CHAPTER SUGGESTED ANSWERS EXERCISES Exercise 6-1 Installment Accounts Rec’l, Jan Less Installment Accounts Rec’l, Dec 31 Collections Gross profit rate (10,000/40,000; 4,400/20,000) Realized Gross Profit 2006 sales P 400,000 100,000 P 300,000 25% P 75,000 2007 sales P 200,000 40,000 P 160,000 22% P 35,200 Deferred Gross Profit, beg Less Deferred Gross Profit,end P100,000 x 25%, P40,000 x 22% Realized Gross Profit 2006 sales P 100,000 25,000 P 75,000 2007 sales P 44,000 8,800 P 35,200 Exercise 6-2 Deferred Gross Profit – 2006 [(P150,000 - -0- ) x 42%] Deferred Gross Profit – 2007 [(P480,000 - P120,000) x 37.5%] Deferred Gross Profit – 2008 [(P750,000 - P650,000) x 40%]* Realized Gross Profit * 66 2/3 166 2/3 = 40% P300,000 40% = P750,000 63,000 135,000 40,000 238,000 Exercise 6-3 (G) (1) P50,000 - P11,000 (E) (2) P10,500 - (25% of P20,000) = P5,500/P25,000 (F) (3) P50,000 x 22% (H) (4) P1,100/22% (B) (5) P80,000 x 75% (A) (6) P80,000 x 25% (C) (7) P28,200 + P91,800 (D) (8) P28,200/P120,000 (9) 2006 = P10,000 x 22% = P 2,200 2007 = P50,000 x 25% = 12,500 2008 = P45,000 x 23.5% = 10,575 P 39,000 22% P 11,000 P 5,000 P 60,000 P 20,000 P120,000 23.5% P 25,275 Exercise 6-4 Deferred Gross Profit – 2006 Deferred Gross Profit – 2007 Deferred Gross Profit – 2008 Realized Gross Profit Deferred gross profit before adj Deferred gross profit after adj (Inst contract rec’l x GP rate) Realized gross profit Cash collections 4,500 14,000 69,000 2006 P 8,000 2007 P26,000 87,500 2008 P105,000 3,500 P 4,500 _12,000 P14,000 36,000 P 69,000 AA1 - Chapter (2008 edition) page 2006 sales - P4,500 /35% 2007 sales - p14,000/30% 2008 sales - P69,000/40% Total Installment Contract Receivable, beg Less Installment Contract Receivable, end Collections P 12,857 46,667 172,500 P232,024 2006 P 22,857 10,000 P12,857 2007 P86,667 40,000 P46,667 2008 P262,500 90,000 P 172,500 Exercise 6-5 a Installment Contracts Receivable Installment Sales 250,000 b Cash Installment Contracts Receivable 120,000 Cost of Installment Sales Inventory 50,000 / 250,000 = 20% 200,000 c d e f g h 250,000 120,000 200,000 Inventory of Repossessed Merchandise Deferred Gross Profit (P20,000 x 20%) Loss on Repossession Installment Contracts Receivable 14,500 4,000 1,500 Expenses Cash 16,000 Installment Sales Cost of Installment Sales Deferred Gross Profit 20,000 16,000 250,000 200,000 50,000 Deferred Gross Profit Realized Gross Profit P120,000 x 20% = P 24,000 24,000 Realized Gross Profit Expenses Loss on Repossession Income Summary 24,000 24,000 16,000 1,500 6,500 Exercise 6-6 a Installment Contracts Receivable Installment Sales 600,000 b Cost of Installment Sales Shipments on Installment Sales 405,000 Cash Installment Contracts Receivable 360,000 c 600,000 405,000 360,000 AA1 - Chapter (2008 edition) d e f page Repossessed Merchandise Deferred Gross Profit (P40,000 x 32.5%) Loss on Repossession Installment Contracts Receivable 24,000 13,000 3,000 Installment Sales Cost of Installment Sales Deferred Gross Profit 195,000/600,000 = 32.5% 600,000 Deferred Gross Profit Realized Gross Profit P360,000 x 32.5% = P117,000 117,000 40,000 405,000 195,000 117,000 Exercise 6-7 Requirement a Cash Installment Contracts Receivable Interest Revenue b c 1,400 1,240 160 Repossessed Merchandise Deferred Gross Profit (P4,000 x 40%) Loss on Defaults Installment Contracts Receivable 2,000 1,600 400 4,000 Deferred Gross Profit Realized Gross Profit (P1,240 x 40%) 496 496 Requirement a Repossessed Merchandise Deferred Gross Profit Loss on Defaults 2,000 1,600 3,600 Exercise 6-8 Repossessed Merchandise (P13,500/120%) Deferred Gross Profit (P15,000 x 20%/120%) Loss on Repossession Installment Contracts Receivable 11,250 2,500 1,250 15,000 Exercise 6-9 a Trade-In Merchandise Installment Contracts Receivable Installment Sales Estimated resale price Less: Reconditioning cost Gross profit 180,000 420,000 600,000 P280,000 P30,000 _70,000 100,000 AA1 - Chapter (2008 edition) page Estimated realizable value P 180,000 Selling price Less Overallowance (P300,000 – P180,000) Adjusted selling price b c d P720,000 120,000 P600,000 Cost of Installment Sales Automobiles 