ACCOUNTING 318 QUIZ

Name: Leyros, Fe C. Class Time: 10:30-12:00 PM Date: 10/05/2020

INSTRUCTIONS: Solve the following problems. Present supporting computation with proper label. Correct answer
without solution will not be given any credit points.

N.B. Round off gross profit rates to 2 decimal points. (e.g. 43.65%)
Round off peso values to the nearest centavo. (e.g. 23,400.24)

Problem 1
The Eman Appliance Co. reports gross profit on the installment basis. The following data are available.
2018 2019
------ ------
Installment Sales 480,000 500,000
Cost of Installment Sales 360,000 362,500
Collections during the year: 2018 sales 90,000 150,000
2019 sales 95,000
Defaults:
Unpaid balance of 2018 receivable 25,000
Value assigned to repossessed merchandise 13,000
Operating expenses 85,000

Answer the following. (3 pts. each)

1. What is the balance of Deferred Gross Profit at Dec. 31, 2019? 171,375
2. How much is the net income (loss) at Dec. 31, 2019? (64,625)
3. Prepare the entry to record the realized gross profit at the end of 2019.

To record realized gross profit on installment sales

Deferred Gross Profit, 2018 37,500
Deferred Gross Profit, 2019 26,125
Realized Gross Profit 63,625

Solutions

2018 2019
Deferred Gross Profit, beg. P 123,000 P137,500
Less: Realized Gross Profit
2018 sales (90,000x.25) (22,500)
2019 sales (150,000x.25) (37,500)
2019 sales (95,000x.275) (26,125)
Deferred Gross Profit P 60,000 P 111, 375
Total DGP: P 60,000 + P 111, 375 = P 171, 375

2018 2019
Installment sales 480,000 500,000
Less: Cost of Installment Sales (360,000) (362,500)
DGP 120,000 137,500
480,00 137,500
GPR = 25% =27.5%

FV of Repossessed Merchandise 13,000

Less: Unrecovered Cost
Unpaid Balance 25,000
Less: DGP(25,000x.25) (6200) 10,750
Loss on Repo P5, 750

Sales 500,000
COGS 362,500
DGP 137,500
Less: DGP, end 111,375
RGP 26,125
Less: OPEX ( 85,000)
Loss on repossession (5,750)
Net Loss P64,625

Cash P 245,000
Installment Contract Receivables, 2018 P 150,000
Installment Contract Receivables, 2019 95,000
#

Deferred Gross Profit, 2018(22,500+37,500) P60,000

Deferred Gross Profit,2019 26,125
Realized Gross Profit P86,125
#

Problem 2
On June 1, 2019 Norkis Company sells a new car costing P540,000 for P756,000. A used car is accepted as down
payment, P144,000 being allowed on the trade-in. The used car can be resold for P162,000 before reconditioning
costs of P21,600. The company expects to make a 20% gross profit on the sale of used cars. During 2019, P90,000
is collected on the contract which includes P5,000 interest. The company uses the installment method in
recognizing profit.

Required: (3 pts. each)

1. What is the gross profit rate on the sale of brand new car? .25 or 25%
2. How much is the realized gross profit during the year 2019? 14,450

3. Prepare the entry to record the sale on June 1, 2019.

Journal Entries

Merchandise Inventory-Trade in P 108,000

Over Allowance- Trade in 36,000
Installment Contracts Receivable 612,000
Installment Sales P756,000
#

Cost of Installment Sales 540,000

Merchandise Inventory 540,000
#
Cash 90,000
Interest Income 5,000
 Installment Contracts Receivable 85,000
#

Installment Sales 756,000

Cost of Installment Sales 540,000
Deferred Gross Profit 216,000
#

Deferred Gross Profit 57,250

Realized Gross Profit 57,250
#

Realized Gross Profit 57,250

Income Summary 57,250
#

Income Summary 57,250

Retained Earnings 57,250
#

SOLUTIONS FOR NO. 1 & 2:

Trade-in Value P 144,000

Less: Realizable Value 162,000
Reconditioning cost (21,600)
*Normal Profit Margin (32,400) 108,000
Over Allowance P 36,000

Normal Profit Margin =162,000 x .20 = 32,400

Selling Price 756,000

Less: Over Allowance 36,000
Net Sales 720,000
Less: Cost of New Car 540,000
Gross Profit 180,000
Divided By: Net Sales 720,000
Gross Profit Rate 0.25 or 25%

