ADDITIONAL ILLUSTRATIONS: Deferred gross profit- 1/1x3 70,400 230,400

Illustration 1: Computation of GROSS profit rate Divide by: Installment receivable- 1/1x3 320,000 960,000
ABC Co. uses the "installment sales method." On January 1, 20x3 ABC Co.'s records show the Gross profit rate based on sales 22% 24%
following balances:
The gross profit rate based on sales in 20x3 is 25%
Installment receivable- 20x1 320,000 Collections in 20x3 from:
Installment receivable- 20x2 960,000 20x1 sales: (320,000x22%) 70,400
Deferred gross profit – 20x1 70,400 20x2 sales (576,000x24%) 138,240
Deferred gross profit- 20x2 230,400 20x3 sales: (1.8M X 25%) 450,000
Total realized gross profit in 20x3 658,640
On December 31, 20x3, ABC Co.'s records show the following. ======
Installment receivable- 20x1 - Illustration 2: Realized gross profit
Installment receivable- 20x2 384,000
Installment receivable- 20x3 1,200,000 On Dec. 31, 20x3, ABC Co.'s records show the following:
Deferred gross profit –20x1 (before adjustment) 70,400 Deferred gross profit (before year-aid adjustments) 1,050,800
Deferred gross profit-20x2 (before adjustment) 230,400 Installment receivable - 20x2 384,000
Deferred gross profit-20x3 (before adjustment) 750,000 Installment receivable - 20x3 1200,000

Installment sales in 20x3 were made at 33 1/3% above cost. Gross profit rate in 20x2 is 24% based on sales, while gross profit rate in 20x3 is 33 1/3% based on
cost.
Requirements:
a. Compute for the installment sale in 20x3. Requirement: Compute for the realized gross profit in 20x3.
b. Compute for the cash collections in 20x3. Solution:
c. Compute for the total realized gross profit in 20x3. Gross profit rate = Deferred gross profit ÷ Installment account receivable

Solutions: Variation:
Requirement (a): Installment sale in 20x3 Installment account receivable X gross profit rate = DGP
Formula: DGP, beg. — Realized gross profit = DGP, end.
Basic formula: GPR based on sales = Gross profit ÷sales Variation: DGP, beg. — DGP, end. = Realized gross profit
Variation: Sales = Gross profi t÷ GPR based on sales
DGP (before year-end adjustments) 1,050,800
Deferred gross profit- 20x3 (before adjustment) 750,000 LES.' DGP (after year-end adjustments):
Divide by: Gross profit rate based on sales 25% Installment receivable, 20x2 x GPR (384K x 24%) 92,160
Installment sale in 20x3 3,000,000 Installment receivable,20x3 x GPR
[1.2M x (33½ %+ 1331/3%)] or (1.2M x 25%) 300,000 392,160
Requirement b: Cash collections Decrease in DGP - Realized gross profit in 20x3 658,640
Installment receivable – 20x1, Jan. 1, 20x3 320,000
Less: Installment receivable- 20x1, Dec. 31, 20x3 - Illustration 3: Reconstruction of information
Cash collection 20x3 320,000 ABC Co. has the following information:
Installment receivable – 20x2, Jan. 1, 20x3 960,000 20x1 20x2
Less: Installment receivable- 20x2, Dec. 31, 20x3 (384,000) Installment sales ? ?
Cash collection 20x3 576,000 Cost of sales 1,560,000 1,824,000
Sale in 20x3 3,000,000 Installment receivable-20x1 800,000 320,000
Less: Installment receivable-20x1, Dec. 31, 20x3 (1,200,000) Installment receivable-20x2 960,000
Cash collection in 20x3 1,800,000 Gross profit rates based on sales 22% 24%
Total collections 2,696,000
Requirement: Compute for the total realized gross profit in 20x2.
Requirement c: Total realized gross profit Collections in 20x2 from:
20x1 sales: (480,000 X 22%) 105,600
Gross profit rate = Deferred gross profit÷ installment account receivable 20x2 sales: (1,440,000 x 24%) 345,600
20x1 20x2 Total realized gross profit in 20x2 451, 200
 Installment sale-20x1 2,000,000
Illustration 4: Reconstruction of information Cash collections (1,200,000 add 480,000) (1,680,000)
ABC Co.'s records show the following information Installment Receivable-20x1, Dec. 31, 20x2 320,000
20x1 20x2 Multiply by: Gross profit rate in 20x1 22%
Deferred gross profit (adjusted ending balances): Deferred gross profit-20x1, dec. 31, 20x2 70,400
176,000 70,400
from 20x1 sale Installment sale-20x2 2,400,000
230,400 Cash collections (1,440,000)
from 20x2 sale 22% 24% Installment receivable-20x2 Dec. 31, 20x2 960,000
Gross profit rates based on sales Multiply by: Gross profit rate in 20x2 24%
Cash collections from: Deferred gross profit-20x2 Dec. 31, 20x2 230,400
20x1 sales Total deferred gross profit- Dec. 31, 20x2 300,800
1,200,000 480,000
=======
20x2 sales 1,440,000
Illustration 6: Cash collection
ABC Co. has the following collection policy on its installment sales:
Requirements: Compute for the following”
• 20% down payment
a. Balances of installment receivables on December 31, 20x2.
• Balance due as follows: 50% in the year of sale, 30% in the second year, and 20% in the third
b. Installment sales in 20x1 and 20x2.
year.
Solutions: • Installment sales during 20x1, 20x2 and 20x3 were P2,000,000, P2,400,000, and P3,000,000
Formula: Gross profit rate = Deferred gross profit ÷ Installment account receivable respectively.
Installment account receivable • Gross profit rates based on sales in 20x1, 20x2 and 20x3 were 22%, 24% and 25%, respectively.
Variation: Installment account receivable = DGP ÷ Gross profit rate Requirement: Compute for the total realized gross profits in each of years 20x1, 20x2 and 20x3.

