AFAR - Chapter 5 installment sales

Problem 1

1 All collections are applied to cost until fully recovered. Collections are applied first to cost until the
full amount of 900,000 is recovered. The profit will be recorded only in 2017 because by then the full
cost is recovered already.

2014 2015 2016 2017

Collections 120,000 360,000 360,000 360,000

Applied to cost 120,000 360,000 360,000 60,000

Applied to gross profit __0___ ___0__ _ 0__ 300,000
Total 120,000 360,000 360,000 360,000

Selling price 1,200,000 100%

Cost 900,000 75%
Gross profit 300,000 25%

Down payment =1,200,000 x 10% = 120,000

2. This is the opposite of No. 1. Collections are applied to profit, then after the full profit of
300,000 is recovered all collections will be applied to cost

2014 2015 2016 2017

Collections 120,000 360,000 360,000 360,000

Applied to cost 0 180,000 360,000 360,000

Applied to gross profit 120,000 180,000__ _ 0__ 0
Total 120,000 360,000 360,000 360,000

3. This method is called the installment sales method. Each collections is applied proportionately to cost
and gross profit.

2014 2015 2016 2017

Collections 120,000 360,000 360,000 360,000

Applied to cost (75%) 90,000 270,000 270,000 270,000

Applied to gross profit (25%) 30,000 _90,000 _90,000 90,000
Total 120,000 360,000 360,000 360,000

Problem 2 Makulit Corporation

1. Gross profit rate for 2016 = 80,000/400,000 = 20%

Gross profit rate for 2017 = 112,500/450,000 = 25%
 2. Realized gross profit = collections x GP rate
2016
2016 sales = 140,000 x 20% = 28,000

2017
2016 sales = 175,000 x 20% = 35,000
2017 sales = 280,000 x 25% = 70,000
105,000
3. Balance - IAR, balance, Dec. 31 x GR rate
2016 sales = 20% (400,000 140,000 175,000) = 17,000
2017 sales = 25% (450,000 280,000) = 42,500

Problem 3

1. Gross profit rate for 2016 = 120,000/300,000 = 40%

Gross profit rate for 2017 = 120,000/400,000 = 30%

2. Realized gross profit

2016
2016 sales = 120,000 x 40% = 48,000

2017
2016 sales = 100,000 x 40% = 40,000
2017 sales = 150,000 x 30% = 45,000
85,000
3. Journal entries ( periodic inventory system)
2016
1. Installment Accounts Receivable 2016 300,000
Installment Sales 300,000

2. Cash 120,000
Installment Accounts Receivable - 2016 120,000

Year end
a. Cost of Installment Sales 180,000
Shipments on Installment Sales 180,000

b. Installment Sales 300,000

Cost of Installment Sales 180,000
Deferred Gross Profit 2016 120,000
 c. Deferred Gross Profit 2016 48,000
Realized Gross Profit 48,000

2017
1. Installment Accounts Receivable 2017 400,000
Installment Sales 400,000

2. Cash 250,000

Installment Accounts Receivable - 2016 100,000

Installment Accounts Receivable - 2017 150,000

Year end
a. Cost of Installment Sales 280,000
Shipments on Installment Sales 280,000

b. Installment Sales 400,000

Cost of Installment Sales 280,000
Deferred Gross Profit 201 120,000

c. Deferred Gross Profit 2016 40,000

Deferred Gross Profit - 2017 45,000
Realized Gross Profit 85,000
Problem 4 Alonzo Company