500,000 Installment Sales Cost of Installment Sales Deferred Gross Profit 600,000 Deferred Gross Profit Realized Gross Profit P180,000 x 16 2/3% = P30,000 Exercise - 10 Correct entry Allowance for Doubtful Installment Contract Rec’l Deferred Gross Profit ( P 10,000 x 25/125 ) Repossessed Merchandise Installment Contract Receivable Correcting Entry Deferred Gross Profit Repossessed Merchandise Allowance for Doubtful Accounts Exercise 6-11 Requirement Oct 31 Cash Installment Contracts Receivable Real Estate Deferred Gross Profit GP rate = P150,000/P750,000 = 20% Nov 30 Dec 31 31 500,000 500,000 100,000 30,000 30,000 1,450 2,000 6,550 10,000 2,000 6,550 8,550 200,000 550,000 600,000 150,000 Cash Installment Contracts Receivable Interest Revenue 550,000 x 1% = 5,500 11,500 Cash Installment Contracts Receivable Interest Revenue P550,000 – P6,000 = P544,000 x 1% = P5,440 11,440 Deferred Gross Profit Realized Gross Profit P200,000 + P6,000 + P6,000 = P212,000 x 20% 42,400 6,000 5,500 6,000 5,440 42,400 AA1 - Chapter (2008 edition) page Requirement Oct 31 Cash Installment Contracts Receivable Real Estate Deferred Gross Profit GP rate = P150,000/P750,000 = 20% Nov 30 Dec 31 31 200,000 550,000 600,000 150,000 Cash Installment Contracts Receivable Interest Revenue P550,000 x 1% = P5,500 6,000 Cash Installment Contracts Receivable Interest Revenue P550,000 – P500 = P549,500 x 1% x = P5,495 6,000 500 5,500 505 5,495 Deferred Gross Profit Realized Gross Profit P200,000 + P500 + P505 = P201,005 x 20% = P40,201 40,201 40,201 Exercise 6-12 Recovery of cost P400,000 25,000 Realized gross profit none P 75,000 100,000/year 2008 2009 2010 2011 – 2014 none none P 25,000 P100,000/year P400,000 P100,000 P 75,000 none 2008 2009 – 2014 P170,000 P 42,500 P230,000 P 57,500 a 2008 2009 2010 – 2014 b c Exercise 6-13 Installment payment = P1,260,000/5.6502 = P223,000 Journal entries Jan Cash Notes Receivable (P223,000 x 10) Real Estate Sales Discount on Notes Receivable Jan 1 Cost of Real Estate Sales Inventory or Real Estate Real Estate Sales Cost of Real Estate Sales Deferred Gross Profit GP rate = P550,000/P1,400,000 = 39.29% 140,000 2,230,000 1,400,000 970,000 850,000 850,000 1,400,000 850,000 550,000 AA1 - Chapter (2008 edition) Dec 31 31 31 Cash Notes Receivable 223,000 Discount on Notes Receivable Interest Revenue (P2,230,000 – P970,000) x 12% = P151,200 151,200 Deferred Gross Profit Realized Gross Profit [P140,000 + (P223,000- P151,200)] x 39.29% 83,216 Exercise 6-14 Requirement a Land Land Improvements Cash b c page Cash Installment Contract Receivable Installment Sales A – @ P400,000 = P2,000,000 B – @ P300,000 = 2,400,000 C – @ P200,000 = 600,000 Total P5,000,000 223,000 151, 200 13,440,000 3,360,000 16,800,000 750,000 4,250,000 5,000,000 Cost of Installment Sales 3,000,000 Land Land Improvements Cost of sales = 16,800,000/28,000,000 = 60% x P5,000,000 = P3,000,000 Land = 13,440,000/16,800,000 = 80% x P3,000,000 = P2,400,000 Land imp = 3,360,000/16,800,000 = 20% x P3,000,000 = P 600,000 d Cash Installment Contract Receivable Interest Revenue Requirement a Installment Sales Cost of Installment Sales Deferred Gross Profit GP rate = 2,000,000/5,000,000 = 40% b Deferred Gross Profit Realized Gross Profit (P750,000 + P1,300,000) x 40% = P820,000 Exercise 6-15 2005 Installment Accounts Receivable Installment Sales Cost of Installment Sales Inventory 83,216 2,400,000 600,000 1,400,000 1,300,000 100,000 5,000,000 3,000,000 2,000,000 820,000 820,000 4,700,000 47,000 2,585,000 2,585,000 AA1 - Chapter (2008 edition) 2006 2007 2008 page Cash Installment Accounts Receivable 2,585,000 Installment Sales Cost of Installment Sales Deferred Gross Profit 4,700,000 Installment Accounts Receivable Installment Sales 4,500,000 Cost of Installment Sales Inventory 2,610,000 Cash Installment Accounts Receivable – 2005 Installment Accounts Receivable – 2006 3,885,000 Installment Sales Cost of Installment Sales Deferred Gross Profit 4,500,000 Deferred Gross Profit Realized Gross Profit 1,410,000 Installment Accounts Receivable Installment Sales 5,800,000 Cost of Installment Sales Inventory 3,074,000 Cash Installment