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Chapter 10
Installment Sales Method

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QUIZ
1. ABC Co. has the following information:

20x2
20x1
Installment sales ? ?
Cost of sales 600,000 660,000
Installment receivable - 20x1 600,000 400,000
Installment receivable - 20x2 720,000
Gross profit rates based on sales 40% 45%

How much is the total realized gross profit in 20x2?

a. 189,000 b. 268,000 c. 296,000 d. 326,000

Use the following information for the next two questions:

ABC Co.’s records show the following information:
20x1 20x2
Deferred gross profit (adjusted ending balances):
240,00
from 20x1 sale 160,000
0
from 20x2 sale 324,000
Gross profit rates based on sales 40% 45%
Cash collections from:
400,00
20x1 sales 200,000
0
20x2 sales 480,000

2. How much is the total installment receivable on December 31, 20x2?

a. 1,000,000 b. 1,120,000 c. 1,280,000 d. 720,000

3. How much are the installment sales in 20x1 and 20x2, respectively?
20x1 20x2 20x1 20x2
a. 1,000,000 1,200,000 c. 600,000 480,000
b. 1,000,000 1,120,000 d. 900,000 720,000

4. ABC Co. uses the installment sales method. The following information was taken from ABC’s records:
20x1 20x2
1,000,00
Installment sales 1,200,000
0
Cost of sales 600,000 660,000
Cash collections from:
20x1 sales 400,000 200,000
20x2 sales 480,000

How much is the total deferred gross profit on December 31, 20x2?
a. 324,000 b. 484,000 c. 284,000 d. 504,000
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5. ABC Co. uses the installment sales method. ABC Co. has the following collection policy on its
installment sales:
 20% down payment
 Balance collectible as follows: 50% in the year of sale, 30% in the second year, and 20% in the third
year.
 Installment sales during 20x1, 20x2 and 20x3 were ₱1,200,000, ₱1,500,000 and ₱1,800,000, respectively.
 Gross profit rate throughout the three years was 40% based on sales.

How much are the realized gross profits in 20x1, 20x2 and 20x3, respectively?
20x1 20x2 20x3 20x1 20x2 20x3
a. 288,000 475,200 652,800 c. 288,000 457,200 652,800
b. 276,000 475,200 628,600 d. 286,000 487,200 632,800

Use the following information for the next three questions:

Rooster Co. uses the installment sales method. Relevant information follows:
20x1 20x2
Sales 300,000 480,000
Cost of sales 240,000 336,000
Installment receivable - 20x1 180,000 60,000
Installment receivable - 20x2 360,000

Rooster Co. repossessed a property that was sold in 20x1 for ₱50,000. Total collections from this sale were
₱24,000. Rooster Co. expects to resell the property for ₱30,000 after reconditioning costs of ₱4,000. The
normal profit margin on resale of repossessed property is 30%.

6. How much is the gain or loss on repossession?

a. 3,200 b. 3,800 c. 4,300 d. 2,900

7. How much is the total realized gross profit in 20x2?

a. 56,000 b. 54,800 c. 53,200 d. 51,600

8. How much is the profit recognized in 20x2?

a. 56,000 b. 54,800 c. 51,000 d. 51,600

9. Garden Co. uses the installment sales method. Garden Co. sells a good costing ₱10,000 for an
installment sale price of ₱16,000. Garden Co. accepts old merchandise as down payment and gives the
customer a trade-in value of ₱4,000 for this merchandise. The fair value of the old merchandise is
₱6,000. Subsequent cash collections during the period amount to ₱6,000. How much is the realized
gross profit recognized in the year of sale?
a. 5,444 b. 5,966 c. 5,333 d. 6,667

10. Demolish Co. uses the “cost recovery method” (traditional accounting based on old US GAAP). The
records of Demolish Co. show the following information:
20x1 20x2
Sales 10,000 15,000
Cost of sales 8,000 9,000
Cash collections:
- from 20x1 sales 7,000 3,000
- from 20x2 sales 12,000

How much is the gross profit recognized by Demolish in 20x2?