Gross profit rate for 2016 = 216,000/480,000 = 45%

Gross profit rate for 2017 = 646,000/1700,000 = 38%
Installment sales 1,700,000
Less: Cost of installment sales
Merchandise inventory, January 1 280,000
Purchases 2,220,000
Repossessed merchandise 12,000
Total available for sale 2,512,000
Less: Merchandise inventory, December 31 380,000
Total cost of goods sold 2,132,000
Less: Cost of regular sales (1,540,000x70%) 1,078,000 1,054,000
Gross profit on installment 646,000
 1. Realized gross profit for the year
2016 2017 TOTAL
Installment AR-1/1 / Installment sales 480,000 1,700,000 2,180,000
Installment AR -12/31 ( 60,000) (800,000) 860,000
Unpaid balance default ( 31,000) 0___ ( 31,000)
Collections 289,000 900,000 3,009,000
Gross profit rate 45%_ 38%
Realized gross profit 130,050 342,000 472,050

2. Unrealized gross profit - Installment Accounts Receivable, Dec/ 31 x GP rate

2016 sales = 60,000 x 45% = 27,000
2017 sales = 800,000 x 38% = 304,000

Problem 5 - Wonderful Appliance Co.

1. Gross profit rate
2015 = 120,000/480,000 = 25%
2016 = 137,500/500,000 = 27.5%
2017 = 168,000/600,000 = 28%

2. Realized gross profit

2015 = 145,000 x 25% = 36,250
2016 = 160,000 x 27.5% = 44,000
2017 = 125,000 x 28% = 35,000

3. Loss/gain on repossession
2015 2016
Unpaid balance 30,000 32,000
Deferred gross profit (30,000 x 25%) ( 7,500)
(32,000x 27.5%) ( 8,800)
Unrecovered cost 22,500 23,200
Value of repossessed merchandise (12,000) (18,000)
Loss (gain) on repossession 10,500 5,200

4. Journal entries Perpetual inventory

a. Installment Accounts Receivable -2017 600,000
Installment Sales 600,000
b. Cost of installment sales 432,000
Merchandise Inventory 432,000
c. Cash 430,000
Installment Accounts Receivable 2015 145,000
Installment Accounts Receivable 2016 160,000
Installment Accounts Receivable - 2017 125,000
 d. Inventory Repossessed Merchandise 30,000
Deferred Gross Profit 2015 7,500
Deferred Gross Profit 2016 8,800
Loss on repossession 15,700
Installment Accounts Receivable 2015 30,000
Installment Accounts Receivable _ 2016 32,000

e. Installment Sales 600,000

Cost of Installment Sales 432,000
Deferred Gross Profit 2017 168,000

f. Deferred Gross Profit 2015 36,250

Deferred Gross Profit - 2016 44,000
Deferred Gross Profit - 2017 35,000
Realized Gross Profit 115,250

Entries Periodic Inventory System

a. Installment Accounts Receivable -2017 600,000
Installment Sales 600,000
b. Cash 430,000
Installment Accounts Receivable 2015 145,000
Installment Accounts Receivable 2016 160,000
Installment Accounts Receivable - 2017 125,000

c. Repossessed Merchandise 30,000

Deferred Gross Profit 2015 7,500
Deferred Gross Profit 2016 8,800
Loss on repossession 15,700
Installment Accounts Receivable 2015 30,000
Installment Accounts Receivable _ 2016 32,000

d. Cost of installment sales 432,000

Shipments on installment sales 432,000
e. Installment Sales 600,000
Cost of Installment Sales 432,000
Deferred Gross Profit 2017 168,000
 f. Deferred Gross Profit 2015 36,250
Deferred Gross Profit - 2016 44,000
Deferred Gross Profit - 2017 35,000
Realized Gross Profit 115,250
Problem 6
1. Gross profit rate = 20,000/80,000 = 25%

2. Gain or loss at the time of repossession

Unpaid balance at time of repossession 80,000
Less: Deferred gross profit (20,000)
Unrecovered cost 60,000
Less: True worth of repossessed merchandise
Estimated selling price 40,000
Reconditioning cost ( 1,000)
Normal gross profit (40,000 x 10%) ( 4,000)
Sales commission (40,000 x 3%) ( 1.200) 33,800
Loss on repossession 26,200
3. Repossessed Merchandise 33,800
Deferred gross profit 2016 20,000
Loss on repossession 26,200
Installment Accounts Receivable 2016 80,000