Realized Gross Profit= Collections Net of Interest x Gross Profit Rate

=P 85,000x.25 = 21,250
Problem 3
The data presented below were taken from the records of Benjamin Appliance Company before the accounts are
closed for the year 2019. The company sells exclusively on credit and uses the installment method of recognizing
profit.
2017 2018 2019
Installment sales 160,000 176,000 168,000
Cost of installment sales 96,000 109,120 102,480
Operating expenses 40,000 37,600 41,600
Balances as of December 31
Installment Contract Receivable, 2017 88,000 44,000 11,200
Installment Contract Receivable, 2018 100,000 36,800
Installment Contract Receivable, 2019 95,200
Deferred Gross Profit, 2017 17,600 17,600
Deferred Gross Profit, 2018 38,000 38,000
During 2019, because the customers can no longer be located, the company wrote off P3,600 of the 2017 accounts
and P1,120 of the 2018 accounts as uncollectible, and the entry made was:

Operating expenses 4,720

Installment Contract Receivable, 2017 3,600
Installment Contract Receivable, 2018 1,120

Also during 2019, a customer defaulted and the company repossessed merchandise appraised at P1,600 after
reconditioning costs estimated at P160. The merchandise had been purchased in 2017 by a customer who still owed
P2,000 at the date of repossession. The entry made to record the repossession was:

Operating expenses 2,000

Installment Contract Receivable, 2017 2,000

Required: (3 pts. each)

1. How much is the total collections during the year 2019? 164,080

2017 2018 2019

Installment sales P160,000 P176,000 P168,000
Cost of installment sales 96,000 109,120 102,480
Deferred Gross Profit P64,000 P66,880 P65,520

GPR 2017 = 64,000/160,000 = 40%

GPR 2018 = 66,880/176,000 = 38%
GPR 2019 = 65,520/168,000 = 39%
2017 2018 2019 Collections in 2019
Installment Contract Receivable, 2017 88,000 44,000 (11,200) – 3,500 = 29,200
Installment Contract Receivable, 2018 100,000 (36,800) –1,120 = 62,080
Installment Contract Receivable, 2019 (95,200) –168,000 = 72,800
P164,080

2. What is the amount of gain or (loss) on repossession during 2019? P 560

Fair Market Value of repossessed merchandise 1,600

Less: Unrecovered costs:
Unpaid Balance 2,000
Less: Unrealized Profit (2000 x .40) 800
Reconditioning Costs 160 1,040
Gain (loss) on Repossession P 560

3. Prepare the entry to record the realized gross profit at the end of 2019.

Deferred Gross Profit- 2017 (29,200x.40) P 11,680

Deferred Gross Profit- 2018 (62,080x.38) 23,590
Deferred Gross Profit- 2019 (72,800x.39) 28,392
Realized Gross Profit P 63,662

Problem 4
The New Life Company sold on March 31, 2019, an equipment for P155,000. The equipment cost P100,000. The
customer is allowed a trade-in allowance of P50,000 for an old machine. A down payment of P45,000 was made
and the balance is to be paid in 12 monthly installments of P5,000 each plus interest of 12% based on the unpaid
principal balance. The old equipment is estimated to have a resale value of P70,000 after incurring reconditioning
cost of P7,500. The seller expects a 20% profit from the sale of used equipment and a cost to sell of 5% on the
resale value.

Answer the following. (3 pts. each)

How much is the total collections for the year 2019? __________________.

2. The balance of deferred gross profit on December 31, 2019 is ________________.

Problem 5
On October 1, 2019, Fastsavers Co. sold article “A” costing P270,000, for P400,000. Article B, a used article, was
accepted as down payment, with the balance in monthly installment of P20,000 starting November 1, 2019.
P120,000 was the allowed value on the article traded in. The company estimated the reconditioning cost of this
article at P8,000 and a selling price of P110,000 after such reconditioning cost. The company employs the perpetual
inventory method. The normal gross profit of second hand item is 20%.

On April 1, 2020, the customer defaulted in the payment of his installment. Article “A” was repossessed and its
value to the seller was estimated at P135,000 after allowing for the estimated reconditioning cost of P8,000 and the
normal profit on resale.

Answer the following. (3 pts. each)

1. The balance of installment contract receivable at the time of repossession was? 260,000

Installment contract receivable 400,000

Less: Over Allowance 40,000
360,000
Collections (20,000 x 5 mos) 100,000
Installment contract receivable, 2020 260,000

2. The amount of realized gross profit in 2019 was 40,000

Trade in value 120,000 x 25% = 30,000

Collections – 2019 (20,000 x 2 mos) 40,000 x 25% = 10,000
Realized Gross Profit 40,000

3. The gain(loss) on repossession was 52,000 loss

Installment contract receivable, 2019 260,000

Fair Market Value of repossessed merchandise 135,000

Less: Unrecovered cots:
Unpaid Balance 260,000
Less: Unrealized profit (260,000 x 25%) 65,000
Reconditioning cost 8,000 187,000
Gain (Loss) on Repossession ( 52,000)

GPR
(400,000 – 40,000) 360,000
270,000
90,000
360,000
= 25%