MIDTERM – ACCOUNTING FOR SPECIAL TRANSACTIONS

NAME: SCORE:

I. ENCIRCLE THE LETTER OF YOUR ANSWER (3 POINTS EACH)

1. Under the installment sales method, when merchandise previously sold is repossessed, the
repossessed merchandise is recorded at

a. Fair value b. original cost c. current cost d. any of these

2. For purposes of applying the installment sales method, “fair value” is

a. The appraised value of the repossessed property or traded-in merchandise.

b. The estimated selling price of the repossessed property or traded-in merchandise less
reconditioning costs and normal profit margin, at date of repossession or date of trade-in.
c. A or b
D. none of these

3. Gain or loss on repossession is computed as

a. The fair value of repossessed property less the sum of the balance in deferred gross profit and the
balance in the defaulted installment account receivable.
b. The sum of the fair value of the repossessed property and the balance in the defaulted installment
account receivable less the balance in deferred gross profit.
c. The difference between the fair value of repossessed property and the balance in deferred gross
profit.
d. The sum of the fair value of the repossessed property and the balance in deferred gross profit less
the balance in the defaulted installment accounts receivable.

4. Merchandise received at trade-in as recognized at

a. Fair value b. original cost c. current cost d. any of these

5. Under an installment sale where merchandise is received as “trade-in,”

a. The fair value of merchandise traded-in is considered as part of collections when determining the
realized gross profit in the year of sale.
b. The trade-in value of merchandise traded in is considered as part of collections when determining
the realized gross profit in the year of sale.
c. Neither the fair value nor the trade in value affects the computation of realized gross profit
d. None of these

6. The excess of the trade-in value over the fair value of a traded-in merchandise in a sale accounted
for under installment sales method represents

a. Over allowance b. under allowance c. no allowance d. small allowance

7. Under the installment sales method, an “over allowance” is

a. Treated as addition to the installment sales price when computing for the gross profit rate.
b. Treated as reduction to the installment sale price when computing for the gross profit rate.
c. Not accounted for
d. None of these

8. According to the cost recovery method of accounting, gross profit on an installment sale is
recognized as income:

a. After cash collections equal to the cost of sales have been received.
b. In proportion to the cash collections
c. On the date the final cash collection is received.
d. On the date of sale

9. 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

10. In general, revenue is recognized as earned when there is reasonable certainty as the collectibility of
the asset to be received and:
a. The sales price has been collected. C. The earnings process is virtually complete.
b. The production is complete. D. a purchase order has been received.

11. Cash collection is a critical event for income recognition

in the Cost recovery Installment
method method
a. No No
b. Yes Yes
c. No Yes
d. Yes No

12. When assets that have been sold and accounted for by the installment 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 minus normal profit.

13. 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 collected

14. I. Installment contracts receivable qualifies for inclusion under the current assets or noncurrent assets
depending on the length of time required for its collection.
II. Estimated cost to complete includes pre-contract costs and costs incurred after contract acceptance.
a. I is True, II is False
b. I is False, II is True
c. I is True, II is True
d. I is False, II is False

15. Which of the following recognition of income and expense accounts related to installment sales is incorrect?
 A. If the collection of the installment receivable is not reasonably assured, gross profit of installment sales is
recognized proportionately on the basis of collection.
B. If the long-term installment receivable is non-interest bearing, interest revenue shall be recognized based on
passage of time using the effective method.
C. The cost of installment sales shall be recognized proportionately throughout the term of the installment
contract based on the proportion of collection.
D. Loss on repossession shall be recognized on the date of default of collection of installments due and
repossession of the item sold computed as the difference between the fair value of repossessed item and
the unrecovered cost of the installment receivable.

16. 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 profits 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

17. Under the cost recovery method of revenue recognition,

a. Income is recognized on a proportionate basis as 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.

18. Chris Co. sells equipment on installment contracts. Which of the following statements best justifies Chris’
use of the cost recovery method of revenue recognition to account for these installment sales?
a. The sales contract provides that title to the equipment passes to the buyer only when all
payments have been made.
b. No cash payments are due until one year from the date of sale.
c. Sales are subject to a high rate of return.
d. There is no reasonable basis for estimating collectability.

19. Winner Co. is engaged in extensive exploration for water in Utah. If, upon discovery of water, Winner
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
b. Cash (or collection) basis
c. Sales (or accrual) basis
d. Cost recovery basis

20. 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.