Deferred gross profit - 20x1 sale, Dec. 31, 20x2 70,400 Solution:
Divide by: Gross profit rate in 20x1 22% 20x1 20x2 20x3
Installment receivable - 20x1, Dec. 31, 20x2 — Reqt. (a) 320,000 20x1 sales:
Add back: Collections (1,200,000 in 20x1 + 480,000 in 20x2) 1,680,000 Downpayment (2Mx20%)X 22% 88,000
Installment sale - 20x1 — Requirement (b) 2,000,000 20x1: [(2Mx80%) x 50%]x22% 176,000
20x2: [(2Mx80%) x 30%]x22% 105,600
Deferred gross profit - 20x2 sale, Dec. 31, 230,400 20x3: [(2Mx80%) x 20%]x22% 70,400
Divide by: Gross profit rate in 20x2 24% 20x2 sales:
Installment receivable - 20x2, Dec, 31, 20x2 — Reqt.(a) 960,000 Downpayment (2.4Mx20%)X 24% 115,200
Add back: Collections from 20x2 sales 1,440,000 20x1: [(2.4Mx80%) x 50%]x24% 230,400
Installment sale-20x2-Requirement b 2,400,000 20x2: [(2.4Mx80%) x 30%]x24% 138,240
20x3 sales:
Illustration 5: Deferred gross profit Downpayment (3Mx20%)X 25% 150,000
ABC Co.'s records show the following: 20x1: [(3Mx80%) x 50%]x25% 300,000
20x1 20X2 Realized gross profit 264,000 451,200 658,640
Installment sales 2,000,000 2,400,000
Cost of sales 1,560,000 1,824,000 Illustration 7: Reconstruction of information
Cash collections from: ABC Co’s incomplete records show the following:
20x1 sales 1,200,000 480,000
20x2 sales 1,440,000 20x1 20x2 20x3
Installment sales 2,000,000 2,400,000 ?
Requirement: Compute for the total deferred gross profit on Dec. 31, 20x2 Cost of sales ? ? 2,250,000
Gross profit ? ? ?
Solution: Gross profit rates ? ? 25%
Formula: Gross profit rate = Deferred gross profit ÷ Installment account receivable Collections
Variation: Installment account receivable X gross profit rate = DGP From 20x1 sales 1,200,000 480,000 320,000
Gross profit rate in 20x1: I(2M -1.56M) ÷ 2M] 22% From 20x2 sales 1,440,000 576,000
Gross profit rate in 20x2: [(2.4M-1.824M) ÷ 2.4M] 24% From 20x3 sales 1,800,000
 Realized gross profit 264,000 ? 658,640  Gross profit rate on the sale 30%.
Requirement: Compute for the cost of sales in 20x2
Requirement: Compute for the gain or loss on repossession
Solution: Solution
Realized gross profit-20x1 264,000 Date Inventory 6,000
Divide by: Collections in 20x1 1,200,000 Deferred gross profit (10kX 30%) 3,000
Gross profit rate-20x1 22% Loss on repossession 1,000
Installment account receivable 10,000
Total realized gross profit in 20x3 658,640 Illustration 2: Repossession — Estimated resale price
Realized gross profit in 20x3 from 20x1 sales (320k X 22%) (70,400) Information on ABC Co.'s installment sales is as follows:
Realized gross profit in 20x3 from 20x3 sales (1.8M X 25%) (450,000) 20x1 20x2
Realized gross profit in 20x3 from 20x2 sales 138,240 Sales 200,000 320,000
Cost of sales 160,000 224,000
Realized gross profit in 20x3 from 20x2 sales 138,240 Gross profit rate 20% 30%
Divide by: collections in 20x3 from 20x2 sales 576,000 Installment receivable - 20x1 90,000 30,000
Gross profit rate-20x2 24% Installment receivable - 20x2 144,000