Accounts Receivable – 2005 Installment Accounts Receivable – 2006 Installment Accounts Receivable – 2007 5,010,000 Installment Sales Cost of Installment Sales Deferred Gross Profit 5,800,000 Deferred Gross Profit – 2005 Deferred Gross Profit – 2006 P1,350,000 – (P2,610,000-P2,475,000) Deferred Gross Profit – 2007 Realized Gross Profit 470,000 1,215,000 116,000 2,585,000 2,585,000 2,115,000 4,500,000 2,610,000 1,410,000 2,475,000 2,610,000 1,890,000 1,410,000 5,800,000 3,074,000 470,000 1,350,000 3,190,000 3,074,000 2,726,000 1,801,000 Installment Accounts Receivable Installment Sale 6,100,000 Cost of Installment Sales Inventory 3,111,000 6,100,000 3,111,000 AA1 - Chapter (2008 edition) page Cash Installment Accounts Receivable – 2006 Installment Accounts Receivable – 2007 Installment Accounts Receivable – 2008 5,545,000 Installment Sales Cost of Installment Sales Deferred Gross Profit – 2008 6,100,000 Deferred Gross Profit – 2006 Deferred Gross Profit – 2007 Deferred Gross Profit – 2008 P3,355,000 – P3,111,000 Realized Gross Profit 450,000 1,740,000 244,000 Gross Profit Recognized: Full Accrual; Cost Recovery Method 450,000 1,740,000 3,355,000 3,111,000 2,989,000 2005 P 2,150,000 2,434,000 2006 P 1,890,000 1,410,000 2007 P 2,726,000 1,801,000 2008 P 2,989,000 2,434,000 Exercise 6-16 Installment sales Cost of Installment sales Gross profit percentage Cash collections: 2006 Sales 2007 Sales 2008 Sales Realized gross profit on installment sales 2006 P 400,000 248,000 38% 2007 P 475,000 280.250 41% 2008 P 525,000 341,250 35% 128,000 232,000 114,000 28,000 218,500 162,750 80,250 112,000 COMPUTATIONS : P 341,250 / 65 = P 525,000 P 400,000 x 62 = P 248,000 - (P 280,250 / P 475,000) = 41% Gross profit recognized in 2008 All costs from 2006 sales are recovered Cash received equals gross profit All cost from 2008 sales are not recovered Cash received goes to recover costs-gross profit Gross profit reported in 2008 from 2006 sales Costs of 2007 sales Costs recovered in 2005 Costs to be recovered in 2005 Cash received related to 2007 sales Cash collections in 2006 not exceed costs of sales Realized gross profit in 2006 = P Cash collections for 2006 sales ( P 128,000 + 232,000 ) P 80,250 28,000 P 52,250 P 280,250 114,000 166,250 P 218,500 P 360,000 AA1 - Chapter (2008 edition) page Costs of 2006 sales Realized gross profit in 2007 Exercise 6-17 Requirement 2007 Jan Cash Notes Receivable (2,197,100 x 10) Real Estate Sales Discount on Notes Receivable (2,347,100 - 1,500,000) Dec 31 31 31 2008 Dec 31 Cost of Real Estate Sales (240,000 x 30) Inventory of Real Estate Real Estate Sales Cost of Real Estate Sales Deferred Gross Profit - Real Estate Sales GP rate = 7,800,000/15,000,000 = 52% 248,000 P 112,000 1,500,000 21,971,000 15,000,000 8,471,000 7,200,000 7,200,000 15,000,000 7,200,000 7,800,000 Cash Notes Receivable 2,197,100 Discount on Notes Receivable Deferred Gross Profit - Real Estate Sales 1,350,000 Cash Notes Receivable 2,197,100 31 Discount on Notes Receivable Deferred Gross Profit - Real Estate Sales (P13,500,000 - P2,197,100 + P1,350,000) x 10% Requirement Date Cost Collection Jan 01, 2007 7,200,000 1,500,000 Dec 31, 2007 2,197,100 Dec 31, 2008 2,197,100 Notes receivable (P21,971,000 - P2,197,100 - P2,197,100) Less: Discount on notes receivable (P8,471,000-P1,350,000- P1,265,300) Deferred gross profit (P7,800,000 + P1,350,000 + P1,265,300) Unrecovered cost Exercise 6-18 Selling Price Cost of Land Gross Profit 2,197,100 1,350,000 2,197,100 1,265,300 1,265,300 Unrecovered Cost 5,700,000 3,502,900 1,305,800 P17,576,800 P 5,855,700 10,415,300 16,271,000 P 1,305,800 P 10,000,000 4,000,000 P 6,000,000 AA1 - Chapter (2008 edition) 10 page Gross Profit rate ( 600 / 1,000 ) a) Full accrual method 60% 2008 2009 – 2010 P 6,000,000 none b) Installment method 2008 2009 2010 Collections P 400,000 300,000 _300,000 P1,000,000 Cost Recovery P 160,000 120,000 _120,000 P 400,000 Gross Profit P 240,000 180,000 _180,000 P 600,000 Collections P 400,000 300,000 _300,000 P 1,000,000 Cost Recovery P 400,000 - _ P 400,000 Gross Profit P 300,000 _300,000 P 600,000 c) Cost Recovery method 2008 