INSTALLMENT SALES

Test I – Multiple Choice (Theory)

01. The installment method of recognizing profit for accounting purposes is acceptable if
a. Collection in the year of sale do not exceed 30% of the total sales price.
b. A deferred gross 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.

02. In installment sales, revenue is recognized

a. At point of sale. c. Before the point of sale
b. After the point of sale. d. All of the above

03. Under the installment method, the difference between the selling price ad cost of sales is
recorded as
a. Deferred gross profit c. Asset
b. Income d. Expense

04. Under the installment method, realized gross profit is computed at the end of each year by:
a. Multiplying the total collections by the gross profit rate based on sales
b. Multiplying the total collections by the gross profit rate based on costs.
c. Multiplying the selling price by the gross profit rate.
d. Multiplying the cost of sales by the gross profit rate.

05. At time of repossession, repossessed merchandise is debited at:

a. Original cost. c. Fair value after reconditioning cost
b. Unrecovered cost. d. Fair value before reconditioning cost

06. Installment accounts receivable is classified in the statement of financial position as

a. Current assets c. Other asset
b. Property and equipment d. Investments

07. In the statement of financial position, deferred gross profit is classified as

a. Current assets c. Current liability
b. Deferred credits d. Long-term liability

08. The installment method of recognizing profit for accounting purposes is acceptable if
a. Collection 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 reasonable assured
d. The method is consistently used for all sales of similar merchandise.

09. When assets have been sold and accounted for by the installment sales method are
subsequently repossessed and returned to inventory, they should be recorded on the
books at
a. Selling price
b. The amount of the installment receivable less associated deferred gross profit.
c. Net realizable value.
d. Net realizable value less normal profit.

10. The method commonly used to report defaults and repossessions is

a. Provide no basis for the repossessed asset recognizing a loss.
b. Record the repossessed merchandise at fair value, recording a gain or loss
of appropriate.
c. Record the repossessed merchandise at book value, recording no gain or loss.
d. None of the above
11. Polo Company appropriately uses the installment sales method of recognizing revenue. On
December 31, 2021, the accounting records show unadjusted balances of the following:
Installment accounts receivable-2019 P12,000
Installment accounts receivable-2020 40,000
Installment accounts receivable-2021 130,000
Deferred gross profit – 2019 10,500
Deferred gross profit – 2020 28,900
Deferred gross profit – 2021 96,000
Gross profit rates:
2019 35%
2020 34%
2021 32%

How much is the total realized gross profit in 2021?

a. P182,000 b. P158,000 c. P106,000 d. P76,000

12. Using the same data in no. 1, how much is the total cash collection in 2021?
a. P368,000 b. P233,000 c. 135,400 d. P97,600

13. Dulce Co., which began operations on January 1, 2020, appropriately uses the installment
method of accounting to record revenues. The following information is available for the
years ended December 31, 2020 and 2021:
2020 2021
Sales P1,000,000 P2,000,000
Gross profit realized on sales made in:
2016 150,000 90,000
2017 - 200,000
Gross profit percentages 30% 40%

What amount of installment accounts receivable should Dulce report in its December 31,
2021, statement of financial position?
a. P1,225,000 b. P1,300,000 c. P1,700,000 d. P1,775,000

14. On October 1, 2020, Lotus Corporation, a high-end car dealer, sold luxury car to Time
Company for P5,000,000. Time paid cash of P600,000 and signed a ten-year P4,400,000 note
bearing interest at 12%. The cost of the car was P4,000,000 on the date of sale. The note was
payable in forty quarterly principal installments of P110,000 beginning January 2, 2021.
Lotus appropriately accounts for the sale under the installment sales. On January 2, 2021,
Time paid the first principal installment of P110,000 and interest of P132,000.

For the year ended December 31, 2021, what total amount of income should Lotus recognize
from the car sale and the financing?
a. P1,132,200 b. P924,200 c. P508,200 d. P416,000

Questions 15 to 19 are based on the following data: Kia Motor sells car to Mr. Tuason for
P525,000 costing P414,000 on March 30, 2021. A used car is accepted as down payment,
P128,000 being allowed on the trade-in. The used car can be resold for P160,200 after
reconditioning cost of P7,660. The company expects to make a 20% gross profit on the sale of
used car. The balance of the sale is to be paid on a 10-month installment basis starting May 1,
2021.

Mr. Torn defaulted payment starting November 1, 2021 and the car was immediately
repossessed. The repossessed car was appraised at a value of P93,750 at the time of
repossession. Kia Motor had to incur additional cost of repairs amounting to P9,250 before the
car was subsequently resold on December 1, 2021 for P128,750 cash to Mr. Lim.

15. How much is the over-allowance in the trade-in?

a. P0 b. P7,440 c. P7,500 d. P7,860

16. Using the same information in no. 15, what is the gross profit rate from the sale of the brand
new car?
a. 21% b. 20% c. 25% d. 27.5%
17. How much is the gain (loss) in repossession on November 1, 2021?
a. P33,290 b. P65,050 c. P5,130 d. P1,530

18. What is the realized gross profit on December 31, 2021?

a. P97,490 b. P98,990 c. P71,740 d. P47,840

19. What is the net income for the year ended December 31, 2021?
a. P64,200 b. P38,450 c. P49,100 d. P40,100

20. PC Express, Inc. sells computers on the installment basis. For the year ended December 31,
2021, the following were reported:

Cost of installment sales P525,000

Loss on repossessions 13,500
Fair value of repossessed merchandise 112,500
Accounts defaulted 180,000
Deferred gross profit, December 31 108,000

How much was collected during the year?

a. P210,000 b. P264,000 c. P390,000 d. P415,715