each annual installment is P1,000 is treated as a return of investment.

3. Profit Percentage is 5,750 / P10,000, or 5.75% of sales

20x4: P4,000 x 57.5%, or P2,300, is profit; P1,700 is treated as a return of investment.

Following years: P1,000 x 57.5%, or P575 per year, is regarded as profit.

P425 per year is treated as return of investment.

Mortgage Notes Receivable ……………………………………………….. 20,500

Real Estate ……………………………………………………………. 9,000

Gain on Sale of Real Estate ……………………………………….. 15,000

Mortgage Notes Receivable ………………………………………. 500

Real Estate ………………………………………………………………………. 16,500

Loss on Repossession of Real Estate ……………………………………….. 3,500

Mortgage Notes Receivable ……………………………………… 20,000

Mortgage Notes Receivable ……………………………………………….. 20,500

Deferred Gross Profit on Installment Sales ………………............ 15,000

Mortgage Notes Receivable …………………………………..….. 500

Receipt P500 cash in 20x4 applicable to principal of note

Deferred Gross Profit on Installment Sales ………………………………... 2,500

Realized Gross Profit on Installment Sales………………………... 2,500

Gross Profit Percentages

6.25% of P4,000 (collections in contract in 20x4)

Real Estate………………………………………………………………………... 16,500

Deferred Gross Profit on Installment Sales ………………………………….. 12,500

Mortgage Notes Receivable ……………………………………….. 20,000

Gain in Repossession of Real Estate ……………………………….. 9,000

Installment Sales …………………………………………………… 250,000

b. Cash ………………………………………………………………………….. 120,000

Installment Contracts Receivable 19X8 ……………………… 120,000

c. Cost of Installment Sales ………………………………………………….. 200,000

Merchandise Inventory ………………………………………….. 200,000

d. Merchandise Repossessions ……………………………………………… 14,500

Loss on Repossession ……………………………………………... 1,500

Installment Contracts Receivable, 19X8 ……………. 20,000

Gross Profit Percentages: 50,000/250,000, or 20%

Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000

Fair value of repossessed merchandise.. P 14,500

Less: Unrecovered cost:

Unpaid balance…………………………P 20,000

Less: Deferred Gross Profit

20% x P20,000…………………… 4,000 16,000

Loss on repossession……………………. P 1,500

e. Expenses ……………………………………………………………………… 16,000

Cash …………………………………………………………………. 16,000

2. Adjustment to Recognize Gross Profit on Installments Sales:

a. To set-up Cost of Installment Sales:

No entry (since perpetual inventory method is used)

b. To set-up Deferred Gross Profit on Installment Sales:

Installment Sales ……………………………………………………… 250,000

Cost of Installment Sales …………………………………. 200,000

Deferred Gross Profit on Installment Sales-20x4.. ……… 50,000

c. Adjustment to Recognize Gross Profit on Installment Sales:

Deferred Gross Profit on Installment Sales – 20x4…………..……. 24,000

Realized Gross Profit on Installment Sales – 20x4 ………. 24,000

Realized Gross Profit: 20% of P120,000 (collections),

Realized Gross Profit on Installment Sales – 20x4………………… 24,000

Expenses ………………………………………………………. 16,000

Loss on Repossessions ………………………………………. 1,500

Income Summary ……………………………………………. 6,500