2009 2010 PROBLEMS Problem 6-1 2007 - (P12,000* + P228,000) (P240,000 + P520,000 + P40,000) 2008 - (P1,500,000 - P975,000) P1,500,000 *P40,000 – P24,000 – P4,000 = P12,000 2.a Installment Sales Cost of Installment Sales Deferred Gross Profit – 2008 b Deferred Gross Profit – 2007 (520,000 x 30%) Deferred Gross Profit – 2008 (740,000 x 35%) Realized Gross Profit c Sales Realized Gross Profit Cost of Sales Gain or Loss on Repossession Selling and Administrative Expenses Income Summary d Income Tax Income Tax Payable e Income Summary Income Tax 30% 35% 1,500,000 975,000 525,000 156,000 259,000 415,000 2,120,000 415,000 1,650,000 4,000 660,000 221,000 77,350 77,350 77,350 77,350 d Income Summary Retained Earnings Requirement 143,650 143,650 Excellent Co Statement of Recognized Income and Expenses AA1 - Chapter (2008 edition) 11 page For the Year Ended December 31, 2008 Sales Cost of Sales Gross Profit Realized Gross Profit on Installment Sales Total Realized Gross Profit Less Loss on Repossession Realized Gross Profit after Loss on Repossession Selling and Administrative Expenses Net Income before Income Tax Income Tax Net Income P 2,120,000 _1,650,000 P 470,000 415,000 P 885,000 4,000 P 881,000 660,000 P 221,000 77,350 P143,650 Problem 6-2 Requirement Computation of gross profit rates 2006 sales 2007 sales 2008 sales P22,500/P50,0000 P96,000/P240,000 100% - (P310,000/P500,000) 45% 40% 38% Requirement Income Statement Reliance Sales Corp Statement of Recognized income and Expenses For the Year Ended December 31, 2008 Sales Cost of Sales: Inventory, January P 30,000 Purchases 455,000 Repossessed Mdse 10,000 Cost of Goods Available for Sale P495,000 Less Inventory, Dec 31 35,000 Gross Profit Less Deferred Gross Profit, including DGP on repossessed merchandise Realized Gross Profit on 2008 sales Add Realized Gross Profit on 2006 & 2007 sales Total Less Loss on Repossession [3,000-(3,600+4,000+1,900)] Realized gross profit after loss on Repossession Operating Expenses Net Loss Analysis of gross profit on installment sales: Installment sales Installment contracts rec’l, beginning Regular Sales P 192,000 Installment Sales P 500,000 Total P 692,000 150,000 P 42,000 310,000 P 190,000 460,000 P 232,000 P 42,000 32,300 P 157,700 32,300 P 199,700 100,650 P 300,350 3,500 P 296,850 300,000 P 3,150 2006 2007 2008 P500,000 P 50,000 P240,000 AA1 - Chapter (2008 edition) 12 page Installment contracts rec’l, end Defaulted installment contracts rec’l Collections Gross profit rate Realized gross profit ( 5,000) ( 8,000) P 37,000 45% P 16,650 ( 20,000) ( 10,000) P210,000 40% P84,000 (80,000) (5,000) P415,000 38% P157,700 Deferred gross profit Requirement - P 2,250 P 8,000 P 30,400 Reliance Corp Statement of Financial Position December 31, 2008 Assets Cash Inst Contracts Rec’l, 2008 Inst Contracts Rec’l, 2007 Inst Contracts Rec’l, 2006 Accounts Rec’l Inventory Other Assets P 25,000 80,000 20,000 5,000 40,000 35,000 52,000 Total Assets P257,000 Liabilities & Shareholders’ Equity Accounts Payable P 75,000 Deferred Gross Profit, 2008 30,400 Deferred Gross Profit, 2007 8,000 Deferred Gross Profit, 2006 2,250 Ordinary Share Capital 100,000 Retained Earnings 41,350 Total Liabilities & Shareolders’ Equity P257,000 Problem 6-3 Schedule of Cost of Goods Sold Inventory, January Purchases, including freight-in Repossessed Merchandise Cost of Goods Available for Sale Less Inventory, December 31 Cost of Goods Sold Schedule of Allocation of Cost of Goods Sold Type of Amount of Amount Based Sale Sales on Cash Sales Cash P 300,000 P 300,000 Charge 600,000 500,000 Installment 1,500,000 1,200,000 P2,400,000 P2,000,000 P 240,000 1,250,000 70,000 P1,560,000 260,000 P1,300,000 Ratio 60/400 100/400 240/400 Allocation of CGS P 195,000 325,000 780,000 P1,300,000 Sales Fuji Products Statement of Recognized Income and Expenses For the Year Ended December 31, 2008 Cash Charge Installment Sales Sales Sales P300,000 P600,000 P 1,500,000 Total P2,400,000 AA1 - Chapter (2008 edition) 13 Cost of Sales 195,000 Gross Profit P105,000 Less Deferred Gross Profit, 2008 sales Realized Gross Profit on 2008 sales P105,000 Add