Installment sales-20x2 2,400,000 During 20x2, ABC Co. repossessed a property that was sold in 20x1 for P20,000. Prior to
Multiply by: Cost ratio in 20x2 (100%-24%) 76% repossession, P5, OOO were collected from the buyer. The repossessed property is expected to þe
Cost of sales- 20x2 1,824,000 resold for P17,000 after reconditioning costs of P3,000. The normal profit margin is 30%.
======== Requirements:
-Observe that the previous problems all revolve arOund the two formulas below (and their Compute for the gain or loss on repossession.
variations): Compute for the total realized gross profit in 20x2.
Compute for the profit recognized in 20x2
Realized gross profit = Collection on sale x Gross profit rate Solution:
Gross profit rate = Deferred gross profit ÷ Installment account receivable Requirement a
Date Inventory 8,900
Repossession Deferred gross profit (15kX 30%) 3,000
The seller may repossess the good sold in case of default by the buyer. On repossession date: Loss on repossession 3,100
a. The repossessed good is debited to an inventory account at "fair value." For purposes of Installment account receivable(20k-5k) 15,000
applying the installment sales method, "fair value" is either:
i. the appraised value of the repossessed good; or Estimated resale price 17,000
ii. the estimated resale price of the repossessed good less reconditioning costs and normal profit Reconditioning cost (3,000)
margin. Normal profit margin (17kx30%) (5,100)
b. The carrying amounts of the related installment receivable and deferred gross profit are Fair value of repossessed property 8,900
derecognized. ======
c. The difference between (a) and (b) is recognized as gain or loss on repossession. The gross profit rate in the year the repossessed good was originally sold is used in computing for
the related deferred gross profit.
Requirements (b) and (c):
Pro forma entry The collections in 20x2 are computed as follows:
Realized gross profit from:
Date Inventory (at fair value) xx 20x1 sale (45K x20%) 9,000
Deferred gross profit (at carrying amount) xx 20x2 sale (175Kx30%) 52,800
Loss on repossession (debit balancing figure) xx Total realized gross profit in 20x2-Req.b 61,800
Installment receivable (at carrying amount) xx Loss on repossession (3,100)
Gain on repossession (credit balancing figure) xx Profit in 20x2-req.c 58,700
======
illustration 1: Repossession — Appraised value Illustration 3: Repossession — Fair value after reconditioning costs
ABC Co. repossessed a good that was previously sold to a defaulting buyer. Relevant information Information on a repossessed good from a defaulting buyer is as follows:
follows:  The appraised value (fair value) is P6,000 after reconditioning costs of P500.
 Appraised value of the repossessed good — P6,000.  The balance of the installment receivable is P10,000. The gross profit rate on the sale is
 Balance of installment receivable — P10,000 30%.
 Illustration 5: Repossession — installments w/ interest
Requirement: Compute for the following: ABC Co. uses the installment sales method. On Jan. 1, 20x1, ABC Co. sold inventory costing
a. Gain or loss on repossession. P180,000 for P240,OOO payable as follows: down payment of P48,OOO and twelve monthly
b. New cost basis of the repossessed inventory. payments of P16,525 due at the beginning of each succeeding month. The installments include
interest of 1/2 of 1% per month. After making three succeeding monthly payments, the customer
Solution defaulted and ABC Co. repossessed the inventory. The fair value of the repossessed inventory is
Requirement(a) P180,000.
Date Inventory (exclusing reconditioning cots) 5,500 Requirements: Compute for the following:
Deferred gross profit (10K x 30%) 3,000 a. Realized gross profit from the sale.
Loss on respossession (squeeze) 1,500 b. Gain or loss on repossession.
Installment account receivable 10,000
Solutions
Date Collections Interest income Principal Balance
a. On repossession date, the inventory account is debited at the appraised value of the 1/1/20x1 240,000
repossessed good in its present condition without the further reconditioning (i.e., 6,000- 1/1/20x1 48,000 - 48,000 192,000
5,000=5,500).The reconditioning costs are subsequently capitalized when incurred as 2/1/20x1 16,525 960 15,565 176,435
follows: 3/1/20x1 16,525 882 15643 160,792
Date Inventory 500 4/1/20x1 16,525 804 15,721 145,071
Cash 500 Collections pertaining to principal 94,929

