RIFT VALLEY UNIVERSITY-BISHOFTU CAMPUS

ASSIGNMENT ON ADVANCED FINANCIAL ACCOUNTING FOR ALL 3RD

YEARSSTUDENTS
DEADLINE -05/06/2020
Instruction: Choose the correct answer for each of the following questions and write the letter of
the correct choice on the space provided.
1. Dalol Company, which began operations on January 2, Year 4, appropriately uses the
installment method of accounting. The following information is available for the year ended
December 31, Year 4.
Gross profit on sales……………………………….……….40%
Deferred gross profit, Dec. 31, Year 4………………….Br. 240,000
Cash collected, including down payments…………………450,000
What is the total amount of Dalol’s installment sales for the year ended December 31, Year 4?
A. Br. 600,000 C. Br. 850,000
B. Br. 690,000 D. Br. 1,050,000 E. Some other amount
2. For a retailing enterprise that appropriately uses the installment method of accounting for
installment sales of merchandise, doubtful installment receivables expense is recognized
when:
A. A customer defaults on an installment contract.
B. An estimate of doubtful installment receivables is made at the end of an accounting
period.
C. There are uncollected deferred gross profits and carrying charges on an installment
receivable.
D. Reconditioning costs for repossessed merchandise are incurred.
3. An overallowance on a trade-in on an installment sale is debited to:
A. Cost of installment sales.
B. Overallowances on trade-ins expense.
C. Inventories (trade-ins).
D. None of the foregoing ledger accounts.
4. Deferred gross profit on installment sales is generally treated as a(n)
A. Deduction from installment accounts receivable.
B. Deduction from installment sales.
C. Unearned revenue and classified as a current liability.
D. Deduction from gross profit on sales.
5. The installment-sales method of recognizing profit for accounting purposes is acceptable if
A. Collections in the year of sale do not exceed 30% of the total sales price.
B. An unrealized profit account is credited.
C. Collection of the sales price is not reasonably assured.
D. The method is consistently used for all sales of similar merchandise.
6. The method most commonly used to report defaults and repossessions is
A. Provide no basis for the repossessed asset thereby recognizing a loss.
B. Record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
C. Record the repossessed merchandise at book value, recording no gain or loss.
D. None of these.
7. Under the installment-sales method,
 A. Revenue, costs, and gross profit are recognized proportionate to the cash that is received
from the sale of the product.
B. Gross profit is deferred proportionate to cash uncollected from sale of the product, but
total revenues and costs are recognized at the point of sale.
C. Gross profit is not recognized until the amount of cash received exceeds the cost of the
item sold.
D. Revenues and costs are recognized proportionate to the cash received from the sale of the
product, but gross profit is deferred until all cash is received.
8. The realization of income on installment sales transactions involves
A. Recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
B. Deferring the net income related to installment sales and recognizing the income as cash
is collected.
C. Deferring gross profit while recognizing operating or financial expenses in the period
incurred.
D. Deferring gross profit and all additional expenses related to installment sales until cash is
ultimately collected.
9. A manufacturer of large equipment sells on an installment basis to customers with
questionable credit ratings. Which of the following methods of revenue recognition is least
likely to overstate the amount of gross profit reported?
A. At the time of completion of the equipment (completion of production method)
B. At the date of delivery (sales method)
C. The installment-sales method
D. The cost–recovery method
10. Under the cost-recovery method of revenue recognition,
A. Income is recognized on a proportionate basis as the cash is received on the sale of the
product.
B. Income is recognized when the cash received from the sale of the product is greater than
the cost of the product.
C. Income is recognized immediately.
D. None of these.
11. Oliver Co. uses the installment-sales method. When an account had a balance of $8,400, no
further collections could be made and the dining room set was repossessed. At that time, it
was estimated that the dining room set could be sold for Br2,400 as repossessed, or for
Br3,000 if the company spent Br300 reconditioning it. The gross profit rate on this sale was
70%. The gain or loss on repossession was a:
A. Br5,880 loss. B. Br6,000 loss. C. Br600 gain. D.Br180 gain.
8400-8400*70%=2520 AND 3000-300= 2700 therefore 2700-2520= 180 gain
12. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed the
costs of exploration, the basis of revenue recognition being employed is the
A. production basis. C. cash (or collection) basis.
B. sales (or accrual) basis. D. cost recovery basis.
13. Seeman Furniture uses the installment-sales method. No further collections could be made
on an account with a balance of $18,000. It was estimated that the repossessed furniture
 could be sold as is for $5,400, or for $6,300 if $300 were spent reconditioning it. The gross
profit rate on the original sale was 40%. The loss on repossession was
A. $4,800. B. $4,500. C. $12,000. D.$12,600.
18000-18000*40%=10800 and 6300-300=6000 , 6000-10800= 4800 loss
14. Wagner Company sold some machinery to Granger Company on January 1, 2007. The cash
selling price would have been $568,620. Granger entered into an installment sales contract
which required annual payments of $150,000, including interest at 10%, over five years.
The first payment was due on December 31, 2007. What amount of interest income should
be included in Wagner's 2008 income statement (the second year of the contract)?
A. $15,000 B. $47,548 C. $30,000 D. $41,862
15. Singer Company sells plasma-screen televisions on an installment basis and appropriately
uses the installment-sales method of accounting. A customer with an account balance of
$5,600 refuses to make any more payments and the merchandise is repossessed. The gross
profit rate on the original sale is 40%. Singer estimates that the television can be sold as is
for $1,750, or for $2,100 if $140 is spent to refurbish it. The loss on repossession is
A. $3,850. B. $2,240. C. $1,610. D. $1,400.
5600-5600*40%=3360 and 2100-140=1960, 1960-3360=1400 loss
Use the following information for questions 16-17.