Realized Gross Profit on 2006 and 2007 sales Total Realized Gross Profit Less Loss on Repossession Realized Gross Profit after loss on repossession Operating Expenses, including bad debts Net Income before Income Tax Income Tax Net Income page 325,000 P275,000 P P275,000 P 780,000 720,000 460,800 263,200 1,300,000 P1,100,000 460,800 P 639,200 P 169,500 P 808,700 51,000 P 757,700 465,000 P 292,700 102,445 P 190,255 Problem 6-4 Computation of gross profit rates 2006 sales 160,000/400,000 2007 sales 167,200/440,000 2008 sales 163,800/420,000 a b a b a b c Adjusting entries Installment Sales Cost of Installment Sales Deferred Gross Profit – 2008 Deferred Gross Profit –2006 Deferred Gross Profit –2007 Deferred Gross Profit –2008 Realized Gross Profit 2006 - (P110,000 – P28,000 - P9,000 - P5,000) x 40% = P27,200 2007 - (P250,000 – P92,000 - P2,800) x 38% = P58,976 2008 - (P420,000 – P238,000) x 39% = P70,980 Correcting entries Deferred Gross Profit – 2006 (9,000 x 40%) Deferred Gross Profit - 2007 (2,800 x 38%) Operating Expenses Inventory of Repossessed Merchandise(4,000 - 400 - 600) Deferred Gross Profit – 2006 (5,000 x 40%) Operating Expenses The indicated gain of P600 is ignored and deducted from the market value of the repossessed merchandise Closing entries Realized Gross Profit Operating Expenses Income Summary 40% 38% 39% 420,000 256,200 163,800 27,200 58,976 70,980 157,156 3,600 1,064 4,664 3,000 2,000 5,000 157,156 94,336 62,820 Income Tax Income Tax Payable 21,987 Income Summary 21,987 21,987 AA1 - Chapter (2008 edition) 14 page Income Tax d Income Summary Retained Earnings Problem 6-5 (1) Sept 30 (2) Oct 31 Dec 31 40,833 Cash Installment Contract Receivable Installment Revenue 48,000 Cash Installment Contract Receivable Installment Revenue 48,000 Collection 48,000 48,000 Nov 30 48,000 Dec 31 48,000 2006 Feb 300,000 180,000 48,000 Sept 30 Oct 31 Dec 31 48,000 432,000 Cash Installment Contract Receivable Installment Revenue Date (4) 40,833 Cash Installment Contract Receivable Piano Deferred Gross Profit 60/160 = 37.5% Nov 30 (3) 21,987 Interest 432,000 x 005 = 2,160 386,160 x 005 = 1,931 340,091 x 005 = 1,700 45,840 2,160 46,069 1,931 46,300 1,700 Principal Reduction 48,000 45,840 Principal Balance 480,000 432,000 386,160 46,069 340,091 46,300 293,791 Deferred Gross Profit 69,828 Realized Gross Profit 48,000 + 45,840 +46,069 + 46,300 = 186,209 x 37.5% = 69,828 Repossessed Piano Deferred Gross Profit Loss on Repossession Installment Contract Receivable 69,828 56,000 36,724 5,207 97,931 Problem 6-6 (1) Sales 1,260,000 + (2,650,000 1.06) Cost of Sales: Inventory, beginning Purchases P3,760,000 P 580,600 2,093,000 P2,673,600 AA1 - Chapter (2008 edition) 15 page Less: Inventory end Gross Profit 333,000 Gross Profit Rate (1,419,400 / 3,760,000 ) (2 ) Installment Time of Sale (3 ) Equivalent Cash Sales Price 10,000 (10,600 1.06) 7,350 (10,000 - 2,650) 6,893.50 (7,350 - (530 - 73.50) 6,432.43 (6,893.50 -(530 - 68.93) 5,966.75 (6,432.43-(530 - 64.32) 5,446.42 (5,966.75- (530 - 59.67) 5,021.38 (5,496.42- (530 - 54.96) Contract Balance 10,600 Interest Revenue - 7,950 (10,000 - 2,650) 7,420 (7,950 -530) 6,890 (7,420 - 530) 6,360 (6,890 - 530) 5,830 (6,360 -530) 5,300 (5,830 -530) 73.50 (7,350 x 1%) 68.93 (6,893.50 x 1%) 64.32 (6,432.43x 1%) 59.67 (5,966.75 x 1%) 54.96 (5,496.42 x 1%) 50.21 (5,021.38 1%) Installment Sales Price Less: Installment on contract 10,600 - (10,600 1.06) Installment sales at cash sales price Less: Downpayment Collections Less interest Cash Collection 2,650 (10,600 x 25%) 530 (7,950 15) 530 (7,950 15) 530 (7,950 15) 530 (7,950 15) 530 (7,950 15) 530 (7,950 15) P10,600.00 600.00 P10.000.00 P 2,650.00 P 1,590.00 206.70 Balance Less: DGP 5,966.75 x 37.75% Repossessed Sales Repossessed Inventory Net gain on defaults (4 ) 2,340,600 P1,419,400 ÷3,760,000 37.75% 1,383.30 P5,966.70 2,252.45 2,300.00 1,800.00 Cash Sales (1,260,000 x 37.75%) Installment Sales: Downpayment 662,500 x 37.75% Installments on defaults 1,383.30 x 37.75% Installment Collections Less Interest (P2,650,000 - P10,600) /1.06 x 03716 Balance 4,033.60 P6,352.45 P 385.75 P 475,650 250,093.75 