Requirement (b): Collections pertaining to principal 94,929

Multiply by: Gross profit rate(240K-180K)÷240k 25%
The new cost basis of the repossessed inventory is P6,000(i.e., the sum of the debits to the Realized gross profit 23,732
inventory account.) =====
Req. b: Gain or loss on repossession
Illustration 4: Profit on resale of repossessed inventory Date Inventory 180,000
ABC Co. uses the "installment sales method." ABC Co. sold inventory costing P30,000 to a Deferred gross profit (145,071x 25%) 36,268
customer for P40,000. After paying P28,OOO, the customer defaulted and ABC Co. repossessed the Installment receivable (40k-28k) 145,071
good. Upon repossession, the good was appraised at P10,000. ABC Co. subsequently spent P2,000 Gain on repossession (squeeze) 71,197
in reconditioning the good before selling it to another customer for P15,000. The second buyer
made total payments of P6,000. Illustration 6: Repossession — Error
Requirements: Compute for the following: ABC Co. uses the installment sales method. After its first year of operations, ABC had the following
a. Gain or loss on repossession. balances:
b. Realized gross profit from the resale. Installment sales 37,500
Purchases 25,000
Solution Inventory - new merchandise, Dec. 31, 20x1 2,500
Req.a Loss on repossession 4,500
Date Inventory (appraised value 10,000 Installment receivable, Dec. 31, 20x1 20,000
Deferred gross profit (12k x 25%) 3,000
Installment receivable (40k-28k) 12,000 During the year, ABC Co. repossessed an inventory sold to a defaulting buyer. The inventory had
Gain on repossession (squeeze) 1,000 an appraised value of 1,500. However, this was not recorded. Instead, the janitor/bookkeeper of
[(40k-30K÷40K]=25%GPR ABC Co. erroneously accounted for the repossession as a debit to "Loss on repossession" and a
Req. b credit to "Installment receivable" for the unpaid balance. This came to light when the security
Resale price 15,000 guard made an audit. The janitor and the guard were classmates in college when they took up BS
Cost of sale (10k appraised value + 2k reconditioning cost (12,000) Accountancy. Sadly, they did not graduate because they only studied half-heartedly and failed in
Gross profit 3,000 Advanced Accounting.
Gross profit rate 20% Requirement: Compute for the correct amount of gain or loss repossession.
Solution:
Collections from the resale 6,000 Date Inventory 1,500
Multiply by: gross profit rate 20% Deferred gross profit (4,500x40%) 1,800
Realized gross profit from the resale 1,200 Loss on repossession (squeeze) 1,200
Installment receivable 4,500
The balance of the installment receivable is equal to the loss on repossession of P4,500, This is
because the janitor recorded the repossession as a debit to "Loss on repossession" equal to the Fair value of old merchandise traded-in 5,000
balance of the receivable. Collections 7,000
Total 12,000
Installment sales 37,500 Multiply by: Gross profit rate (20k-12k)÷20K 40%
Cost of goods sold: Realized gross profit in year of sale 4,800
Inventory beg. 0
Purchases 25,000 The fair value of the merchandise traded-in is part of the collections in the year of sale computing
Repossessed inventory 1,500 for the realized gross profit.
Total goods available for sale 26,500 Case2: Over allowance
Inventory end(2,500+1,500) (4,000) (22,500) To induce sale, ABC Co. grants the customer a trade-in value of P7,000 for the old merchandise.
Gross profit 15,000 Subsequent collection during the year amount to P7,000.
Gross profit rate (15,000÷37,500) 40% Requirement: Compute for the realized gross profit in the year sale.
Solution:
Trade-ins Date Inventory-traded-in 5,000
A seller may accept from a buyer a trade-in of old merchandise as part payment for the sale of new Overallowance(7ktrade-in value>5kFV) 2,000
merchandise. Trade-ins under the "installment sales method" are accounted for as follows: Installment receivable 13,000
a. The traded-in merchandise is debited to inventory at "fair value." For purposes of Installment sale 20,000