During 2008, Steele Corporation sold merchandise costing $1,500,000 on an installment basis
for $2,000,000. The cash receipts related to these sales were collected as follows: 2008,
$800,000; 2009, $700,000; 2010, $500,000.
16. What is the rate of gross profit on the installment sales made by Steele Corporation during
2008?
A. 75% B. 60% C. 40% D. 25%
(2000000-1500000)/2000000=25%
17. If expenses, other than the cost of the merchandise sold, related to the 2008 installment sales
amounted to $90,000, by what amount would Steele’s net income for 2008 increase as a
result of installment sales?
A. $110,000 B. $177,500 C. $200,000 D. $710,000
(800000*25%)-90000=110000
18. On January 1, 2007, Dole Co. sold land that cost $210,000 for $280,000, receiving a note
bearing interest at 10%. The note will be paid in three annual installments of $112,595
starting on December 31, 2007. Because collection of the note is very uncertain, Dole will
use the cost-recovery method. How much revenue from this sale should Dole recognize in
2007?
A. $0 B. $21,000 C. $28,000 D. $70,000

Part II: Workout Items

The Ethelco Appliance Company recorded installment sales of Br600,000 in 2002. A record was
kept of the different articles sold on the installment basis. At the end of the year the total cost of
goods sold on the installment basis was calculated at Br405,000. The total collections on
installment sales for the year were Br360,000. The estimated value of the merchandise
repossessed was Br24,000, and balances owed on the repossessions were Br40,000. Perpetual
inventory accounts were maintained
Exercise 1
.

Instructions
Prepare the journal entries required for the data above, including the entries:
A. To set up the total realizable gross profit at the end of the year,
B. To record the cash collections
C. To record the repossessions, and
D. To record the realized gross profit

Exercise 2
The following partial information is available for the Cupp Company:

Installment method sales $120,000 (C)

90,000
Installment method cost of goods sold (A)96,000 $63,000
Gross profit percentage (B)20% 30%
Cash receipts on installment method sales
2007 sales 25,000 (D)35,000
2008 sales (E)30,000
Realized gross profit on installment method sales
2007 sales 5,000 7,000
2008 sales 9,000

Sales(C) =cost of Sales Divide by cost ratio since cost ratio= 1-gross profit ratio
C=63000/70%=90,000
Realized gross profit= Cash Collection * Gross Profit %
25,000*B/100=5000 for 2007
25000B=500,000, B=20%
A=120,000*80%=96,000.00
Realized Gross Profit for 2008
D*20%=7000 and E*30%*=9000

D=7000/0.2=35000 and E=9000/0.3=30,000

Required
Compute the unknown amounts. (Note: It is not necessary to compute the amounts in the
numerical sequence.)

Exercise 3

The following information is available for the Butler Company in 2007, its first year of
operations:
Total credit sales (including installment method sales) $205,000
Total cost of goods sold (including installment method cost of goods sold) 130,000
Installment method sales 65,000
Installment method cost of goods sold 39,000
Cash receipts on credit sales (including installment method sales of $20,000) 120,000
Required
1. Prepare the journal entries for 2007.
2. If the company collected $45,000 in 2008 on its 2007 installment method sales, prepare the
appropriate journal entries in 2008.

1.
INSTALLMENT ACCOUNTS RECEIVABLE               205,000
              INSTALLMENT SALES        205,000
COST OF INSTALLMENT SALES                           130,000
             INVENTORY ( USING PERPETUAL)                              130,000        
INSTALLMENT SALES 65,000
COST OF INTALLMENT SALES 39,000 
DEFERRED GROSS PROFIT,2007 26,000
CASH 120,000
INTALLMENT ACCOUNTS RECEIVABLE 120,000
DEFERRED GROSS PROFIT,2007 8000
GROSS PROFIT REALIZED 8000
GROSS PROFIT REALIZED ON INSTALLMENT METHOD SALES 8000
INCOME SUMMARY 8000

Deferred Gross Profit % 26000/65000=40%

Therefore realized Gross Profit on installment sales method = Cash Collection *GP %
20000*40%=8000

2.
Cash 45000
INTALLMENT ACCOUNTS RECEIVABLE 45000
DEFERRED GROSS PROFIT,2007 18000
GROSS PROFIT REALIZED ON INSTALLMENT METHOD SALES 18000
GROSS PROFIT REALIZED ON INSTALLMENT METHOD SALES 18000
INCOME SUMMARY 18000

Realized Gros profit= 45000*40%=18000

Or 45%*40000=18000