21. BUCOLIC RURAL Co. uses the installment method. Information on BUCOLIC’s
transactions during 20x1 and 20x2 is shown below:

20x1 20x2
Installment sales 2,000,000 2,400,000
Cost of sales 1,200,000 1,320,000
Gross profit 800,000 1,080,000
 Cash collections from:
20x1 sales 800,000 400,000
20x2 sales 960,000

How much is the total realized gross profit in 20x2?

a. 160,000 b. 432,000 c. 592,000 d.642,000 e. none

Solution:
20x1 20x2 Total
Collection 400,000 960,000
GPR X 40% X 45%
RGP 160,000 432,000 592,000

Use the following information for the next three questions:

INNOCUOUS HARMLESS Co. uses the installment method. On January 1, 20x3,
INNOCUOUS Co.’s records show the following balances:

Installment receivable - 20x1 800,000

Installment receivable - 20x2 2,400,000
Deferred gross profit - 20x1 176,000
Deferred gross profit - 20x2 576,000

On December 31, 20x3, INNOCUOUS Co.’s records show the following balances before
adjustments for realized gross profit:
Installment receivable - 20x1 -
Installment receivable - 20x2 960,000
Installment receivable - 20x3 2,400,000
Deferred gross profit - 20x1 176,000
Deferred gross profit - 20x2 576,000
Deferred gross profit - 20x3 1,500,000

Installment sales in 20x3 were made at 331/3 above cost.

22. How much is the installment sale in 20x3?

a. 4,836,000 b. 5,800,000
c. 6,000,000 d. 7,200,000 e. none

solution:
AMOUNT % SOLUTION
SALES 6,000,000 133 1/3% 4,500,000 X 133 1/3%
COST 4,500,000 100% 1,500,000/33 1/3 %
GP 1,500,000 33 1/3 %

23. How much is the total cash collections in 20x3?

a. 5,840,000 b. 1,440,000
C. 3,600,000 d. 5,640,000 e. none
 20X1 20X2 20X3 TOTAL
SOLUTION 2,400,000 – 6,000,000 –
960,000 2,400,000
COLLECTIO 800,000 1,440,000 3,600,000 5,840,
N 000
 24. How much is the total realized gross profit in 20x3?
a. 984,600 b. 1,241,200 c. 1,520,000 d. 1,421,600 e. none
SOLUTION:
20X1 20X2 20X3 TOTAL
COLLECTION 800,000 1,440,000 3,600,000
X GPR BASED ON SALES 22% 24% 25%
GPR 176,000 345,600 900,000 1,421,600

25. DEMOTIC POPULAR Co. uses the installment method. The following information was taken
from the incomplete records of DEMOTIC Co.:

20x1 20x2 20x3

Installment sales 4,000,000 4,800,000 ?

Cost OF sales ? ? ?
Gross profit ? ? ?
Gross profit rates ? ? 25%
Collections:
from 20x1 sales 2,000,000 1,200,000 800,000
from 20x2 sales 2,400,000 1,440,000
from 20x3 sales 3,600,000
Realized gross profit 440,000 ? 1,421,600

How much is the cost of sales in 20x2?

a. 2,840,000 b. 3,248,000 c. 3,648,000 d. 3,946,000 e. none

SOLUTION:
20X1 GPR = 440,000/2,000,000 = 22%
20X3 RGP 20X1 20X2 20X3 TOTAL
COLLECTION 800,000 1,440,000 3,600,000
GPR 22% ? 25%
RGP 176,000 ? 900,000 1,421,600
20X2 RGP IN 20X3 = 1,421,600 – 900,000 – 176,000 = 345,600
20X2 GPR = 345,600 / 1,440,000 = 24%
20X2 COS = 4,800,000 X (1-24%) = 3,648,000

Use the following information for the next three questions:

THRALL SLAVE Co. uses the installment method. Information on installment sales in 20x1 and 20x2
is shown below:

20x1 20x2
Sales 400,000 640,000
Cost of sales 320,000 448,000
Gross profit rate 20% 30%
Installment receivable - 20x1 180,000 60,000
Installment receivable - 20x2 288,000

During 20x2, THRALL Co. repossessed a property which was sold in 20x1 for ₱40,000. Prior to
repossession, ₱10,000 were collected from the buyer. The estimated resale price of the
repossessed property was ₱34,000 after reconditioning costs of ₱6,000.

