TEST I True or False. Write true if the statement is correct and false if it is not. Use the date column of your
worksheet. Write the word or words that made it false.
1. Gross profit rate may be computed by deducting cost of sales from installment sales and dividing this by the
cost of sales.
2. GPR can also be computed by dividing the unrealized gross profit by the installment sales.
3. If collection is not reasonably assured, point of realization is collection.
4. The theoretically correct presentation of Deferred Gross Profit is as a liability account.
5. Gain or loss on repossession can be determined by comparing the cost to be recovered and the resale value
of the repossessed merchandise.
6. When the value of the repossession is higher than the cost to be recovered, a loss on repossession will be
recognized.
7. Time of sales method and Time of Collection method gives a similar GPR rate.
8. If gross profit is 25% of cost and collection amounts to P300,000 with a deferred gross profit placed in the
statement of financial position as P15,000, the contract sales must have amounted to P360,000.
9. Refer to no. 8, Installment Contract Receivable will appear in the balance sheet as P75,000.
10. RA 6552 known as the Maceda Law covers only residential realty property with mortgage, condominiums,
and commercial buildings.
11. Under the Maceda Law for a qualified buyer to be given a grace period to continue with the unpaid
installments due , buyer must have paid more than two years of required installment payments.
12. Under the Maceda Law, the qualified buyer upon default may opt for a refund on all payments made
including down payment and deposit, 50% of these within an installment payment period of five year and
increaseing every year thereafter until it reaches 90% .
13. An overallowance on trade in requires a downward adjustment on the original sales price.
14. An interest bearing note payable in installments which requires uniform collection plus interest based on
the outstanding balance uses the long end method.
15. The contract price represents the sales price of the merchandise if the note is interest bearing whether you
use the long end method or present value method.
16. In a non-interest bearing contract, required periodic payment must be discounted to its present value and
added to the down payment to arrive at an estimated sales price which can be recognized as installment
sales.
TEST II A and B on the left side of your worksheet. C and D on the right side of your worksheet. Only
final answers. Use the back of your worksheet for your computations.
A. Joco Industries sells appliances on installment basis and uses the installment method to account for
installment sales. The following information were taken from its records as at Dec. 31, 2014:
Installment Accounts Receivable, Jan. 1 (for 2013 contracts) P755,000
Installment Receivable, Dec. 31 (for 2014 contracts) 840,000
Installment Accounts Receivable, Dec. 31 (for 2013 contracts) 540,000
Unrealized Gross Profit, Dec 31(for 2013 contracts) 312,750
Installment Sales 950,000
Cost of Installment Sales 570,000
The unrealized profit on 2013 contracts amounting to P312,750 has been adjusted for defaulted
contracts but not for realized profit.
Information on the defaulted contract follows: In June 2014, customer Santos defaulted on his
contract. The sale of an appliance for P150,000 took place in 2013 and twelve monthly payments
were already given out of 20 payments. The resale value of the repossessed merchandise was P65,000
after reconditioning cost of P10,000 and a mark-up rate of 20%. The reconditioned appliance was
sold for cash on Nov 15.
1. Compute GPR for 2013 contracts using installment accounts receivable after deducting defaulted
contract.
2. Reconstruct the entry recorded for the defaulted contract. Apply the GAAP for recognition of
profit or loss.
3. Give the entry recorded for the reconditioning cost.
4. Give the entry recorded for the resale of the repossessed merchandise on cash basis.
5. Give the adjusting entry for realized profit in 2014 for the 2013 contracts and 2014 contracts.
B. A refrigerator was sold to Fortune on Oct. 1, 2015 for P20,000 which cost price was P12,000.
Contract requires a 25% down payment. An old appliance was given by Fortune for this which could
be sold for P7,000 after a reconditioning cost of P2,000 and a mark-up half of the regular rate.
Customer bargained for an allowed trade in value of P4,000. Two installment payments were made
before the year ended out of the required twelve monthly installment payments plus interest at 12%
based on outstanding balance.
6. Give the entry to record the sale in 2015
7. Give the entries to record collection for November 1 and December 1.
8. Adjusting entries to record realized profit and accrued interest.
C. On June 1, 2014, Roger Corporation, sold a condo unit to Jerry Company for P5,000,000. Jerry
signed a four year 12% contract for a P600,000 down payment the balance payable semi-annually
starting Dec 1, 2014 for four years in uniform periodic payments including interest. The carrying
cost of the condo was P3,000,000. Roger appropriately uses the installment method of recognizing
profit. Round off PV factor to the second decimal place.
10. Entry to record collection on Dec 1, 2014.
11. Entry to adjust for realized profit and interest income on Dec 31, 2015.
D. Using problem C but assume instead that the contract is non-interest bearing with imputed interest at
12%. Round off gross profit rate to the second decimal place.
12. Entry to record sale in June 1, 2014
13. Entry to adjust for interest on Dec, 31 m 2014
14. Entry to record collection on Dec. 1, 2015
. . 15. For 2015: Compute for a) realized gross profit and b) total interest income.
SOLUTION TO OCT 15, 2015 QUIZ for AAC and BAC
False
1. cost of sales
2. instalment sales
4. liability
5. resale value
6. higher or loss
8. P360,000
10. commercial buildings
11. more than
TEST II
False
1. cost of sales
2. instalment sales
4. liability
5. resale value
6. higher or loss
8. P360,000
10. commercial buildings
11. more than
TEST II
B. 6.
Inventory of Used Mdse 3,600
Cash 2,000
Installment Contract Receivable 14,000
Installment Sales 19,600
Estimate value of trade in (7,000 – 2,000 – 1,400*)= 3,600
Allowed trade in 4,000
Overallowance P 400
Adjusted selling price (20,000 – 400) = P19,600
Additional cash payment reqd down P6,000 less P4,000 allowed trade in
= P2,000
*Regular gross profit rate (20 – 12 /20) =.4 / 2= .2 x 7,000= 1,400
Nov 1
Cash 1,307
Installment Receivable (14,000 / 12) 1,166.67
Interest Income (14,000 x .01) 140.00
Dec 1 Cash 1,295.00
Installment Contract Receivable 1,166.67
Interest Income (12,833.33 x .01) 128.33
8.
Dec 31 Deferred Gross Profit 3,076.55
Realized Gross Profit
3,076.55
GP rate= 19,600 – 12,000= 7,600 divide
by 19,600= 38.7755 % x 7,933.34
(3,600 +2,000 + 1,166.67 + 1,166.67)