Afar by Dr.

Ferrer
First Preboard Review ‘85

1. The following data pertain to the installment sales of Innovative Store:

Down payment 20%*

Installment Sales 2017 2,725,000
Installment Sales 2018 3,925,000
Installment Sales 2019 4,840,000
Mark up on cost 35%
Collection after down payment are:
 40%* during the year of sale
 35% during the year after sale
 25% on the third year

What is the balance of DGP at the end of 2018?

Solution:
Installment Sales 3,925,000 *100%-20%*=80%
Uncollected (80%* x 60%*) x 48% *100%-40%*=60%
Installment A/R, end 1,884,000
COS 1,395,556 (1,884,000/1.35)
DGP 488,444

2. Sales 1,959,000
Collection, net of 4% discount 1,451,520
Expenses paid by Agency 190,500
Agency samples:
Cost 102,000
Inventory, end 10,800

Expenses Allocated 89,550

Gross profit rate is 30% of net sales. The receivable is estimated to be 97% collectible.
What is the net income?

Solution:
Sales 1,959,000
Sales Discount 60, 480 (1,451,520/96%= 1,512,000*4%)
Net Sales 1,898, 520
Gross profit rate x 30%
Gross profit 569, 556
Expenses paid by Agency (190, 500)
Expenses Allocated (89,550)
Agency Samples (91,200)
Bad debts (13, 410) (1,959,000-1,512,000=447,000*3%)
Net Income 184, 896
3. The Home office bills its branch for merchandise shipments at 30% above cost.
The following data are some of the account balances of the books of Home office and Branch:

HO B
Beg, inventory 5,000* 14,500
Shipments from H.O 37,700
Purchases 225,000* 50,000
Shipment to Branch 36,250 *
AFOBI 13,125
Sales 300,000 180,000
OPEX 72,500 27,500

The ending inventory of the branch is 10,500 including goods from outside purchases of 6,925.
The ending inventory of HO is 30,000*. What is the combined net income?

Solution:
Home Office
Sales 300,000
COS 163, 750 (225,000*+5,000*=230,000-30,000*=200,000-36,250)
GP 136,250
OPEX (72,500)
Net income 63, 750 63, 750

Branch
Sales 180,000
COS (81, 575) (4,750*+7,500*+36,250+50,000=98,500-6,925-10,000*)
OPEX (27, 500)
Net income 70, 925 70, 925
14,500 134, 675
*36,250 x 1.30= 47,125-36,250=10,875-13,125=2250/.30x1.30= (9,750)
4,750
*9,750/1.30= 7,500
10,500
(6,925)
* 47,125-37,700=9,425+ 3,575 =13,000/1.30=10,000

4. ABC partners share profits on 5:3:2. On January 1, 2019, D is admitted into the partnership with a 10%
share in profits. The old partners continue to participate in profits using their original ratio. Net income
during the year is 250,000. The company discovered the following error:
2018 2019
Prepaid expense 16,000 0
Accrued expense 12,000
Unearned income 14,000
Accrued income 10,000

What is the share of partner C in net income?

Solution: 250,000-16,000+14,000-12,000+10,000= 246,000 x 18% (20% x 90%) = 44,200

5. On January 1, 2019, Jess entered into a franchise agreement with Toy Inc. to sell their products. The
agreement provides initial franchise fee of 3,000,000, down payment for 1,000,000 and the balance in
4 equal annual installments starting December 31, 2019. Ms. Jess, signed a non-interest bearing note,
the credit rating indicates that the money can be borrowed at 10%. The present value of ordinary
annuity for 4 periods is 3.1698. The agreement further provides that the franchisee must pay
continuing franchise fee of 5% based on gross sales.
 Direct cost 930, 564
 Indirect cost 167,400
 Sales 1,240,000

A. Assuming the collectability of the note is not reasonably assured, how much is the net income?

Solution:
Case 4
Receivables x Down payment 1,000,000
Collection / Collection, net of interest 341, 510 (500,000-158,490)
Franchise Revenue / Total collection 1,341,510
Gross profit rate x 64%*
Realized Gross profit 858,566
Continuing Franchise Fee 62,000 (1,240,000 x 5%)
Interest Income 158 490 (1,584,900* x 10%)
Indirect Cost (167, 400)
Net Income 911, 656

*3,000,000-1,000,000= 2,000,000 x 3.1698 =6,339,600/4= 1,584,900

*1,000,000 + 1,584,900= 2,584,900 – 930,564=1,654,336/2,584,900= 64%

B. Assuming the collectability of the note is reasonably assured, how much is the net income?

Solution:
Case 3
Receivables / Revenue (DP+PV) 2,584,900
Collection / Cost of Sales (930,564)
Franchise Revenue / Gross profit 1,654,336
Continuing Franchise Fee 62,000
Interest income 158, 490
Expenses (167, 400)
Net Income 1,707,426

C. Assuming the collectability of the note is not reasonably assured, how much is the revenue?

Solution:
Down payment 1,000,000
Collection 1,584,900
CFF 62,000
Interest Income 158,490
Total revenue from Franchisor 2,805,390
D. Assuming the collectability of the note is reasonably assured, how much is the revenue?

Solution:
Down payment 1,000,000
Collection, net of interest 341, 510
CFF 62,000
Interest Income 158,490
Total revenue from Franchisor 1,562,000