applying the installment sales method, "fair value" is either: The installment receivable can also be computed as Sale price less trade in value (20K-7K=13,000)
i. The appraised value of the trade-in merchandise; or Fair value of old merchandise traded in 5,000
ii. the estimated resale price of the traded-in merchandise less reconditioning costs and Collections 7,000
normal profit margin. Total 12,000
b. The seller gives the buyer a trade-in value for the old merchandise. The trade- Mutiply by gross profit rate 33.33%
in value is the amount that is treated as part payment of the new merchandise Realized gross profit in year of sale 4,000
being sold. There is no accounting problem if the trade-in value is equal to the
fair value in (a) above. If this is not the case, the seller recognizes either an over Sale price 20,000
allowance or an under allowance for the difference. Less: Over allowance (2,000)
 If the trade-in value is greater than the fair value, the difference is debited to an "Over Adjusted sale price 18,000
allowance" account. The over allowance is deducted from the sale price when computing Cost of sale (12,000)
for the gross profit rate. Adjusted gross profit 6,000
 If the trade-in value is less than the fair value, the difference is credited to an "Under Adjusted gross profit rate 33.33%
allowance" account. The under allowance is added to the sale price when computing for
the gross profit rate. Case 3: Under allowance
Pro forma entry ABC Co. grants the customer a trade-in value of P2,500 for the old merchandise. Subsequent
Date Inventory-traded in (at fair value) xx collection during the year amount to P7,000.
Over allowance (if traded in >FV) xx
Installment receivable (balancing figure) xx
Installment sale xx Requirement: Compute for the realized gross profit in the year sale.
Under allowance (if trade-in value<FV) xx Solution:
Illustration: Trade In Date Inventory-traded-in 5,000
ABC Co. uses the "installment sales method." merchandise costing P12,000 to a customer for Installment receivable 17,500
P20,000. ABC accepts sold merchandise as trade-in. The old merchandise's fair value is P5,000. Installment sale 20,000
Under allowance (2.5Ktrade-in,5KFV) 2,500
Case1: Trade in value equal to fair value
ABC Co. grants the customer a trade-in value of P5,000 for the old merchandise. Subsequent Fair value of old merchandise traded-in 5,000
collection during the year amount to P7,000. Collections 7,000
Total 12,000
Requirement: Compute for the realized gross profit in the year sale. Multiply by Gross profit rate 46.67%
Solution: Realized gross profit in year of sale 5,600
Date Inventory-traded-in 5,000
Installment receivable 15,000 Installment sale 20,000
Installment sale 20,000 Add: Under allowance 2,500
Adjusted sale price 22,500 Inventory - Jan. 1, 20x2 350,000
Cost of sale (12,000) Purchases 2,775,000
Adjusted gross profit 10,500 Repossession 15,000
Adjusted gross profit rate 46.67% Total goods available for sale 3,140,000
Inventory - Dec. 31, 20x2 (new and repossessed) (475,000)
Cost of goods sold - Regular and Installment 2,665,000
Allocation of Cost of goods sold
 The cost of goods sold on regular sales is
A seller that makes both "regular" and "installment" sales may need to allocate the cost of goods Regular sales 1,925,000
sold between the two sales. Multiply by: Cost ratio on regular sales (100% - 30%) 70%
Cost of goods sold — Regular 1,347,500
========
Illustration 1: Relative cash price equivalents  The cost of goods sold on installment sales is follows:
ABC co. recognizes revenue from its regular sales at the point of sale and uses the "installment' Cost of goods sold - regular and installment 2,665,000
sales method" for its installment sales. Information at year-end is as follows: Cost of goods sold regular sales (1,347,500)
Regular sales 1,000,000 Cost of goods sold - Installment sales in 20x2 1,317,500
Installment sales 2,400,000
Cost of goods sold 1,200,000
