Exercise 1.

A. The Accrual Method

Selling Price 500,000 Selling Price 500,000

Carrying Amount (cost) (300,000) Required Down x 20%

Payment
Gross Profit 200,000 Down Payment 100,000

January 1, 2015 = The Gross Profit is amounted 200,000

B. The Installment Method

Selling Price 500,000 Selling Price 500,000

Carrying Amount (cost) (300,000) Required Down x 20%

Payment
Gross Profit 200,000 Down Payment 100,000

Gross Profit 200,000

Selling Price / 500,000

Gross Profit Rate 40%

Year Collections Realized Gross Deferred Gross Contract Balance

Profit Profit
January 1, 2015 200,000 500,000

  100,000 40,000 160,000 400,000

December 31, 100,000 40,000 120,000 300,000

2015
December 31, 100,000 40,000 80,000 200,000
2016
December 31, 100,000 40,000 40,000 100,000
2017
December 31, 100,000 40,000 - -
2018
  500,000 200,000
C. The Cost Recovery Method

Year Collections Cost Profit

2015 200,000 200,000

2016 100,000 100,000

2017 100,000 100,000

2018 100,000 100,000

  500,000 300,000 200,000

Exercise 2.

B.

1. Compute for the Gross Profit Rate

Year Installment Sales Cost of Sales Deferred Profit Gross Profit Rate
2014 350,000 245,000 105,000 0.3
2015 420,000 336,000 84,000 0.2

2. Prepare a table for realized and unrealized GP for 2014

Year Collections Realized GP Unrealized GP Contract Balance

Jan 1 2014 105,000 350,000
Dec 31 2014 120,000 36,000 69,000 120,000
Dec 31 2015 150,000 45,000 24,000 80,000
270,000 81,000
 3. In comparative format under two methods: installment and accrual for the year 2014. But
consider the cash collections as excluding the 10% down payment

Accrual Method Installment Method

Date Collection Cost Profit Cost Profit
70% 30%
December 31, 2014 155,000 50,000 105,000 108,500 46,500
December 31, 2015 150,000 150,000 105,000 45,000
305,000 200,000 213,500 91,500

Accrual Method Installment Method

Installment Contract Receivable, 2014 350,000
Cash 35,000 SAME ENTRY
Installment Sales 350,000

Cost of Installment Sales 245,000

Merchandise Inventory 245,000 SAME ENTRY

Selling and Administrative Expense 35,000

Cash 35,000 SAME ENTRY

Cash 120,000
Installment Contract Receivable 120,000 SAME ENTRY

Installment Sales 350,000 Installment Sales 350,000

Cost of Installment Sales 245,000 Cost of Installment Sales 24
Selling and Administrative Expense 35,000 Deferred Gross Profit 10
Income and Expense Summary 70,000
Deferred Gross Profit 46,500
Income and Expense Summary 70,000 Realized Gross Profit 4
Retained Earnings 70,000
Realized Gross Profit 46,500
Selling and Administrative Exp 3
Income and Expense Summary 1

Income and Expense Summary 11,500

Retained Earnings 1

Exercise 2.
C.

1. Get the GP Rate for 2015

Gross Profit Rate of 2015

Installment Sales 420,00
Cost of Installment Sales 336,000
Gross Profit Rate 20%
420,000 – 336,000 = 84,000 /420,000 = 0.2 x 100 = 20%

2. Prepare a table for realized and unrealized GP for 2014

Year Collections Realized GP Unrealized GP Contract Balance

Beginning, 2015 84,000 420,000
Ending, 2015 192,000 38,400 45,600 270,000

3. In comparative format under two methods for the year 2015. Again remember 10% down
payment for current contract is not included in the given cash collections.

Accrual Method Installment Method

Installment Contract Receivable, 2015 378,000
Cash 42,000 SAME ENTRY
Installment Sales 420,000

Cost of Installment Sales 336,000

Merchandise Inventory 336,000 SAME ENTRY

Selling and Administrative Expense 45,000

Cash 45,000 SAME ENTRY

Cash 150,000
Installment Sales 150,000 SAME ENTRY

Installment Sales 420,00 Installment Sales 420,000

Cost of Installment Sales 336,000 Cost of Installment Sales 33
Selling and Administrative Expense 45,000 Deferred Gross Profit 8
Income and Expense Summary 39,000
Deferred Gross Profit, 2014 45,000
Deferred Gross Profit, 2015 38,400
Realized Gross Profit 8

Realized Gross Profit 83,400

 Selling and Administrative Exp 4
Income and Expense Summary 3

Income and Expense Summary 38,400

Retained Earnings 3

Exercise 3.

A. Time of Sales Method

Installment Sales 1,200,000
Cost of Installment Sales 1,000,000
Operating Expenses 150,000
Net Profit 50,000

B. Installment Method

Year Collection Realized GP Deferred GP Contract Balance

January 15, 2014 200,000 1,200,000
600,000 100,000 100,000 600,000
Dec 31, 2014 120,000 20,000 80,000 480,000

Realized Gross Profit 120,000

Operating Expenses (150,000)
Net Loss 30,000

Exercise 4.