522.20 P791,820.00 92,528.40 P699,291.60 x 37.75% 263,982.60 AA1 - Chapter (2008 edition) 16 page Realized Gross Profit P990,248.60 Problem 6-7 Total installment sales Less Installment Receivable - Dec 31 Total Collections in Sales P3,450,000 1,594,600 P1,855,400 P1,855,400 Collections GPR: Total Selling price Total Cost GP Total sales RGP P9,500,000 5,225,000 P4,275,000 ÷9,500,000 45% P 834,930 Installment Receivable - Dec 31 GPR Unrealized GP P1,594,600 x 45%_ P 717,570 Realized gross profit Interest Income Operating Expenses Net Income before Income Tax Income Tax Net Income P 834,930 520,300 (682,130) P 673,100 235,585 P437,515 Problem 6-8 Sales (Schedule 1) Cost of Sales (43% of Sales, Schedule 2) Gross Profit Less Sales Commission Gross profit excluding Commission Less DGP 4,373,200 / 8,060,000 x 5,370,000 Realized gross profit Expenses: Advertising Sales Managers Salaries Gen Operating Expenses (2,360,000 x 1/ ) Net loss P 8,060,000 3,465,800 P 4,594,200 221,000 P 4,373,200 2,913,658 P 1,459,542 P730,000 900,000 590,000 P 2,220,000 760,458 Schedule – Sales A 26 @ 150,000 B 32 @ 100,000 C 12 @ 80,000 Total Sales Price P3,900,000 3,200,000 960,000 P8,060,000 Cash Received P1,650,000 800,000 240,000 P2,690,000 Installment NR Balance 2,250,000 2,400,000 720,000 5,370,000 Unit Total Schedule - Cost of Sales Rate AA1 - Chapter (2008 edition) 17 A B C page No of lots 80 100 130 310 Sales Price 150,000 100,000 80,000 Cost of Land Legal fees, etc Grading Water & Sewerage Paving expenses General operating expenses (2,360,000 x 3/4) Total cost Total sales value Cost of sales rate Problem - 2007 Inventory Cash P 4,800,000 600,000 2,250,000 1,849,000 2,663,000 1,770,000 P13,932,000 ÷ 32,400.000 43% 45,200 45,200 Notes Receivable – 2007 (32,000 + 62,000 + 3,600) Discount on Notes Receivable - 2007 (7,167 + 3,600 ) Installment Sales 97,600 Cost of Installment Sales (45,200 - 2,000) Inventory 43,200 Cash Notes Receivable - 2007 (32,000 + 3,600) 35,600 Discount on Notes Receivable - 2007 Interest Revenue 2008 Sales Value P12,000,000 10,000,000 10,400,000 P32,400,000 10,767 86,833 43,200 35,600 3,600 3,600 Installment Sales Cost of Installment Sales Deferred Gross Profit - 2007 86,833 Deferred Gross Profit - 2007 Realized Gross Profit 43,633/86,833 = 50.25% x 32,000 16,080 Inventory Cash 52,020 Notes Receivable - 2008 (160,000 + 50,000 + 5,500 - 26,000) Discount on Notes Receivable 2008[8,043 + (5,500 - (7,167 - 5,579)] Installment Sales 89,500 Cost of Installment Sales (52,020 - 8,000) 44,020 43,200 43,633 16,080 52,020 11,955 77,545 AA1 - Chapter (2008 edition) 18 page Inventory 44,020 Cash Notes Receivable – 2008 (89,500 - 60,000) Notes Receivable – 2007 (62,000 - 36,000) 55,500 Discount on Notes Receivable – 2008 (5,500 - 1,588) Discount on Notes Receivable – 2007 (7,167 - 5,579) Interest Revenue 3,912 1,588 Installment Sales Cost of Installment Sales Deferred Gross Profit - 2008 77,545 Deferred Gross Profit - 2008 (29,500 - 3,912 x 43.33%) Deferred Gross Profit - 2007 (26,000 - 1,588 = 24,412 x 50.22%) Realized Gross Profit 33,525/77,545 = 43.23% 11,062 11,267 Problem 6-10 2005 Jan 2006 July 2007 Dec 31 2008 Feb Feb 29,500 26,000 5,500 44,020 33,525 23,329 Cash Notes Receivable Idle Plant Deferred Gross Profit 2,000,000 5,000,000 Cash Notes Receivable Deferred Gross Profit 1,900,000 5,000,000 2,000,000 1,000,000 900,000 Cash 2,250,000 Deferred Gross Profit 400,000 Notes Receivable Interest Revenue 2,250,000 - (5,000,000 - 2,000,000 - 1,900,000) = 1,150,000 Cash Notes Receivable Interest Revenue 1,500,000 1,150,000 2,825,000 2,500,000 325,000 Deferred Gross Profit (2,000,000 + 900,000 - 400,000) 2,500,000 Gain on Sale of Idle Plant 2,000,000 Interest Revenue 500,000 (900,000 + 750,000 + 325,000 = 1,975,000 - 1,150,000 - 325,000 = 500,000) AA1 - Chapter (2008 edition) 19 page MULTIPLE CHOICE D 2008 Inst Sales 8,765,625 68% Inst Rec beg Inst Rec end Collections GPR A B C B B A B B 2007 2006 P8,387,500 (3,025,000) P5,362,500 x 30% P1,608,750 P1,512,500 P1,512,500 x 28% P 423,500 P12,890,625 (9,728,125) P 3,162,500 x 32% P 1,012,000 Deferred gross profit before adjustment