The installment price is higher than the regular price by 20%.  The gross profit rate on the 20x2 installment sales is computed as follows:
Requirement: Compute for the allocation of the cost of goods sold. Installment sales in 20x2 2,125,000
Cost of goods sold - installment sales in 20x2 (1,347,500)
Solution: Gross profit - Installment sales in 20x2 807,500
Cash sale prices Fraction Allocation of COGS Gross profit rate - Installment sales in 20x2 38%
Regular sales 1M 1/3 400,000
Installment sales (2.4M÷120%) 2M 2/3 800.000
Totals 3M 3/3 1,200,000
 The gross profit rate on the 20x1 installment sales is computed as follows:
Illustration 2: Consistent mark-up on regular sales Deferred gross profit - 20x1 sales, Jan. 1, 20x2 270,000
ABC Co. recognizes revenue from its regular sales at the point of sale and uses the "installment Installment receivable - 20x1 sales, Jan, 1, 20x2 600,000
sales method" for its installment sales. ABC's trial balance on Dec. 31, 20x2 is shown below: Gross profit rate - Installment sales in 20x1 45%
Debit Credit
Installment receivable-20x1 sales 75,000  The collections in 20x2 from installment sales in 20x1 and 20x2 are computed as follows:
Installment receivable-20x2 sales 1,000,000
Inventory, Jan. 1, 20x2 350,000 Installment receivable – 20x1 (600,000-38750-75,000) = 486,250
Purchases 2,775,000 Installment receivable – 20x2 (2,125,000-1000,000) = 1,125,000
Repossessed inventory (at appraised value) 15,000  The total realized gross profit is computed as follows:
Deferred gross profit-20x1 sales, jan. 1, 20x2 270,000 Collections in 20x2 from:
Regular sales 1,925,000 20x1 installment sales: (486,250x 45%) 218,813
Installment sales 2,125,000 20x2 installment sales: (1,125,000 X 38%) 427,500
20x2 regular sales: (1,925,000x 30% given) 577,500
Additional Information: Total realized gross profit in 20x3 1,223,813
 Installment receivable-20x1 sales, jan 1, 20x2 600,000 Req. b: Gain or loss on repossession
 Inventory, Dec. 31 20x2 (new and repossessed) 475,000 Date Inventory-repossessed 15,000
 Consistent gross profit rate on regular sales 30% Deferred gross profit (38750x45%) 17,438
 Installment receivable from 20x1 sales written-off Loss on repossession (squeeze) 6,312
In 20x2. The related inventory was repossessed in 20x2 38,750 Installment receivable 38,750
Requirements: Compute for the following:
a. Total realized gross profit in 20x2 from regular and installment sales. Cost recovery method
b. Gain or loss on repossession. Under the "cost recovery method"* of traditional US GAAP, no gross profit or interest/ income is
Solutions: recognized until the total collections from the sale exceed the cost of the inventory sold.
Requirement (a): Total realized gross profit in 20x2
Illustration: Cost recovery method
 The total cost of goods is computed as follows:
ABC Co. uses the "cost recovery method," On Jan. 1, 20x1, ABC Co. sold inventory costing P280,000 NET INCOME P xxx
to a customer for P500,000 payable as follows: P100,000 down payment and balance due in 4
equal annual payments every Dec. 31.
Requirement: Compute for the realized gross profit (RGP) in years 20x1 through 20x4. *GP on Regular Sales *RGP on Installment Sales
Sales Pxxx Collection P xxx
Solution
Less: Cost of Regular Sales (xxx) Multiplied by GP rate ( xxx)
20x1 20x2 20x3 20x4
GP ON REGULAR SALES P xxx RGP ON INSTALLMENT SALES P xxx
Cumulative collections 200,000 300,000 400,000 500,000
Cost of goods sold 280,000 280,000 280,000 280,000
Excess collection - 20,000 120,000 220,000 Installment Accounts Receivable
RGP in previous years - (20,000) (120,000)
IAR, beginning (prior year) xxx xxx Collections
RGP in current year - 20,000 100,000 100,000
or
Variation: Installment sales xxx Repossessed accounts
What if the installments include imputed interest, can ABC Co. recognize interest income in 20x1? (current year) or IAR defaulted
Answer: No. Under the cost recovery method, neither gross profit nor interest income is xxx Write-off
recognized until the collections exceed the cost of goods sold. IAR, ending xxx