Problem 7

1. Trade-in allowance granted 100,000

Less: True worth of merchandise traded-in
Estimated selling price 150,000
Reconditioning cost ( 40,000)
Selling and adm. Exp. (150,000 x 20%) ( 30,000)
Normal profit ( 150,000 x 20%) ( 30,000) 50,000
Over-allowance on the trade-in 50,000

2. Selling price new 850,000

Over-allowance (50,000)
Adjusted selling price 800,000
Cost (600,000)
Gross profit 200,000

GP rate = 200,000/800,000 = 25%

 3. Down payment 50,000
Collections 250,000
Total 300,000
X Gross profit rate 25%
Realized gross profit 75,000

Problem 8
1. The company is using perpetual inventory because there is no purchase account on the
trial balance, instead what they have is cost of installment sales. So if the method being
used in perpetual the merchandise inventory account on the trial balance is the ending
inventory.

2. Adjusting is to record the deferred gross profit and the amount realized during the period.
Because the company is using perpetual, we need two entries. The cost of installment
sales is recorded already. For periodic inventory system, there are 3 entries including the
recording of the cost of installment sales.

a. Installment sales 200,000

Cost of installment sales 130,000
Deferred gross profit 2017 70,000

b. Deferred GP 2016 (104,000 x (45,600 + 2,400) 31,200

104,000 + 48,000 + 8,000
Deferred GP - 2017 (109,000 x 70,000 38,150
200,000
Realized gross profit 69,350

Closing entries
Sales 353,000
Realized gross profit 69,350
Cost of sales 255,000
Loss on repossession 800
Selling and administrative expenses 128,000
Income summary 38,550

Income summary 38,550

Retained earnings 38,550
3. Statement of comprehensive income
Sales 353,000
Less: Cost of regular sales 255,000
Gross profit regular sales 98,000
Realized gross profit on installment sales 69,350
Total realized gross profit 167,350
Less Loss on repossession 800
Net realized gross profit 166,550
Less: Selling and administrative expenses 128,000
Net income 38,550
4.Statement of financial position

Assets Liab. & Stockholders Equity

Cash 153,000 Accounts payable 98,500
Installment Accts Receivable2016 48,000 DGP-2016 (48,000 x 30%) 14,400
Installment Accts Receivable2017 91,000 DGP-2017 (91,000 z 35%) 31,850
Merch. Inventory new 131,200 Capital Stock 170,000
Merch. Inventory - repossessed 24,000 RE (93,900 + 38,550) 132,450
447,200 447,200

Problem 9 - ( CORRECTIONS - GP RATE FOR REGULAR SALES SHOULD BE 48%

AND THE ENDING INVENTORY SHOULD P 38,500, Selling & administrative
expenses, P100,000, IAR 2017 ON THE TRIAL BALANCE P45,000.
1. The Deferred Gross Profit will be set up only after the adjusting entries have been
prepared
2. The company is using periodic inventory because of the purchases account on the trial
balance. Under periodic, the inventory on the trial balance is the beginning inventory.
The ending inventory will be part of the additional information.
3. Adjusting entries under periodic inventory system, there are 3 adjusting entries
a. Cost of installment sales 242,000
Shipments on installment sales 242,000
Merchandise inventory, beginning 52,500
Purchases 390,000
Freight in 5,000
Repossessed merchandise 15,000
Total available for sale 462,500
Less: Merchandise inventory, end 38,500
Total cost of goods sold 424,000
Less: Cost of goods sold regular sales (350,000x52%) 182,000
Cost of installment sales 242,000
b. Installment Sales 440,000
Cost of installment sales 242,000
Deferred Gross Profit 2017 198,000

c. Deferred Gross Profit 2015 12,300

Deferred Gross Profit 2016 18,240
Deferred Gross Profit 2017 76,500
Realized Gross Profit 107,040

