25. a - Costs not yet recovered. 26. 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
27. 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.
30. 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
31. c Total Income for 20x4: Gross profit (realized) No. 51 Interest revenue4 months: P816,619 x 10% x 4/12..
P179,119 _ 27,221 Total income for 20x4 P206,340
32. b Total Income for 20x5: 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 Note 1 Discount (1) (2) 10% (3) 1 P1,125,000 P308,381 3 P 816,619 2 81,662 5
2 937,500 226,719 4 710,781 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.
33. 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.
34. a Total Income for 20x4: 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
35. 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
36. d (P2,000,000 P1,500,000) P2,000,000 = 25%
37. a (P800,000 x .25) P90,000 = P110,000,
38. d P700,000 x .25 = P175,000; P500,000 x .25 = P125,000.
45. 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
46. 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)
47. 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 48. 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 P 174,662.9 49. 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**
50. 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
51. 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
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
52. d (Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is recognized in the year of sale, because collection of the receivable is reasonably assured.) Finley Company Computation of Income Before Income Taxes On Installment Sale Contract For the Year Ended December 31, 20x3 Sales P4,584,000 Cost of Sales 3,825,000 Gross Profit 759,000 Interest Revenue (Schedule I) 328,320 Income before Income Taxes P1,087,320 Schedule I Computation of Interest Revenue on Installment Sale Contract Cash selling price (sales) P4,584,000 Payment made on January 1, 20x3 936,000 Balance outstanding at 12/31/x3 3,648,000 Interest rate 9% Interest Revenue P 328,320
Quiz - VII 1. P920,000
20x4: P1,200,000 x 30% = P 360,000 20x5: P1,400,000 x 40% = 560,000 P920,000
2. P190,000 (P300,000 P750,000) x P250,000 = P100,000 [(P270,000 P900,000) x P300,000] + P100,000 = P190,000
3. P1,600 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.
4. Zero/Nil When the cost recovery method is used, gross profit is recognized only after all costs have been recovered. 20x5 P45,000 x 63% = P28,350 Cost of sale P28,350 - P24,000 = P4,350 No gross profit is recognized in 20x5. Costs still to be recovered. 5. P19,250 20x6 Relating to 20x5 sales: P19,000 - P4,350 = P14,650 Gross profit recognized Relating to 20x6 sales: P60,000 x 59% = P35,400 Cost of sale P40,000 - P35,400 = 4,600 Gross profit recognized P19,250 Recognized in 20x6 6. P21,000 20x7 Relating to 20x5 sales: Since all costs have been recovered, all cash collected is
recognized as gross profit ...... P 2,000 Relating to 20x6 sales: Since all costs have been recovered, all cash collected is
recognized as gross profit ...... 17,000 Relating to 20x7 sales: P85,000 x 60% = P51,000 Cost of sale P53,000 - P51,000 = .......... 2,000 Gross profit recognized P21,000 Recognized in 20x7 7. P320,000 [(P1,000,000 P200,000) x (P1,000,000 P600,000)/P1,000,000 = P320,000
8. P390,000 P1,800,000 P1,080,000 = P720,000 (40% gross profit rate) P720,000 (P825,000 x 40%) = P390,000. 9. P 128,000 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
To deferred gross profit: 20x3: P160,000 x P136,000 = P24,000 20x4: P184,000 x P158,240 = 25,760 P49,760
Gross profit realized: 0.15 x P40,000 = P 6,000 0.15 x P89,600 = 13,440 0.14 x P36,800 = 5,152 P24,592 Balance of Gross Profit Deferred: P49,760 - P24,592 = P25,168
11. P 0 all profit recognized in 20x5 12. P240 (P1,200/P2,000) x P400 13. P100 - (100% of costs were fully recovered prior to 20x7 14. P10 million, the amount of sale 15 . P450 [P1,000 P250 = P750 (P750 x 400/1,000)] = P450
16. P50 gain Repossessed merchandise 500 Deferred gross profit 300 Installment Accounts receivable.. 750 Gain on repossession 50
24. P43,700 Unrecovered costs Cost of installment sales for 20x5 installment sales 56,050 Less: Collections in 20x5 for 20x5 installment sales _22,800 Unrecovered costs, 12/31/20x5 33,250 Less: Collections in 20x6 for 20x5 installment sales (balancing figure) _43,700 Realized GP on I/S in 20x6 for 20x5 sales *10,450 * Realized GP on I/S in 20x6 16,050 Less: Realized GP on I/S in 20x6 for 20x5 I/S since cost of P31,000 (No. 23) is already recovered in 20x5 equivalent to collection __5,600 Realized GP on I/S in 20x6 for 20x5 installment sales *10,450 25. Zero costs is not yet fully recovered, the profit should be recognized Unrecovered costs Cost of installment sales for 20x4 (No. 23) 31,000 Less: Collections in 20x4 for 20x4 installment sales _22,800 Unrecovered costs, 12/31/20x4 8,200
26. P41,000 Unrecovered costs Cost of installment sales for 20x4 installment sales 31,000 Less: Collections in 20x4 for 20x4 installment sales _25,600 Unrecovered costs, 12/31/20x4 5,400 Less: Collections in 20x5 for 20x4 installment sales 46,400 Realized GP on I/S in 20x5 for 20x4 installment sales 41,000 Realized GP on I/S in 20x5 for 20x5 installment sales: Unrecovered costs Cost of installment sales for 20x5 installment Sales 56,050 Less: Collections in 20x5 for 20x5 installment sales 22,800 Unrecovered costs, 12/31/20x4 33,250 ____-0- Realized GP on I/S in 20x5 41,000 27. P 45,000 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
28. Zero P450,000 cost P300,000 collections = P150,000 unrecovered costs
29. P300,000 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
30. 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
31. 24%. Determined from the repossession entry: Deferred gross profit P2,400 = 24% Installment accounts receivable P10,000
32. 35% Installment sales P120,000 Cost of sales 78,000 Gross profit P 42,000
30. c 35. b 40. a 45. b 50. d 55. d 31. b 36. d 41. e 46. c 51. c 56. b 32. b 37. d 42. b 47. c 52. b 57. d 33. b 38. e 43. b 48. c 53. a 58. c 34. c 39. c 44. d 49. d 54. b 59. c
60. C 65. b 61. B 66. b 62. b 67. d 63. c 68. d 64. d 69. c