26. How much is the gain or loss on repossession?

a. 17,800 b. 6,200 c. 12,800 d. 5,400 e. none
SOLUTION:
FV OF REPOSSESED B4 RECON (34,000 – 6,000 – (34,000 * 30%) 17,800
UNRECOVERED COST ( 30,000 * 80%) 24,000
 LOSS 6,200

27. How much is the total realized gross profit in 20x2?

a. 123,600 b. 352,000 c. 117,400 d. 90,000 e. none

SOLUTION:
20X1 20X2 TOTAL
SOLUTION 180,000 – 60,000 – 30,000 640,000 – 288,-000
COLLECTION 90,000 352,000
GPR 20% 30%
RGP 18,000 105,600 123,600

28. How much is the profit recognized in 20x2?

a. 123,600 b. 352,000 c. 117,400 d. 90,000 e. none

Use the following information for the next three questions:

PP and Co., which began business on Jan. 1, 2021 uses installment sales method. The following data are available for
2021:
Cash collections during the year P150,000.00
Deferred gross profit, (after adjustment) P140,000.00
Gross profit rate based on sales 40%

29. How much is the ending balance of installment receivable as of December 21, 2021?
a. 200,000 b. 350,000 c. 500,000 d. none

SOLUTION:
140,000 / 40% = 350,000

30. How much is the installments sales for the year 2021?
a. 200,000 b. 350,000 c. 500,000 d. none

SOLUTION:
350,000 + 150,000 = 500,000

31. How much is total gross profit for this sale?

a. 80,000 b. 140,000 c. 200,000 d. 350,000 e. none

SOLUTION: 500,000 * 40% = 200,000

32. Western Appliance Company, began business on January 1, 2006, appropriately uses the installment sales
method of accounting. The following data are available for 2006:
Installment sales 350,000
Cash collections on installment sales 150,000
Gross profit on sales 40%
The gross profit on installment sales for 2006 should be:
a. Realized: P60,000; Deferred: P80,000 c. Realized: 140,000; deferred: 80,000
b. Realized: 80,000; deferred: 60,000 d. realized: 140,000; deferred: 60,000 e. none

SOLUTION:
RGP = 150,000 X 40% = 60,000
DGP = (350,000-150,000) X 40% = 80,000

33. The Pattison Company began operations on January 2, 2006, and appropriately uses the installment sales
method of accounting. The following data are available for 2006 and 2007:
2006 2007
Installment sales 600,000 750,000
Cash collections from:
2006 sales 200,000 250,000
2007 sales 300,000
Gross profit on sales 30% 40%
 The deferred gross profit that would appear in the 2007 balance sheet is:
a. 200,000 b. 180,000 c. 285,000 d. 225,000 e. none
SOLUTION:
2006 2007
ENDING AR 600,000 – 200,000 – 750,000 – 300,000 =
250,000 = 150,000 450,000
MULTIPLIED BY GPR 30% 40%
DGP, END 45,000 180,000 = 225,000

34. White Plains, Inc. sells residential lots on installment basis. The following data was taken from the accounting
records of the company as at December 31, 2013:

Installment accounts receivable, January 1 P755,000

Installment accounts receivable, December 31 840,000
Deferred gross profit, January 1 339,750
Installment sales 950,000

Complete (1) the realized gross profit on December 31, 2013 and (2) the balance of the Deferred Gross Profit
account on December 31, 2013.

a. (1) P389,250; and (2) P378,000 c. (1) 427,500; and (2) 389,250
b. (1) 330,750; and (2) 427,000 d. (1) 378,000; and (2) 339,750 e. none
SOLUTION:
RGP DGP
COLLECTION 950,000 + 755,000 – ENDING AR 840,000
840,000 = 865,000
GPR ( 339,750/755,000) 45% 45%
389,250 378,000

35. Sta. Lucia Realty Corporation sells residential subdivision lots on installment basis. The following data were
taken from the company’s accounting records as of December 31,2013. The company uses a uniform gross
profit rate:

Installment accounts receivable:

January 1,2013 P3,020,000
December 31,2013 3,360,000
Unrealized gross profit – January 1,2013 1,359,000
Installment sales – 2012 2,360,000
Installment sales - 2013 3,800,000
How much is the gross profit realized during the year 2013?
a. P1,557,000 b. P1,359,000
C.P1,513,000 d.P1,261,000 e. none

Solution:
Collection 3,020,000 + 3,800,000 – 3,360,000 = 3,460,000
GPR 1,359,000/3,020,000 = 45%
RGP 3,460,000 X 45% = 1,557,000

36. Four J Co. sold goods on installment. For the year just ended the following were reported:
Installment sales P3,000,000
Cost of installment sales 2,025,000
Collections on installment sales 1,800,000
Repossessed accounts 200,000
 Fair market value of repossessions 120,000
The gain(loss) on repossession is:
a. (P15,000) b. P15,000 c. (P80,000) d. P5,000 e. none