2015 2016 2017 TOTAL

IAR balance Jan. 1 74,000 123,000
Installment sales/ Total IAR 440,000
IAR balance Dec. 31 ( 15,000) ( 45,000) ( 270,000)
Account defaulted ( 18,000) ( 21,000) ________
Collections 41,000 57,000 170,000
X GP rate 30% 32% 45%_
Realized gross profit 12,300 18,240 76,500 107,040

TO DETERMINE THE IAR BALANCE, Jan.1, THE FORMULA IS

DEFERRED GROSS PROFIT, JAN,1 DIVIDED BY GROSS PROFIT RATE
2015 = 22,200 = 74,000 2016 = 39,360 = 123,000
30% 32%

Closing entries
a. Sales 350,000
Merchandise inventory, end 38,500
Realized gross profit 107,040
Shipments on installment sales 242,000
Merchandise inventory, beg/ 52,500
Purchases 390,000
Freight-in 5,000
Repossessed merchandise 15,000
Selling & administrative expenses 100,000
Loss on repossession 11,880
Income Summary 163,160

b. Income Summary 163160

Retained earnings 163,160
 The loss on repossession should be corrected by
Unpaid balance (18,000 + 21,000) 39,000
Less: DGP 2015 (18,000 x 30%) 5,400
DGP 2016 ( 21,000 x 32%) 6,720 12,120
Unrecovered cost 26,880
Less: Value of repossessed merchandise 15,000
Loss on repossession 11,880
Less: Recorded amount 24,000
Overstatement of loss (12,120)

4. Statement of comprehensive income

Sales 350,000
Less: Cost of regular sales (350,000 x 52 %) 182,000
Gross profit on regular sales 168,000
Realized gross profit on installment sales 107,040
Total realized gross profit 275,040
Less: Loss on repossession 11,880
Net realized gross profit 263,160
Less: Selling & administrative expenses 100,000
Net income 163,160

5. Statement of financial position as of December 31, 2017

ASSETS Liabilities & SE

Accounts Receivable 73,000 DGP- 2015 (15,000 30%) 4,500
Installment Receivable-2015 15,000 DGP-2016 (45,000x32%) 14,400
Installment Receivable-2016 45,000 DGP-2017
(270,000x45%) 121,500
Installment Receivable-2017 270,000 Capital stock 100,000
Merchandise Inventory 38,500 Retained earnings 201,100
441,500 441,500

Problem 10
Selling Price 160,000 Gross Profit rate = 40,000/160,000 = 25%
Cost 120,000
Gross Profit 40,000
 Collections Amt. applied Amt..applied Balance of
To interest To principal Principal
October 31 160,000
Down payment 40,000 - 40,000 120,000
1st installment Nov. 30 8,000 1,200 6,800 113,200
2nd installment Dec. 31 8,000 1,132 6,868 106.332
TOTAL 56,000 2,332 53,668
Entries
a. Installment Contract Receivable 120,000
Cash 40,000
Land 120,000
Deferred Gross Profit 40,000

b. Cash 8,000
Installment Contract Receivable 6,800
Interest Income 1,200

c. Cash 8,000
Installment Contract Receivable 6,868
Interest Income 1,132

d. Deferred Gross Profit 13,417

Realized Gross Profit (53,668 x 25%) 13,417

MC THERIES
1. A 6. B
2. B 7. C
3. C 8. B
4. D 9. A
5. C 10. A

MC- PROBLEMS
1. D 6. B 11. A 16. B 21. D 26. A
2. C 7. D 12. A 17. B 22. C 27. A
3. D 8. C 13. D 18. B 23. D 28. C
4. A 9. D 14. A 19. B 24. C 29. B
5. D 10. C 15. C 20. D 25. D 30. A
31. B
32. C
33. A