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a. 0 b. 5,000 c. 3,000 d. 2,000

“Likewise you younger people, submit yourselves to your elders. Yes, all of you be submissive to one another, and be clothed with humility, for “God resists the proud, but
gives grace to the humble.” “Therefore humble yourselves under the mighty hand of God, that He may exalt you in due time.” (1 Peter 5:5-6)

SOLUTIONS:

1. C Solution:

* (660K COS in 20x2 ÷ 55% cost ratio) = 1,200,000 sales in 20x2

55% cost ratio = 100% less 45% gross profit rate

Collections in 20x2 from:

20x1 sales: (200,000 x 40%) 80,000
20x2 sales: (480,000 x 45%) 216,000
Total realized gross profit in 20x2 296,000

2. B Solution:
Deferred gross profit - 20x1 sale, Dec. 31, 20x2 160,000
Divide by: Gross profit rate 40%
Installment receivable - 20x1, Dec. 31, 20x2 400,000
Add back: Collections (400,000 in 20x1 + 200,000 in 20x2) 600,000
Installment sale - 20x1 1,000,000

Deferred gross profit - 20x2 sale 324,000

Divide by: Gross profit rate 45%
Installment receivable - 20x2, Dec. 31, 20x2 720,000
Add back: Collections from 20x2 sales 480,000
Installment sale - 20x2 1,200,000

Installment receivable - 20x1, Dec. 31, 20x2 400,000

Installment receivable - 20x2, Dec. 31, 20x2 720,000
Total Installment receivable – Dec. 31, 20x2 1,120,000

3. A (see solution in previous problem)

4. B Solution:

Gross profit rate - 20x1: [(1M-600K)/1M] 40%

Gross profit rate - 20x2: [(1.2M-660K)/1.2M] 45%

Installment sale - 20x1 1,000,000

Cash collections (400K + 200K) (600,000)
Installment receivable - 20x1, Dec. 31, 20x2 400,000
Multiply by: GPR 40%
Deferred gross profit - 20x1, Dec. 31, 20x2 160,000
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Installment sale - 20x2 1,200,000

Cash collections (480,000)
Installment receivable - 20x2, Dec. 31, 20x2 720,000
Multiply by: GPR 45%
Deferred gross profit - 20x2, Dec. 31, 20x2 324,000

Total deferred gross profit - Dec. 31, 20x2 (160K + 324K) 484,000

5. A Solution:
20x1 20x2 20x3
20x1 sale:
Down payment (20% x 1.2M) 240,000
Balance: (80%* x 1.2M) x 50%; 30%; & 20% 480,000 288,000 192,000
20x2 sale:
Down payment (20% x 1.5M) 300,000
Balance: (80%* x 1.5M) x 50% & 30% 600,000 360,000
20x3 sale:
Down payment (20% x 1.8M) 360,000
Balance: (80%* x 1.8M) x 50% 720,000
Total collections 720,000 1,188,000 1,632,000
Multiply by: Gross profit rate 40% 40% 40%
Realized gross profits 288,000 475,200 652,800
*100% less 20% down payment = 80% balance

6. B Solution:
Estimated selling price 30,000
Reconditioning costs (4,000)
Normal profit margin (30K x 30%) (9,000)
Fair value of repossessed property 17,000

Date Inventory (at fair value) 17,000

Deferred gross profit (26K x 20%*) 5,200
Loss on repossession (squeeze) 3,800
Installment receivable (50K – 24K) 26,000
* (300K sales in 20x1 – 240K COS in 20x1) ÷ 300K sales in 20x1 = 20% GPR in 20x1

7. B Solution:
Installment receivable - 20x1 Installment receivable - 20x2
Beg. 180,000 26,000 Write-off Beg. - - Write-off
Collection Collection
94,000 (squeeze) Sale 480,000 120,000 (squeeze)
60,000 End. 360,000 End.

Realized gross profit from:

- 20x1 sale (94K x 20%) 18,800
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- 20x2 sale (120K x 30%**) 36,000

Total realized gross profit in 20x2 54,800
Loss on repossession (3,800)
Profit in 20x2 51,000
** (480K sales in 20x2 – 336K COS in 20x2) ÷ 480K sales in 20x2 = 30% GPR in 20x2

8. C See solution in preceding problem

9. C Solution:
Trade-in value granted to customer 4,000
Fair value of merchandise traded-in (6,000)
Under allowance (2,000)

Installment sale price 16,000

Under allowance 2,000
Adjusted installment sale price 18,000
Cost of sale (10,000)
Gross profit 8,000
Gross profit rate 44.44%

Fair value 6,000

Subsequent collections 6,000
Total collections on installment sale 12,000
Multiply by: Gross profit rate 44.44%
Realized gross profit - 20x1 5,333

10. B Solution:
Total collections from 20x1 sales 10,000
Cost of 20x1 sales (8,000)
Gross profit - 20x1 sales 2,000
Total collections from 20x2 sales 12,000
Cost of 20x2 sales (9,000)
Gross profit - 20x2 sales 3,000
Gross profit recognized in 20x2 5,000