Year Collection Realized GP Deferred GP Contract Balance

January 15, 2014 200,000 1,200,000
600,000 100,000 100,000 600,000
December 31, 2014 120,000 20,000 80,000 480,000

December 31, 2015 90,000 15,000 65,000 390,000

A. Installment Method

Collection made for the 2014 is P90,000

B. Installment Method

Year Collection Realized GP Deferred GP Contract Balance

540,000 1,800,000
900,000 270,000 270,000 900,000
 240,000 72,000 198,000 660,000

Collection made for the 2015 is P1,140,000 (900,000 + 240,000)

C. Total Realized Gross Profit to be reported for 2015

Realized Gross Profit, 2014 15,000

Realized Gross Profit, 2015 342,000
Total 357,000

Exercise 5.

A. 2013 Contracts

2013 Contracts
Gross Profit Rate Deferred GP, Beginning Installment Receivable, Beginning 35%
Collections 40,000 Beginning Balance 25,000 Ending Balance 15,000
Realized Gross Profit 15, 000 Collection 35% 5,250
Unrealized Gross Profit 25,000 Installment Receivable, Ending 35% 8,750

B. 2014 Contracts

2014 Contracts
Gross Profit Rate Deferred GP, Beginning Installment Receivable, Beginning 20%
Collections 60,000 Beginning Balance 15,000 Ending Balance 45,000
Realized Gross Profit 45, 000 Collection 20% 9,000
Unrealized Gross Profit 15,000 Installment Receivable, Ending 20% 3,000

Exercise 7.
2013 Contracts
Year Collections Realized Gross Profit Deferred Gross Profit Contract Balance
Collection regarding 2013 Contract 90,000
2013 144,000 Collection regarding
28,8002014 Contract 72,000
125,000 360,000
2014 240,000 Collection regarding
48,0002015 Contract 24,000
120,000 120,000
2015 - - - -
 Gross Profit regarding 2013 Contract 18,000
Gross Profit regarding 2014 Contract 21,250
Gross Profit regarding 2015 Contract 30,000

Current Fair Value 4,500

Less: Reconditioning Cost 200
Mark Up 900 (1,100)
Assigned Value of Repossessed Article 3,400

Contract Defaulted 6,000

Less: Deferred Gross Profit (1,020)
Cost to be recovered 4,980
Value of Repossession (3,400)
Loss on Repossession 1,580

January 1 December 31 GP Rate

Installment Contract Receivable, 2013 410,000 320,000
Sales of 600,000 and Cost of Sales of 480,000 0.20
Installment Contract Receivable, 2014 595,000 470,000
Sales of 675,000 and Cost of Sales of 562,500 0.17
Installment Contract Receivable, 2015 800,000
Sales of 920,000 and Cost of Sales of 690,000 0.25

2015 Journal Entries

Installment Contract Receivables, 2015 800,000
Cash 120,000
Installment Sales 920,00

Cost of Installment Sales 690,000

Merchandise Inventory 690,000

Cash 215,000
Installment Contract Receivables, 2013 90,000
Installment Contract Receivables, 2014 125,000

Installment Sales 920,000

Cost of Installment Sales 690,000
Deferred Gross Profit, 2015 230,000
 Deferred Gross Profit, 2013 18,000
Deferred Gross Profit, 2014 21,250
Deferred Gross Profit, 2015 30,000
Realized Gross Profit 69,250

Inventory of Repossessed Merchandise 3,400

Deferred Gross Profit 1,020
Loss on Repossession 1,580
Installment Contract Receivables, 2014 6,000

Realized Gross Profit 69,250

Loss on Repossession 1,580
Income and Expense Summary 67,670

Income and Expense Summary 67,670

Retained Earnings 67,670

Exercise 8.

A. Correcting Entry

Inventory of Repossessed Merchandise 3,400

Deferred Gross Profit, 2014 1,000
Loss on Repossession 1,600
Merchandise Inventory 4,500
Installment Contract Receivable 1,500

B.
 2014 Contracts
  Collections Realized Unrealized Contract Balance
January 1, 2014 112,500 675,000
December 31, 2014 80,000 13,336 99,164 595,000
December 31, 2015 125,000 20,837.5 78,327 470,000
Error 4,500 - - 4,500
Balances 120,500 20,847.5 78,327 465,500
Correcting entry 1,500 1,000 1,000 1,500
  119,000 19,847.5 79,327 464,000

Sales - Cost Sales Gross Profit Rate

2013 120,000 600,000 20%
2014 112,500 675,000 16.67%
2015 230,000 920,000 25%

2013 Contracts
Collections Realized Unrealized Contract Balance
2013 144,000 28,800 72,000 360,000
2014 240,000 48,000 24,000 120,000
2015

Installment Contract Receivable, 2013 410,000 320,000 90,000

Installment Contract Receivable, 2014 595,000 470,000 125,000
Installment Contract Receivable, 2015 920,000 800,000 120,000

Gross Profit, 2013 90,000 20% 18,000

Gross Profit, 2014 125,000 17% 21,250
Gross Profit, 2015 120,000 25% 30,000

Current FV 4,500
Less: 20% Mark Up 200
Reconditioning Cost 900 1,100
Assigned Value of Repossed Article   3,400

Contract defaulted (10,000 - 4,000) 6,000

Less: Deferred GP (6,000*16.67%) 1,000
Cost to be recovered 5,000
Less: Value of Repossession 3,400
Loss on Repossession 1,600