MODULE SUMMARY 1. Gain or Loss on Repossession

 Realized gross profit= Gross profit X collection on sale
 Gross Profit rate= Deferred gross profit COMPUTATION OF FV OF REPOSSESSED MERCHANDISE:
Installment Account Receivable
Repossession: Estimated Selling Price P xxx
Dat Inventory (at fair value) xx Reconditioning cost ( (xxx)
e Deferred gross profit xx Normal Profit (xxx)
Loss on repossession (squeeze) xx Cost to sell ( xxx)
Installment account xx FV OF REPOSSESSED MERCHANDISE AFTER RECONDITIONING COST
receivable P xxx
 Trade-in: If trade-in value exceeds fair value, the excess is an over allowance, which is
deducted from sales when computing for the gross profit rate. The fair value of the
traded-in merchandise is treated as part of the collections in the year of sale when
computing for the realized gross profit.  If it is BEFORE reconditioning cost, IGNORE the amount of reconditioning
cost.
INSTALLMENT SALES  If the problem is SILENT if the estimated selling price is before
If collectability of the note is REASONABLY ASSURED, ACCRUAL METHOD should be applied. In this or after recondition cost, deduct the reconditioning cost
topic the entire amount of GP becomes part of the net income.  If the problem says ESTIMATED WHOLESALE VALUE or
APPRAISED VALUE, the normal profit should not be deducted
If the collectability of the note is NOT REASONABLY ASSURED, INSTALLMENT METHOD anymore.
should be applied 5.COMPUTATION OF GAIN (LOSS) ON REPOSSESSION:
FV of Repossessed Merchandise P xxx
COMPUTATION OF NET INCOME:
Less: Unrecovered cost
Gross Profit (GP) on Regular Sales P xxx 1) IAR-defaulted P xxx
Realized Gross Profit (RGP) on Installment Sales xxx Less: DGP related to receivables ( xx)
or
TOTAL RGP P xxx 2) IAR x cost ratio xxx ( xxx)
Less: Expenses GAIN (LOSS) ON REPOSSESSION P xxx
1. Selling Expenses P xxx
2. Loss on Repossession xxx  If Unrecovered Cost > FV or Repossessed Merchandise = LOSS ON
3. Loss on Write-off xxx REPOSSESSION
(xxx)
 Repossessed Merchandise @ FV xxx c. a or b
d. none of these
DGP xxx
3. Under the installment sales method, when merchandise previously sold is repossessed, the
Loss on Repossession xxx repossessed merchandise is recorded at
IAR – defaulted xxx a. fair value c. current cost
Gain on Respossession (if any) xxx b. original cost d. any of these
4. For purposes of applying the installment sales method, “fair value” is
 If Unrecovered Cost < FV of Repossessed Merchandise
a. the appraised value of the repossessed property or traded-in merchandise
b. the estimated selling price of the repossessed property or traded-in merchandise less
reconditioning costs and normal profit margin, at date of repossession or date of trade-in.
 GAIN ON REPOSSESSION Journal entry: c. a or b
d. none of these
5. Gain or loss on repossession is computed as
a. the fair value of the repossessed property less the sum of the balance in deferred gross profit
6. Write-off
and the balance in the defaulted installment account receivable
b. the sum of the fair value of the repossessed property and the balance in the defaulted
Regular Sales installment account receivable less the balance in deferred gross profit
c. the difference between the fair value of the repossessed property and the balance in deferred
Allowance on Doubtful accounts xxx gross profit
Accounts Receivable xxx d. the sum of the fair value of the repossessed property and balance in deferred gross profit less
the balance in the defaulted installment account receivable
Installment Sales 6. Merchandise received as trade-in is recognized at
a. fair value c. current cost
DGP xxx b. original cost d. any of these
Loss on Write-off xxx
IAR xxx 7. Under an installment sale where merchandise is received as “trade-in,”
a. the fair value of merchandise traded-in is considered as part of collections when determining
the realized gross profit in the year of sale.
7. Deferred Gross Profit b. the trade-in value of merchandise traded-in is considered as part of collections when
COMPUTATION OF DEFERRED GROSS PROFIT: determining the realized gross profit in the year of sale.
c. neither the fair value nor the trade in value affects the computation of realized gross profit.
Installment Sales P xxx d. none of these
8. The excess of the trade-in value over the fair value of a traded-in merchandise in a sale
Cost of Installment ( xxx)
accounted for under the installment sales method represents
Sales a. over allowance c. no allowance
DGP P xxx b. under allowance d. small allowance
9. Under the installment sales method, an “over allowance” is
DGP a. treated as addition to the installment sale price when computing for the gross profit rate.
b. treated as reduction to the installment sale price when computing for the gross profit rate.
RGP (Collection x GP rate) xxx xxx DGP, beginning
c. not accounted for
DGP on Repossessed Merchandise xxx d. none of these
DGP on Write-off xxx e.
xxx DGP, ending 10. Under the cost recovery method,
a. the initial collections on the sale are treated as recovery of the cost of the inventory sold.
Thus, no gross profit or interest income is recognized until total collections from the sale
MODULE ACTIVTY/ASSESSMENT I.MULTIPLE CHOICE: THEORY/PROBLEMS
equals the cost of inventory sold.
1. When the consideration receivable from an installment sale is discounted, the gross profit rate is
b. the initial collections on the sale are treated as recovery of the cost of the inventory sold.
computed
Thus, no gross profit is recognized until total collections from the sale equals the cost of
a. based on the present value of the consideration receivable.
inventory sold. However, interest income may nonetheless be recognized.
b. based on the undiscounted installment sale price
c. a or b
c. a or b
d. none of these
d. none of these
2. When the consideration receivable from an installment sale is discounted, realized gross profit
II. PROBLEM SOLVING:
is computed
a. based on collections pertaining to the principal
b. based on the total collection during the period
1. BUCOLIC RURAL Co. uses the installment method. Information on BUCOLIC’s transactions during d. 5,640,000
20x1 and 20x2 is shown below: 4. How much is the total realized gross profit in 20x3?
20x1 20x2 a. 984,600
b. 1,241,200
Installment sales 2,000,000 2,400,000 c. 1,520,000
d. 1,421,600
Cost of sales 1,200,000 1,320,000 5. DEMOTIC POPULAR Co. uses the installment method. The following information was taken
Gross profit 800,000 1,080,000 from the incomplete records of DEMOTIC Co.:
20x1 20x2 20x3
Cash collections from:
4,000,00
20x1 sales 800,000 400,000 Installment sales 0 4,800,000 ?

