Advanced Financial Accounting

Instalment Sales

Part I: Theory of Accounts

1. Under IAS 18, what is the measurement of sales revenue from installment sales?
a. Book value of the consideration received or receivable
b. Fair value of the consideration received or receivable
c. Cost of the consideration received or receivable
d. Carrying amount of the consideration received or receivable

2. Under IAS 18, if the company receives long-term non-interest bearing note
receivable as consideration for the sale of its inventories on an installment basis,
what is the measurement of sales revenue from installment sales?
a. Face value of the note receivable
b. Maturity value of note receivable
c. Present value of note receivable
d. Undiscounted value of note receivable

3. How shall the difference between the fair value and the nominal amount of the
long-term note received as consideration in an installment sales be accounted for?
a. It shall be recognized as expense on the date of sale
b. It shall be recognized as gain on exchange on the date of sale
c. It shall be recognized as interest revenue over the term of the note using
effective interest method
d. It shall be recognized as interest revenue over the term of the note using
straight line method

4. In an installment sales, if the collection of the note receivable is not remote and not
reasonably, how shall the gross profit be recognized?
a. It shall be fully recognized on the date of sale using accrual basis
b. It shall be recognized in proportion to the amount of collection under installment
method.
c. It shall not be recognized
d. It shall be recognized fully only on the year the receivable is completely
collected.

5. Under generally accounted accounting principles, what is the proper presentation

of deferred gross profit from installment sales?
a. It shall be presented as current liability
b. It shall be presented as equity
c. It shall be presented as deferred revenue
d. It shall be presented as contra-installment receivable account

6. If the fair value of the repossessed inventory cannot be estimated reliably at the
date of repossession, what shall be the basis of initial measurement of
repossessed inventory?
a. Estimated selling price less reconditioning cost less cost to sell
b. Estimated selling price less reconditioning cost
c. Estimated selling price less cost to sell
d. Estimated selling price less reconditioning cost less cost to sell less normal
profit
 7. If the initial measurement of repossessed inventory is lower than the net of
defaulted installment receivable and its corresponding deferred gross profit, the
difference shall be recognized as
a. Loss on repossession to be presented as part of income from continuing
operation before tax
b. Deferred loss on repossession to be presented as current asset
c. Gain on repossession to be presented as part of other comprehensive income
d. Deferred gain on repossession to be presented as current liability

Part II: Problem Solving

1. The ABC Company recognizes profit on credit sales on installment basis. At the
end of 2016, before the accounts are adjusted, the ledger shows the following:

Installment Accounts receivable 2015 337,500

Installment Accounts receivable 2016 525,000
Deferred gross profit 2015 185,000
Deferred gross profit 2016 272,500
Regular Sales 1,500,000
Cost of Regular Sales 960,000

Each year the gross profit on installment sales was 8% lower than the regular
sales. In 2016, the gross profit on installment sales was 4% higher than 2015.

How much is the total realized gross profit in 2016?

a. 229,500
b. 769,500
c. 181,000
d. 721,000

2. The following account balances appeared on the books of FRC Company on

December 31, 2016:

Cash 150,000
Receivables 800,000
Merchandise inventory 75,000
Accounts payable 30,000
Deferred gross profit – 2014 261,250
Sales 1,250,000
Purchases 640,000
Expenses 425,000

 The Receivables account is a controlling account for three subsidiary ledgers

which showed the following totals:

2015 installment contracts 150,000

2016 installment contracts 600,000
Charge accounts (terms, 30 days, net) 50,000

 The gross profit on sales was 55% on installment contracts for 2015 and 50%
on installment contracts for 2016.

 Collections on installment contracts for 2015 totaled P300,000 for the year just
closed, on installment contracts for 2016, P400,000 and on charge accounts,
P200,000.
  Account balances from installment sales made prior to 2015 were also
collected.

 Repossession for the year was on installment contracts for 2015 on which the
uncollected balance at the time of repossession amounted to P50,000.