Deferred gross profit after adjustment 2007 - P16,250 x 30/130 2008 - P90,000 x 33 1/3 /133 1/3 Realized gross profit Operating expenses Net income C 11 A P 3,750 22,500 26,250 P11,750 1,500 P10,250 P109,000 174,400 P283,400 x 35/135 P 73,474 P785,000 P157,000 251,200 Unrealized GP on Year installment sales at the end of Year 408,200 P376,800 x 35/135 P 97,689 Inst Accts Rec., end of year On year installment sales (P968,000 x 80 x 60) On Year installment sales (P785,000 x 80 x 25) Total installment accounts receivable, end of Year P464,640 157,000 P621,640 Total installment accounts receivable, end of Year Total unrealized gross profit at end of Year 10 P3,044,250 P38,000 Downpayment (P545,000 x 2) Inst Collections (P545,000 x x 40) Collections in year on Year Inst Sales Realized gross profit for Year Installment sales - Year Less Collections in Year DP (P785,000 x 20) Installment collection (P785,000 x 80 x 40) Balance, end of Year P10,037,500 2007 - 100% - (31,250/62,500) = 50% x P25,000 2008 - 100% - (45,000/100,000) = 55% x P62,500 Total P621,640 x 35/135 P161,166 P12,500 34,375 P46,875 AA1 - Chapter (2008 edition) 20 page 12 D Sales - regular Cost of sales - regular Gross profit - regular Realized gross profit (see D1) Total gross profit Selling expenses Net income P187,500 112,500 P 75,000 46,875 P121,875 31,250 P 90,625 13 D P610,750 x 60% P366,450 14 D P306,520 x 40% P122,608 15 B 2006 sales - P17,400 x 36% 2007 sales - P(205,400 - P200 - P25,800) x 39% Total 16 B Selling price Cost (P200 x 61%) Gain from sale of repossessed merchandise 17 B (P344,460 - P67,440 - P2,200) x 34% 18 B Market value of repossessed ref (P1,700 x 63%) Unrecovered cost (P2,200 x 66%) Loss on repossession 19 D 2006 sales - 100% - (247/380) = 35% x P24,020 2007 sales - see 6-17 2008 sales - 100% - (379,260/602,000 = 37% 37% x (P602,000-P410,090) Total 20 D ( P100,000 - P12,500 - P6,250) x 50% 21 B ( 375,000 - 150,000) x 45%* *Installment sales Invty Beg Purchases Repossessions Mdse Avail for sale Less Invty End CGS Cost of Regular sale ( 312,500 x 70% ) Gross profit on Installment sales Gross profit rate on Installment (168,750/375,000) 22 A (3,750 - (6,250 x 50%) P 6,264 69,966 P76,230 P 200 122 P 78 P93,438.80 P1,071 1,452 P 381 P 8,407.00 93,438.80 71,006.70 P172,852.50 P40,625 P101,250 P 375,000 P 62,500 435,000 2,500 500,000 75,000 425,000 218,750 206,250 sales = 45% P625 loss AA1 - Chapter (2008 edition) 21 23 B 2006 sales - P108,750 x 25% page P27,187.50 AA1 - Chapter (2008 edition) 22 page 2007 sales - P120,000 x 27.5% 2008 sales - P 93,750 x 28% Total 24 A Value assigned to repossessed merchandise: 2006 sales 2007 sales Unrecovered cost 2006 sales - P22,500 x 75% 2007 sales - P24,000 x 72.5% Loss on repossession 33,000.00 26,250.00 P86,437.50 P 9,000 13,500 P16,875 17,400 P22,500 34,275 P11,775 25 D 2006 sales - P24,000 x 39% 2007 sales - (P300,000 - P60,000 - P10,000) x 42% 2008 sales - (P480,000 - P320,000 - P5,000) x 40% Total P 9,360 96,600 62,000 P167,960 26 B 2007 sales - P4,500 - (P10,000 x 58%) 2008 sales - P3,500 - (P5,000 x 60%) Net gain (loss) on repossession 27 A P360,000 x 33 1/3% 28 B Loss = P8,000 - (P15,000 x 60%) 29 30 C A (P800,000 - P250,000 - P300,000 - P15,000) x 40% (P75,810/42%) + P75,810 P94,000 P256,310 31 D 2006 sales - P35,800 x 32.26% 2007 sales - (P155,000 - P42,000) x 40% 2008 sales - (P256,310 - P100,500) x 42/142 total P 11,550 45,200 46,085 P102,835 32 C (P120,000 - P15,000 - P7,750) x 45% 33 C Inventory, Dec 31, 2007 Purchases Repossessions Cost of goods available for sale Less Inventory, Dec 31, 2008 Cost of goods sold Less Cost of goods sold on regular sales (P385,000 x 70%) Cost of installment sales Gross profit rate on installment sales [100% - (263,500/425,000)] Realized gross profit - (P425,000 - P200,000) x 38% P 70,000 555,000 3,000 P628,000 95,000 P533,000 269,500 P263,500 38% P85,500 34 A (7,750 x 55%) - 3,000 P1,262.50 35 B Cash sales Charge sales (P180,000/120%) Installment sales (P446,400/124%) P 90,000 150,000 360,000 P(1,300) 500 P (800) P120,000 P1,000 P43,762.50 AA1 - Chapter (2008 edition) 23 36 37 A Total sales - cash basis