MODULE 3 - Installment Sales
MODULE 3 - Installment Sales
MODULE 3 - Installment Sales
Introduction
These conditions were similarly indicated under PAS No. 1, wherein Revenue
is recognized when:
Learning Objectives
Revenue Recognition
Installment Sales
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evidence that revenue should be recognized now –only when cash is
collected
Front end loading is the opposite: this is to recognize revenue
prematurely
FASB prescribes installment sale method for real estate – the title
passes when the “mortgage is burned” (i.e.- no more payments)
Repossession may occur if installment sale is deemed uncollectible
Write off receivable with the attached deferred gross profit
Journal Entry
Repossessed Merchandise………………………….xxx
Deferred gross profit……………………………...….xxx
Installment A/R……………………………………..….xxx
No profit recognized until the cash payments by buyer exceed the sellers
Cost of Goods Sold
Deposit method
Postpone recognizing sale until the sale and asset transfer occurs
Seller treats the cash received from buyer is a deposit on a contract , and
this is a liability that he owes to the buyer until the actual sale occurs)
Since the seller has not performed, there is no claim on the deposit
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ILLUSTRATIVE PROBLEMS
2019 2020
Installment sales ₱1,200,000 ₱1,500,000
Cash collections from:
2019 sales 400,000 500,000
2020 sales 600,000
Gross profit on sales 30%
a. 240,000
b. 390,000
c. 440,000
d. 600,000
The cash collections and the realized gross profit on installment sales for
the year ended December 31, 2019 should be
3. Dudong Electronics makes all of it sales on credit and accounts for them
using the installment sales method. For simplicity, assume that all sales
occur on the first day of the year and that all cash collections are made on
the last day of the year and that allcash collections are made on the last
day of the year. Dudong Electronics charges 18% interest on the unpaid
installment balance Data for 2019 and 2020 are as follows:
2019 2020
Sales ₱100,000 ₱120,000
Cost of goods sold 60,000 80,000
Cash collections (principal and interest)
2017 sales 40,000 50,000
2018 sales 90,000
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a. 14,000
b. 21,600
c. 35,640
d. 49,700
4. Using the same information in No. 3 compute the realized gross profit in
2020:
a. 14,384
b. 22,800
c. 37,184
d. 39,600
5. The books of Harry Co. shows the following balances on December 31,
2020
a. 11,000
b. 11,500
c. 16,000
d. 10,250
6. On January 1, 2019, Art Company sold its idle plant facility to Tony, Inc.
for ₱1,050,000. On this date, the plant had a depreciated cost of
₱735,000. Tony paid ₱150,000 cash on January 1, 2019 and signed a
₱900,000 note bearing interest at 10%. The note was payable in three
annual installments of ₱300,000 beginning January 1, 2020. Art
appropriately accounted for the sale under the installment method. Tony
made a timely payment of the first installment on January 1, 2020 of
₱390,000 which included interest of ₱90,000 to date of payment. At
December 31, 2020, Art has a deferred gross profit of
a. 153,000
b. 180,000
c. 225,000
d. 270,000
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December 2020, what total amount of income should Rienna recognize
from the land sale and the financing?
a. 0
b. 208,000
c. 508,200
d. 309,640
8. Asser Computer Co. began operation at the beginning of 2020, During the
year, it had cash sales of ₱6,875,000 and sales on installment basis of
₱16,500,000. Asser adds a markup on cost of 25% on cash sales and
50% on installment sales. Installments receivable at the end of 2020 is
₱6,600,000.
a. 1,375,000
b. 3,300,000
c. 4,675,000
d. 3,575,000
Johnson Enterprises uses the cost recovery method for all installment sales.
Complete the following table:
a. 92,137.50
b. 105,000
c. 112,612.50
d. 195,000
10. Using the same information in the cost of installment sales in 2018:
a. 0
b. 30,400
c. 47,619
d. 49,600
11. Using the same information the cost of installment sales in 2019:
a. 29%
b. 41%
c. 59%
d. Cannot be determined
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12. Using the same information the collection in 2020 and 2019 sales:
a. 10,450
b. 33,250
c. 43,700
d. 48,600
13. Using the same information, the realized gross profit on installment sales
in 2018:
a. 9,728
b. 7,049
c. 4,800
d. Zero
14. Using the same information, the realized gross profit on installment sales
in 2019:
a. 8,664
b. 9,348
c. 18,012
d. 22,400
Use the following information to answer questions 15, 16, 17, 18, 19, and 20.
Additional information:
Pampanga industrial uses calendar year as a result of the above transaction and
use effective-interest rate method of amortizing any discount.
The present value factors at 10% for six periods are as follows:
Year PV of P1 PV of an annuity of P1
1 .9091 .9091
2 .8264 1.7355
3 .7513 2.4869
4 .6830 3.1699
5 .6209 3.7908
6 .5645 4.3553
15. Assuming that circumstances are such that the collection of the
installments due under the contract is reasonably assured, compute the
realized gross profit on installment sales for 2019 (rounded)
a. Zero
b. 81,250
c. 179,119
d. 487,500
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16. Using the same information compute the total income for 2019 (rounded)
a. 27,221
b. 108,471
c. 206,340
d. 541,721
17. Using the same information compute the total income for 2020 (rounded)
a. 71,221
b. 108,471
c. 206,340
d. 541,721
18. Assuming that circumstances are such that the collection of the
installments due under the contract cannot be reasonably assured.
Compute the realized gross profit on installment sales for 2019 (rounded)
a. Zero
b. 81,250
c. 179,119
d. 487,500
19. Using the same information in No. 18, compute the total income for 2019
(rounded)
a. 27,221
b. 108,471
c. 206,340
d. 541,721
20. Using the same information in No. 18, compute the total income for 2020
(rounded)
a. 78,134
b. 101,418
c. 102,194
d. 119,384
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ILLUSTRATIVE PROBLEM ANSWER KEY
1. B
2. D
3. C
4. C
5. D
6 B
7. A
8. C
9. B
10. D
11. B
12. C
13. D
14. D
15. C
16. C
17. B
18. A
19. A
20. D
-END OF DISCUSSIONS-
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