ACC06 ADVANCED ACCTG I PROF.

ZENAIDA MANUEL
A. Theory:
1. The deferred gross profit account theoretically is treated as a liability.
2. Repossessed merchandise should be recorded either at appraised value or fair market value.
3. If allowed trade in is higher than the assigned value of the trade in, the excess is called an
overallowance on trade in.
4. Overallowance on trade in is recognized as a downward adjustment on the selling price.
5. If the contract is an interest bearing note, the face value of the contract is credited to
instalment sales.
6. Gain or loss on repossession may be determined by comparing the cost to be recovered
against the book value of the repossessed merchandise.
7. Sales price of a non-interest bearing contract may be determined by discounting the
instalment or periodic payment at its present value and deducting the down payment.
8. If the present value of the contract described in no 7 is P702,000 but the immediate cash
price is P650,000, then the instalment sales must be recorded for P650,000.
9. Repossessed merchandise may be recorded at cost to be recovered rather than at its assigned
value , if the assigned value will result in a gain on repossession.
10. Bad debts write off is recorded for contracts that are defaulted without a possibility of
repossession.

B. A refrigerator was sold by Cool Air to Flora on Oct 1, 2015 for P16,000 which cost price
was P9,480. A 25% down payment was required, balance collectible in twelve monthly
instalments which was evidenced by a 12% note issued by Flora. Cash plus an old
refrigerator was given by Flora for this for an allowed trade in value of P3,200. The old
appliance could be sold for P5,000 after a reconditioning cost of P1,000 and a 20% mark-
up on used merchandise. Two instalment payments were made before the year ended out
of twelve instalment payments due.

Give the entries to record- sale in Oct 1, 2015 and the two instalment payments.
1. Give the required adjusting entries for 2015.
2. Give the total realized revenues to be recognized in 2015.
3. Total realized profit for 2015.
C. Roro Industries sells boats on installment basis and uses the installment method to account for
installment sales. The following information were taken from its accounting records as at Dec.
31, 2016:
Installment Accounts Receueivable, Jan. 1 (for 2015 contracts) P755,000
Installment Receivable, Dec. 31 (for 2016 contracts) 840,000
Installment Accounts Receivable, Dec. 31 (for 2015 contracts) 540,000
Deferred Gross Profit, Dec 31(for 2015 contracts) 312,750
Installment Sales 950,000
Cost of Installment Sales 570,000
In 2016, customer Santos defaulted on his contract. The sale of an appliance for P150,000 took
place in 2015 and twelve monthly payments were already given out of 20 payments. The resale
value of the repossessed merchandise is P65,000 with a mark-up rate of 10%. The appliance was
sold on Nov 15, 2016 for cash after it was reconditioned for P2,000.

4. Reconstruct the entry recorded for the defaulted contract. Apply the GAAP for recognition of
profit or loss for defaulted contracts.
5. Entries to record reconditioning cost and sale of repossessed merchandise.\
6. Give the total realized gross profit in 2016.
D. On July 1, 2015, Roy Corporation, sold a condo unit to Jerry for P6,600,000. Jerry signed
a three year contract for a P600,000 down payment, the balance payable every six
months in uniform periodic payments including interest imputed at 12%. The carrying
cost of the condo was P3,837,600 on the date of sale. Roger appropriately uses the
instalment method of recognizing profit.

7. For 2015: Compute for realized gross profit and interest income.
8. For 2016: Compute for realized gross profit and interest income.
9. Balance sheet presentation for the year 2016 for the instalment contract at net
realizable value.
Solution
1. True 2. True 3. True 4.True 5. True 6.False 7.False 8. True 9.True 10True
Assigned value of trade in (5,000-1,000-1,000) P3,000
Required deposit (.25 x 16,000= 4,000 less allowed trade in 3,200) = 800
Overallowance (3,000-3,200)= 200
Adjusted sales price (16,000-200)= P15,800
GPR (15,800- 9,480= 6,320/15,800= 40%
Realized (3,800 + 1,000+ 1,000) x 40%= P2,3205
1. Cash 800
Used Merchandise 3,000
Instalment Recble 12,000
Instalment Sales 15,800
Cash 1,120
Installment Contract Receivable 1,000
Interest Income (12,000 x .01) 120
Cash 1,110
Installment Contract Receivable 1,000
Interest Income (11,000 x .01) 110
2. Deferred Gross Profit 2,320
Realized Gross Profit 2,320
Interest Receivable 100
Interest Income 10,000 x .01 100
3. 2,320 + 120 + 110 + 100= P2,650 total realized profits
10. 4. Inventory of Repossessed Merchandis 25,250
Deferred Gross Profit, 2015 34,750*
Installment Contract Receivable 60,000
*312,750/540,000=.5791666 X 60,000
If problem states that deferred gross profit has not
been adjusted yet for realized gross profit then GPR
should be 312,750 / 695,000(755 -60) or 45%
2,000
5. Inventory of Repossessed Merchandise
Cash 2,000
Cash 65,000
Inventory of Repossessed Merchandise 27,250
Gain 34,750
Collections from 2015 contracts(755-540-60)=155
Realized GP from 2015 contracts (155 x .5791666)= P89,771
2016 GPR (280/950)= .2947
Collections from 2016 contracts (950-840)= 110
Realized GP from 2016 contracts (.2947 x 110)= 32,417
Gain from sale of repossessed merchandise 34,750
6. Total Realized Profit (34,750 + 89,771 + 32,417) = P156,938
7. Date Total Interest Principal Sales Price Contract Price
Collections
7/1/15 5,517,300 6,600,000
600,000 600,000 4,917,300 6,000,000
1/1/16 1,000,000 295,038 704,962 4,212,338 5,000,000
7/1/16 1,000,000 252,740 747,260 3,465,078 4,000,000
1//1/17 1,000,000 207,905 792,095 2,672,983 3,000,000
7/1/17 1,000,000 160,379 839,621 1,833,362 2,000,000
1/1/18 1,000,000 110,002 889,998 943,364 1,000,000
7/1/18 1,000,000 56,602 943,398* -
*34.2 because of rounding off
PVF of 4.9173 x future periodic payments of 1,000,000 = P4,917,300 PV of future payments
Present value of contract (4,917,300 + 600,000) = P5,517,300
Gross Profit Ratio (5517300-3837600= 1,679700/5517300) = 30.44%
2015: Realized GP (600,000 x 30.44%)= P182,640
Interest Income of P295,038
2016: Realized GP (704,962 + 747,260) x 30.44% ) = P442,056
Interest Income (252,740+ 207,905)= P460,645
Entries at date of sale:
Cash 600,000
Instalment Contract Receivable 6,000,000
Instalment Sales 5,517,300
Deferred Interest Income 1,082,700*
*total interest income on the table is lesser by P34 because of the rounding off.

Cost of instalment sales 3,837,600

12/31
Installment Sales 5,517,300
Cost of instalment sales 3,837,600
Deferred Gross Profit 1,679,700

Deferred Gross Profit 182,640

Deferred Interest Income 295,038

Jan 1, 2016 and July 1, 2016

Dec 31, 2016

Deferred Gross Profit 442,056

Deferred Interest Income 460,465

BS Presentation 2016:

Asset Section:
Installment Contract Receivable P4,000,000
Deferred Gross Profit (1,055,004)*

Liability Section:
Deferred Interest Income 345,606

Can be classified as liability