SOLUTION:

FAIR VALUE OF REP B4 RECON 120,000

UNRECOVERED COST 200,000 * 67.5% = 135,000
COST RATIO 2,025,000/3,000,000 = 67.5%
GAIN (LOSS) 120,000 – 135,000 = (15,000)

37. The Bengal Furniture Company appropriately used the installment sales method in accounting for the
following installment sale. During 2013 Bengal sold furniture to an individual of P6,000 at a gross profit of
P2,400. On June 1 2013, this installment account receivable had a balance of P4,400 and it was determined
that no further collections would be made. Bengal therefore repossessed the merchandise. When reacquired,
the merchandise was appraised as being worth only P2,000. In order to improve its salability, Bengal incurred
costs P200 for reconditioning. What should be the loss on repossessions attributable to this merchandise?
a. P440 b. P640 c. P1,760 d. P2,200 e. none
SOLUTION:
FAIR VALUE OF REP. B4 RECON 2,000
UNRECOVERED COST 4,400 X 60% = 2,640
COST RATIO (6,000 – 2,400) / 6,000 = 60%
GAIN (LOSS) 2,000 – 2,640 = (640)

38. Presented below is the unadjusted trial balance, as of December 31,2013 of Moslim Products Corporation:
Cash P5,000
Installment Accounts Receivable - 2012 40,000
Installment Accounts Receivable - 2013 140,000
Inventory, December 31,2013 200,000
Other Assets 497,000
Trade Accounts Payable P50,000
Unrealized Gross Profit - 2011 10,000
Unrealized Gross Profit – 2012 86,000
Unrealized Gross Profit – 2013 100,000
Capital stock 600,000
Retained Earnings 80,000
Repossession Gain 6,000
Operating expenses 50,000
P932,000 P932,000
The cost of goods sold had been uniform over the years at 60% of sales, and the company adopts perpetual
inventory procedures. On the installment sales, the company charges installment accounts receivable and
credits inventory and unrealized gross profit accounts.
Repossessions of merchandise have been made during 2013 due to some customers’ failure to pay
maturing installments. The analysis of these transactions has been summarized as follows:
Inventory P7,500
Unrealized gross profit - 2011 800
Unrealized gross profit – 2012 2,400
Installment accounts receivable - 2011 2,000
Installment accounts receivable – 2012 6,000
Repossession gain 2,700
The repossessed merchandise was unsold at December 31,2013 and it was ascertained that these were
booked, upon repossession, at their original cost. A fair valuation would be a sales price of P10,000 after
reconditioning cost of P1,000 and a normal gross profit.
The realized gross profit from 2013 sales and the gain (loss) on repossession on December 31,2013 are:
a. P44,000 and (P200) b. P44,000 and P200 c. P56,000 and P300 e. P56,000 and P200 e. None
SOLUTION:
2013 installment sales 100,000 / 40% = 250,000
 Collection 250,000 – 140,000 = 110,000
RGP 2013 SALES 110,000 X 40% = 44,000
FAIR VALUE OF REP B4 REC 10,000 – 1,000 (10,000*40%) = 5,000
UNRECOVERED COST 8,000 * 60% = 4,800
GAIN (LOSS) 5,000 – 4,800 = 200

39. On January 2, 2020, Colt Co. sold land that cost P1,200,000 for P1,600,000, receiving a note bearing interest at
10%. The note will be paid in annual installments of P643,400 starting on December 31, 2020. Because
collection of the note is very uncertain, Colt will use the cost recovery method. How much revenue from this
sale should Colt recognize in 2020?
a. 0 b. 1,200 c. 16,000 d. 40,000 e. None

40. Dolce Co., which began operations on January 1, 2019, appropriately uses the installment method of
accounting to record revenues. The following information is available for the years ended December 31, 2019
and 2020:

2019 2020
Sales 1,000,000 2,000,000
Gross profit realized on sales made in:
2019 150,000 90,000
2020 200,000
Gross profit percentage 30% 40%

What amount of installment accounts receivable should Dolce report in its December 31, 2020, balance sheet?
a. 1,225,000 b. 1,300,000 c. 1,700,000 d. 1,775,000 e. none

SOLUTION:
2019 2020 TOTAL
SALES 1,000,000 2,000,0000
LESS: COLLECTION (150,000+90,000)/30% = 200,000/ 40% = 500,000
800,000
ENDING AR 200,000 1,500,000 1,700,000