INSTALMENT SALES

Name:____________________________________________ Section:___________________

Summary of answers (5 pts each):

1 6 11 16
2 7 12 17
3 8 13
4 9 14
5 10 15

Part I: Theory of Accounts

1. Under IAS 18, what is the measurement of sales revenue from instalment sales?
a. Book value of the consideration received or receivable.
b. Fair value of the consideration received or receivable.
c. Cost of the consideration received or receivable.
d. Carrying amount of the consideration received or receivable.

2. Under IAS 18, if the company receives long-term non-interest bearing note receivable as consideration for the sale of
its inventories on an instalment basis, what is the measurement of sales revenue from instalment sales?
a. Face value of the note receivable
b. Maturity value of note receivable
c. Present value of note receivable
d. Undiscounted value of note receivable

3. How shall the difference between the fair value and nominal amount of the long-term note received as consideration
in an instalment sales be accounted for?
a. it shall be recognized as expense on the date of sale.
b. It shall be recognized as gain on exchange on the date of sale.
c. It shall be recognized as interest revenue over the term of the note using effective interest method.
d. It shall be recognized as interest revenue over the term of the note using, straight line method.

4. In an instalment sales, if the collection of the note receivable is not remote and not reasonably, how shall the gross he
recognized?
a. It shall be fully recognized on the date of sale using accrual basis.
b. It shall be recognized in proportion to the amount of collection under instalment method.
c. It shall not be recognized
d. It shall be recognized fully only on the year the receivable is completely collected.

5. Under generally accepted accounting principles, what is the proper presentation of deferred gross profit from
instalment sales?
a. It shall be presented as current liability.
b. It shall be presented as equity.
c. It shall be presented as deferred equity.
d. It shall be presented as contra-instalment receivable account.

6. If the fair value of the repossessed inventory cannot be estimated reliably at the date of repossession, what shall be
the basis of initial measurement of repossessed inventory?
a. Estimated selling price less reconditioning cost less cost to sell.
b. Estimated selling price less reconditioning cost.
c. Estimated selling price less cost to sell.
d. Estimated selling price less reconditioning cost less cost to sell less normal profit.

7. If the initial measurement of repossessed inventory is lower than the net of defaulted instalment receivable and its
corresponding deferred gross profit, the difference shall be recognized as
a. Loss on repossession to be presented as part of income from continuing operation before tax.
b. Deferred loss on repossession to be presented as current asset.
c. Gain on repossession to be presented as part of comprehensive income.
d. Deferred gain on repossession to be presented as current liability.

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Part II: Problem Solving

Problem 1: The ABC Company recognizes profit on credit sales on installment basis. At the end of 2021, before the
accounts are adjusted. the ledger shows the following:

Installment Accounts Receivable 2020 337,500

Installment Accounts Receivable 2021 525,000
Deferred gross profit 2020 185,000
Deferred gross profit 2021 272,500
Regular Sales 1,500,000
Cost of Regular Sales 960,000

Each year the gross profit on installment sales was 8% lower than the regular sales. In 2021. the gross profit on
installment sales was 4% higher than 2020.

8. How much is the total realized gross profit in 2021?

a. 229,500
b. 769,500
c. 181,000
d. 721,000

Problem 2: Appliance Company reports gross profit on the installment basis. The following data are available:

2018 2019 2020

Installment sales 240,000 250,000 300,000
Cost of goods – installment sales 180,000 181,250 216,000
Gross profit 60,000 68,750 84,000

Collections
2018 installment contracts 45,000 75,000 72,500
2019 installment contracts 47,500 80,000
2020 installment contracts 62,500

Defaults
Unpaid balance of 2018 installment contracts 12,500 15,000
Value assigned to repossessed merchandise 6,500 6,000
Unpaid balance of 2019 installment contracts 16,000
Value assigned to repossessed merchandise 9,000

9. What is the realized gross profit before loss on repossession for 2020?
a. 49,775
b. 57,625
c. 48,975
d. 56,625

10. What is the loss on repossession for 2020?

a. 5,250
b. 2,600
c. 7,850
d. 9,000

Problem 3: Davao Company uses the installment method of income recognition. The entity provided the following
pertinent data:

2018 2019 2020

Installment sales 300,000 375,000 360,000
Cost of goods sold 225,000 285,000 252,000

Balance of Deferred Gross Profit at Year-end:

2018 52,500 15,000 -
2019 54,000 9,000
2020 72,000

11. What is the total balance of the Installment Accounts Receivable on December 31, 2020?
a. 270,000
b. 277,500
c. 279,000
d. 300,000

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Problem 4: Nikko Company, which began operations on January 5, 2018, appropriately uses the installment method of
revenue recognition. The following information pertains to the operations for 2018 and 2019:

2018 2019
Sales 300,000 450,000
Collections from
2018 sales 100,000 50,000
2019 sales - 150,000
Accounts written off from
2018 sales 25,000 75,000
2019 sales - 150,000
Gross profit rates 30% 40%

12. What amount should be reported as deferred gross profit on December 31, 2019?
a. 75,000
b. 80,000
c. 112,000
d. 125,000

Problem 5: On November 1, 2020, Speed Motor which maintains a perpetual inventory record sold a new automobile to
Rapids for P6,800,000. The cost of the car to the seller was P5,205,000.

The buyer paid 30% down and received P640,000 allowance on old car traded, the balance being payable in equal monthly
installment payments commencing the month of sale.

The monthly amortization was P240,000 inclusive of 12% interest on the unpaid amount of the obligation.

The car traded-in has a wholesale value of P960,000 after expending reconditioning cost of P180,000.

After paying three instalments, the buyer defaulted, and the car was subsequently repossessed.

When reacquired, the car was appraised to have a fair value of P2,400,000.

13. How much is the realized gross profit on instalment sales during 2020?
a. 820,596
b. 855,596
c. 885,000
d. 804,897

Problem 6: On January 1, 2018, an entity sold a car to a customer at a price of P400,000 with a production cost of P300,000.
It is the entity's policy to employ installment method to recognize gross profit from installment sales.

At the time of sale, the entity received cash amounting to 25% of the selling price and an old car with trade-in allowance of
P50,000. The said old car has fair value of P150,000. The customer issued a 5-year note for the balance to be payable in
equal annual installments every December 31 starting 2018. The note payable is interest bearing with 10% rate due on the
remaining balance of the note.

The customer was able to pay the first annual installment and corresponding interest due. However, after the payment of
the second interest due, the customer defaulted on the second annual installment resulted to the repossession the car sold
with appraised value of 110,000. On December 31, 2019, the repossessed car was sold for P140,000 after reconditioning
cost of P10,000.

14. What is the entity’s realized gross profit for the year ended December 31, 2018?
a. 50,000
b. 120,000
c. 108,000
d. 128,000

15. What is the loss on repossession for the year ended December 31, 2019?
a. 30,000
b. 20,000
c. 10,000
d. 40,000

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Problem 7: The chief accountant of Sony Appliances Inc. provided the following balances from its unadjusted trial balance
for the year ended December 31, 2023:

January 1, 2023 December 31, 2023

Instalment receivable – 2021 contract 2,000,000 500,000
Instalment receivable – 2022 contract 3,000,000 1,000,000
Instalment receivable – 2023 contract 5,000,000
Deferred gross profit – 2021 contract 800,000
Deferred gross profit – 2022 contract 1,800,000
New inventory 200,000 300,000
Net purchases (excluding freight-in) 5,000,000
Freight in 100,000
Cash sales for year 2023 2,000,000
Instalment sales for year 2023 8,000,000

The following additional notes are provided for the year ended December 31, 2023:
 The gross profit rate for 2023 instalment sales is the average of previous years' gross profit rate for instalment sales.
 On July 1, 2023, Sony wrote off 2021 instalment receivable with account balance of P300,000 because of the bankruptcy
of the customer. Sony records its impairment loss of instalment receivable using direct write off method.
 On October 1, 2023, a 2022 contract customer defaulted on the instalment due which resulted to repossession of the
inventory with fair value of P100,000. The defaulted account has a balance of P600,000.
 On November 1, 2023, the repossessed inventory was sold at a cash price of P150,000 after reconditioning it at a cost
of P20,000. The sale of repossessed inventory is not yet reflected on the cash sales stated above.
 The total operating expenses, exclusive of impairment loss and loss on repossession, of Sony for the year ended
December 31, 2023 amount to P400,000.

16. What is the net income to be reported by Sony Inc. for the year ended December 31, 2023?
a. 2,840,000
b. 3,130,000
c. 3,520,000
d. 2,980,000

17. What is the total adjusted deferred gross profit as of December 31, 2023, respectively?
a. 3,200,000
b. 3,300,000
c. 3,100,000
d. 3,400,000

-END-

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