P600,000 Inventory, beginning Delivered cost of purchases Repossessed merchandise Cost of goods available for sale Less Inventory, end Cost of goods sold P52,500 393,000 15,000 P460,500 70,500 P390,000 Cost of installment sales - P390,000 x 360/600 P234,000 C Installment rec’l, beg Installment sales Installment rec’l, end Defaulted rec’l Collections 38 A page 2006 P 74,000 2007 P123,000 ( 15,000) ( 18,000) P 41,000 ( 45,000) ( 21,000) P 57,000 Sales price of Article “A” Less Overvaluation on trade -in Sales price Reconditioning cost Normal profit Market value of trade-in Allowed trade-in value Adjusted sales price Cost of Article “A” Gross profit Gross profit rate 2008 P446,400 ( 270,000) - _ P176,400 P400,000 P110,000 ( 8,000) ( 22,000) P 80,000 120,000 Realized GP - (P80,000 + P40,000) x 25% 39 C Inst rec’l balance, Dec 31, 2007 (P360,000 - P120,000) Installment payment, Jan - Mar (P20,000 x 3) Inst rec’l balance, April Cost percentage Unrecovered cost Market value of repossessed mdse (P13,500 - P800 - P2,700) Loss on repossession 40 B Expected loss (125,000 x 4%*) Less: Loss on default 2008 Recovery from sale of repossessed merchandise 40,000 P360,000 270,000 P 90,000 25% P30,000 P240,000 60,000 P180,000 x 75% P135,000 100,000 P 35,000 P5,000 P1,500 175 1,325 AA1 - Chapter (2008 edition) 24 page Balance of allowance for defaulted contracts; Dec 31, 2008 *Loss on default in 2007 on 2007 sales P 250 Loss on default in 2008 on 2007 sales 3,750 Recovery on sale of repossession in 2008 P 800 Repossessed Merchandise on hand 200 Expected loss Sales Rate of loss as a % of sales 41 42 C C Inst contract rec’l beg Less: Inst Contract rec’l, end Inst Contract rec’l written off Collections Gross profit rate Realized gross profit P3,675 P 4,000 1,000 P 3,000 P75,000 4% P31,500 P2,000 3,750 Lot A (791,086.20 x 30%) Lot B (973,333.30 x 25%) Lot C and House (P2,080,000 x 40%) Realized gross profit 5,750 P25,750 x 40% P10,300 P 237,325.80 243,333.30 832,000.00 P1,312,659.10 Schedule of Collection Lot A 3/31 - Initial balance 3/31 - Down payment 6/30 - P120,000 - (P1,200,000 x 2.5%) 9/30 - P120,000 - (P1,110,000 x 2.5%) 12/31- P120,000 - (P1,017,750 x 2.5%) Lot B 10/31 – Initial balance 10/31 – Down payment 12/31 – P200,000 – (P1,600,000 x 1.667%) Lot C 6/30 – Initial balance 6/30 – Down payment 12/31- P400,000 – (P2,400,000 x 5%) Principal P514,280.00 90,000.00 92,250.00 94,556.20 P791,086.20 P800,000.00 173,330.30 P973,333.30 P1,800,000.00 280,000.00 P2,080,000.00 Balance P1,714,280.00 1,200,000.00 1,110,000.00 1,017,750.00 923,193.80 P2,400,000.00 160,000 1,426,666.70 P4,200,000 2,400,000 2,120,000 Allocation of Cost & GP rates: Lot A – P1,600,000 x 6/8 Lot B - P2,400,000 x 6/8 Lot C: Farm A – P400,000 B – P600,000 House - P1,520,000 43 B Unpaid balance upon default Less: DGP (P2,120,000 x 40%) Cost P1,200,000 1,800,000 SP P1,714,280 2,400,000 GP P514,280 600,000 % 35% 25% 2,520,000 4,200,000 1,680,000 40% P2,120,000 848,000 AA1 - Chapter (2008 edition) 25 page Unrecovered cost Market value [P2,520,000 – (P1,520,000 20)] Gain on repossession P1,272,000 2,444,000 P1,172,000 P192,000.00 178,471.30 P370,471.30 44 A 8,000,000 – (8,000,000 x 20%) = 6,400,000 x 3% = 6,400,000 – (642,957.30 – 192,000) x 3% Collections to be applied on interest 45 D Downpayment 1st inst 642,957.30 - 192,000 2nd inst 642,957.30 - 192,000 Total collections (P8,000,000 - (2,500,000 + 3,560,000) / 8,000,000] Realized gross profit P1,600,000.00 450,957.30 464,486.00 P 2,515,443.30 x 24.25% P 609,995.00 ... 93,438.80 71, 006. 70 P172,852.50 P40,625 P101,250 P 375,000 P 62,500 435,000 2,500 500,000 75,000 425,000 218,750 206, 250 sales = 45% P625 loss AA1 - Chapter (2008 edition) 21 23 B 2 006 sales - P108,750... received related to 2007 sales Cash collections in 2 006 not exceed costs of sales Realized gross profit in 2 006 = P Cash collections for 2 006 sales ( P 128,000 + 232,000 ) P 80,250 28,000 P 52,250... AA1 - Chapter (2008 edition) 22 page 2007 sales - P120,000 x 27.5% 2008 sales - P 93,750 x 28% Total 24 A Value assigned to repossessed merchandise: 2 006 sales 2007 sales Unrecovered cost 2 006 sales