Hull Gan Co. uses Cost Recovery Method. On Jan 1, 2021, Hull Gan Co.
sold SOLUTION: #1
inventory costing Php300,000.00 to a customer for Php550,000.00 payable 2021 2022 2023
as follows: Php100,000.00 down payment and balance due in four annual CUMULATIVE COLLECTIONS 212,500.00 325,000.00 437,500.00
equal payments every December 31. COST OF GOODS SOLD 300,000.00 300,000.00 300,000.00
EXCESS COLLECTION - 87,500.00 25,000.00 137,500.00
Requirement: RGP IN PREVIOUS YEARS - 87,500.00 - 25,000.00
1. Compute the Realized Gross Profit from Year 2021 to Year 2024 RGP IN CURRENT YEARS - 112,500.00 112,500.00
2.What if Installments include imputed interest, can Hull Gan Co. recognize
interest income in Year 2021? SOLUTION: #2
NO. UNDER THE "COST TO RECOVERY MEETHOD" NEITHER GROSSS PROFIT NOR INTEREST
INCOME IS RECOGNIZED UNTIL THE COLLECTIONS EXCEED THE COST OF GOODS SOLD.
2024
550,000.00
300,000.00
250,000.00
-137,500.00
112,500.00
ROSSS PROFIT NOR INTEREST
E COST OF GOODS SOLD.
Hull Gan Co. uses Installment Method. On Jan 1, 2021, Hull Gan Co. sold JOURNAL ENTRIES:
inventory costing Php300,000.00 to a customer for Php500,000.00 payable 2021
as follows: Php100,000.00 down payment and balance due in four annual CASH 100,000.00
equal payments every December 31. INSTALLMENT ACCOUNTS RECEIVABLE 400,000.00
SALES 500,000.00
Requirement:
COST OF SALES 300,000.00
Compute the Realized Gross Profit and Deferred Gross Profit from INVENTORY 300,000.00
Year 2021 to Year 2024
CASH (400K/4) 100,000.00
INSTALLMENT ACCOUNTS RECEIVABLE 100,000.00
ADJUSTING ENTRY:
INCOME SUMMARY 110,000.00
DEFERRED GROSS PROFIT 110,000.00
2022
CASH 100,000.00
INSTALLMENT ACCOUNTS RECEIVABLE 100,000.00
ADJUSTING ENTRY:
INCOME SUMMARY 40,000.00
DEFERRED GROSS PROFIT 40,000.00
2023
CASH 100,000.00
INSTALLMENT ACCOUNTS RECEIVABLE 100,000.00
ADJUSTING ENTRY:
INCOME SUMMARY 40,000.00
DEFERRED GROSS PROFIT 40,000.00
2024
CASH 100,000.00
INSTALLMENT ACCOUNTS RECEIVABLE 100,000.00
ADJUSTING ENTRY:
INCOME SUMMARY 40,000.00
DEFERRED GROSS PROFIT 40,000.00
DOWN PAYMENT - JAN.1,2021 100,000.00
1ST INSTALLMENT- DEC.31, 2021 100,000.00
TOTAL COLLECTIONS- 2021 200,000.00
MULTIPLY BY: GROSS PROFIT RATE BASED ON SALES 0.40
REALIZED GROSS PROFIT- 2021 80,000.00
SALES 500,000.00
COST OF SALES 300,000.00
DEFERRED GROSS PROFIT-BEG. 200,000.00
LESS: REALIZED GROSS PROFIT 80,000.00
DEFERRED GROSS PROFIT-END. 120,000.00
2ND INSTALLMENT 100,000.00
MULTIPLY BY: FROSS PROFIT RATE BASED ON SALES 0.40
REALIZED GROSS PROFIT- 2022 40,000.00
DEFERRED GROSS PROFIT-BEG. 120,000.00
LESS: REALIZED GROSS PROFIT 40,000.00
DEFERRED GROSS PROFIT-END. 80,000.00
3RD INSTALLMENT 100,000.00
MULTIPLY BY: FROSS PROFIT RATE BASED ON SALES 0.40
REALIZED GROSS PROFIT- 2023 40,000.00
DEFERRED GROSS PROFIT-BEG. 80,000.00
LESS: REALIZED GROSS PROFIT 40,000.00
DEFERRED GROSS PROFIT-END. 40,000.00
4TH INSTALLMENT 100,000.00
MULTIPLY BY: FROSS PROFIT RATE BASED ON SALES 0.40
REALIZED GROSS PROFIT- 2024 40,000.00
DEFERRED GROSS PROFIT-BEG. 40,000.00
LESS: REALIZED GROSS PROFIT 40,000.00
DEFERRED GROSS PROFIT-END. -
Hull Gan Co. uses Installment Method. Information on Hull Gan Co.'s
transactions during 2021 and 2022 is shown below:
2021 2022
Installment Sales 500,000.00 800,000.00
Cost of Sales 300,000.00 400,000.00
Gross Profit 200,000.00 400,000.00
Cash Collections from:
2021 Sales 200,000.00 100,000.00
2022 Sales 160,000.00
Requirement:
Compute the Realized Gross Profit and Deferred Gross Profit in Year 2022
SOLUTIONS:
2021 2022
GROSS PROFIT 200,000.00 400,000.00
INSTALLMENT SALES 500,000.00 800,000.00
GROSS PROFIT RATES BASED ON SALES 0.40 0.50
COLLECTION IN 2022 FROM:
2021 SALES: (100K X 40%) 40,000.00
2022 SALES: (160K X 50%) 80,000.00
TOTAL REALIZED GROSS PROFIT IN 2022 120,000.00
DEFERRED GROSS PROFIT 400,000.00