 Merchandise repossessed was erroneously debited as a newly acquired

merchandise equal to the amount defaulted by the customer.

 The repossessed merchandise had a true worth of P20,000 at the time of

repossession and was unsold at year end.

 The final inventory of the merchandise (new) valued at cost amounted to

P45,000.

1. What is the total realized gross profit in 2016?

a. 626,250
b. 756,250
c. 495,000
d. 365,000

2. What is the net income for 2016?

a. 331,250
b. 301,250
c. 328,750
d. 382,500

3. On November 2, 2016, Speed Motor which maintains a perpetual inventory records

sold a new automobile to Rapids for P6,800,000. The cost of the car to the seller
was P5,205,000.

The buyer paid 30% down and received P640,000 allowance on an old car traded,
the balance being payable in equal monthly installment payments commencing the
month of sale.

The monthly amortization was P240,000 inclusive of 12% interest on the unpaid
amount of the obligation.

The car traded-in has a wholesale value of P960,000 after expending

reconditioning cost of P180,000.

After paying three installments, the buyer defaulted and the car was subsequently
repossessed. When reacquired, the car was appraised to have a fair value of
P2,400,000.

How much is the realized gross profit on installment sales during 2016?
a. 820,596
b. 855,596
c. 885,000
d. 804,897

4. QR Appliances sells home theater set both on installment and cash basis. Mr. X
purchased a set from QR appliances on March 30, 2016 for P367,500 which has
a cost of P289,800.
 A used set is accepted as down payment, P89,600 being allowed on the trade in.
the used set can be resold for P112,140 after reconditioning cost of P5,362.the
company expects to make a 20% gross profit on the sale of used set.

The balance of the sale is to be paid on a 10-month installment basis starting May
1, 2016. Mr. X defaulted payment staring November 1, 2016 and the set was
immediately repossessed.

The repossessed merchandise was appraised at a value of P65,625 at the time of

repossession. QR had to incur additional cost of repairs amounting to P6,475
before the car was subsequently resold on December 1, 2016 for P90,125 cash to
Mr. Y.

What is the net income to be recognized for 2016?

a. 69,293
b. 44,940
c. 51,415
d. 68,243

5. The chief accountant of Sony Appliances Inc. provided the following balances from
its unadjusted trial balance for the year ended December 31, 2023:

Account January 2, 2023 December 31, 2023

Installment receivable – 2021 contract P2,000,000 P500,000
Installment receivable – 2022 contract P3,000,000 P1,000,000
Installment receivable – 2023 contract P5,000,000
Deferred gross profit – 2021 contract P800,000
Deferred gross profit – 2022 contract P1,800,000
New inventory P200,000 P300,000
Net purchases P5,000,000
Freight-in P100,000
Cash sales for year 2023 P2,000,000
Installment sales for year 2023 P8,000,000

The following additional notes are provided for the year ended December 31, 2023:

 The gross profit rate for 2023 installment sales is the average of previous years’
gross profit rate for installment sales.

 On July 1, 2023, Sony wrote off 2021 installment receivable with account
balance of P300,000 because of the bankruptcy of the customer. Sony records
its impairment loss of installment receivable using direct write off method.

 On October 1, 2023, a 2022 contract customer defaulted on the installment due

which resulted to repossession of the inventory with fair value of P100,000. The
defaulted account has a balance of P600,000.

 On November 1, 2023, the repossessed inventory was sold at a cash price of

P150,000 after reconditioning it at a cost of P200,000. The sale of repossessed
inventory is not yet reflected on the cash sales stated above.

 The total operating expenses, exclusive of impairment loss and loss on

repossession, of Sony for the year ended December 31, 2023 amount to
P400,000.
1. What is the net income to be reported by Sony Inc. for the year ended
December 31, 2023?
a. 2,840,000
b. 3,130,000
c. 3,520,000
d. 2,980,000

2. What is the total adjusted deferred gross profit as of December 31, 2023,
respectively?
a. 3,200,000
b. 3,300,000
c. 3,100,000
d. 3,400,000

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