20x2 sales 960,000 Cost of sales ? ? ?

How much is the total realized gross profit in 20x2? Gross profit ? ? ?

a. 160,000 Gross profit rates ? ? 25%

b. 432,000
c. 592,000 Collections:
d. 642,000
2,000,00
from 20x1 sales 0 1,200,000 800,000
Use the following information for the next three questions:
INNOCUOUS HARMLESS Co. uses the installment method. On January 1, 20x3, INNOCUOUS Co.’s records 1,440,00
show the following balances: from 20x2 sales 2,400,000 0

Installment receivable - 20x1 800,000 3,600,00

from 20x3 sales 0
Installment receivable - 20x2 2,400,000
1,421,60
Deferred gross profit - 20x1 176,000 Realized gross profit 440,000 ? 0
Deferred gross profit - 20x2 576,000 How much is the cost of sales in 20x2?
On December 31, 20x3, INNOCUOUS Co.’s records show the following balances before adjustments for a. 2,840,000
realized gross profit: b. 3,248,000
c. 3,648,000
Installment receivable - 20x1 -
d. 3,946,000
Installment receivable - 20x2 960,000
Use the following information for the next three questions:
Installment receivable - 20x3 2,400,000 THRALL SLAVE Co. uses the installment method. Information on installment sales in 20x1 and 20x2 is
shown below:
Deferred gross profit - 20x1 176,000
20x1 20x2
Deferred gross profit - 20x2 576,000
400,00
Deferred gross profit - 20x3 1,500,000
Sales 0 640,000
Installment sales in 20x3 were made at 33 1/3 above cost.
320,00
2. How much is the installment sale in 20x3?
Cost of sales 0 448,000
a. 4,836,000
b. 5,800,000 Gross profit rate 20% 30%
c. 6,000,000
d. 7,200,000 180,00
3. How much is the total cash collections in 20x3? Installment receivable - 20x1 0 60,000
a. 5,840,000
b. 1,440,000 Installment receivable - 20x2 288,000
c. 3,600,000
During 20x2, THRALL Co. repossessed a property which was sold in 20x1 for ₱40,000. Prior to
repossession, ₱10,000 were collected from the buyer. The estimated resale price of the repossessed
property was ₱34,000 after reconditioning costs of ₱6,000.
6. How much is the gain or loss on repossession?
a. 17,800
b. 6,200
c. 12,800
d. 5,400
7. How much is the total realized gross profit in 20x2?
a. 123,600
b. 352,000
c. 117,400
d. 90,000
8. How much is the profit recognized in 20x2?
a. 123,600
b. 352,000
c. 117,400
d. 90,000

Use the following information for the next three questions:

ARNZQUIN Co. sells household furniture both on cash and on installment basis. For each installment sale,
a contract is entered into whereby the following terms are stated:
a. A down payment of 25% of the installment selling price is required and the balance is payable
in 15 equal monthly installments.
b. Interest of 1% per month is charged on the unpaid cash sales price equivalent at each
installment.
c. The price on installment sale is equal to 110% of the cash sales price.

For accounting purposes, installment sales are recorded at contract price. Any unpaid balances on
defaulted contracts are charged ton uncollectible accounts expense. Sales of defaulted merchandise are
credited to uncollectible accounts expense. Interests are recorded in the period earned. For its first year
of operation ending December 31, 20x1, the books of the company showed the following:

Cash sales ₱378,000

Installment sales 794,970

Merchandise inventory, Jan. 1 174,180
Cash collections on installment contracts:
Down payment, including defaulted contract 198,750
Installment payments, including interest
of ₱27,758.52 (average of six
monthly installments on all
contracts, except on defaulted
contracts) 238,023

A contract amounting to ₱3,300 was defaulted after the payment of 3 installments.

9. The gross profit rate based on total sales at cash sales price equivalent is:
a. 33.75% c. 37.00%
b. 36.34% d. 40.88%
10. The total interest earned for the first four months on the defaulted contract is:
a. 60.94 c. 72.07
b. 69.30 d. 80.85
11. The realized gross profit for the year 20x1 is:
a. 151,335.35 c. 249,674.52
b. 161,789.16 d. 291,355.96