INSTALLMENT SALES PROBLEMS AND EXERCISES

1. Using the cost-recovery method of revenue recognition, profit on an installment sale is recognized
a. On the date of the installment sale.
b. In proportion to the cash collections.
c. After cash collections equal to the cost of goods sold have been received.
d. On the date the final cash collection is received
Answer: C
 Under the cost-recovery method, no revenue is recognized until cash payments by the

buyer exceed the seller's cost of the merchandise sold. This method is appropriate when
collection of the revenue is very uncertain.

2. 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
3. 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.

4. Wren Co. sells equipment on installment contracts. Which of the following statements best
justifies Wren’s 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 purchaser 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 collectibility.
5. A sells on the installment basis, with service contracts paid in full at the date of sale. The
collections from service contracts should be recorded as an increase in:
a. Deferred revenue account
b. Sales receivable valuation account
c. Valuation account of stockholders’ equity
d. Service revenue account

6. According to the cost recovery of accounting, the gross profit on installment sale is
recognize in
income:
a. After cash collections equal to the cost of sales are received.
b. In proportion to cash collections.
c. On the date of final cash collection is received.
d. On the date of sale.
7. Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in
24 equal monthly amounts, which include 12% interest. What is the balance of an installment note
receivable 6 months after the sales?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.

8. On January 2, 2020, Harvey Co. sold a plant to Julia, Inc. for P1.5 million. On that date, the plant’s
carrying cost was P1 million. Julia gave Harvey P300,000 cash and a P1.2 million note, payable in four
annual installments of P300,000 plus 12% interest. Ivory made the first principal and interest payment of
P444,000 on December 31, 2020. Harvey uses the installment method of revenue recognition. In its 2020
income statement, what amount of realized gross profit should Harvey report?
a. P344,000
b. P200,000
c. P148,000
d. P100,000

300k +300k= 600k x .333333= 200,000

9. Dolphy 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 P 1,000,000 P 2,000,000
Gross profit realized on
Sales made in:
2019 150,000 90,000
2020 - 200,000
Gross profit percentages 30% 40%

What amount of installment accounts receivable should Dolphy report in its December 31, 2020,
balance sheet?
a. P1,100,000
b. P1,300,000
c. P1,700,000
d. P1,900,000

2019 1000000 x 30%= 300,000 – 240,000= 60,000/ .30= 200,000

2020 2000000x 40%= 800,000- 200000= 600,000/.40= 1,500,000
Total 1,700,000
10. London Co., which began operations on January 2, 2020, appropriately uses the installment sales
method of accounting. The following information is available for 2020:

Installment accounts receivable,

December 31, 2020 P 800,000
Deferred gross profit, December 31,
2020 (before recognition of realized
gross profit for 2020) 560,000
Gross profit on sales 40%

For the year ended December 31, 2020, cash collections and realized gross profit on sales should be

Cash collections Realized gross profit

a. P 480,000 P 320,000
b. P 480,000 P 240,000
c. P 600,000 P 320,000
d. P 600,000 P 240,000

DGP 560,000
Divide GP rate 40%
Installment Sales 1,400,000
- Inst/Rec dec 31 800,000
Collections 600,000
X GP rate 40%
RGP 240,000
11. The Brownlee Inc. began operating at the beginning of the calendar year 2020
and, using the installment method of accounting, presented the following data for the
first year:

Installment sales P400,000

Gross margin based on cost 66- 2/3 %
Inventory, Dec. 31, 2020 P 80,000
General and administrative expenses 40,000
Inst Accts receivable, Dec. 31, 2020 320,000

The balance of the deferred gross profit account should be:

a. P192,000
b. P128,000
c. P 96,000
d. P 80,000

GP rate(sales)= 66-2/3% / 166-2/3%= 40% x 320,000= 128,000.

Questions 12 and 13 are based on the following information.

The Central Plains Subdivision sells residential subdivision lots on installment basis. The following
information was taken from the company’s records as at December 31, 2020:

Installment Account Receivable:

January 1, 2020 P755,000
December 31, 2020 840,000
Unrealized Gross Profit, January 1, 2020 339,750
Installment sales 950,000

12. How much gross profit was realized in 2020?

a. P427,500
b. P339,750
c. P378,000
d. P389,250

Installment Account Receivable beg P755,000

Add Installment sales 2020 950,000
Less Installment Account Receivable end - 840,000
Collections 2020 865,000
x GP rate 339750 / 755,000 45%
2020 RGP 389,250
Questions 12 and 13 are based on the following information.

The Central Plains Subdivision sells residential subdivision lots on installment basis. The following
information was taken from the company’s records as at December 31, 2020:

Installment Account Receivable:

January 1, 2020 P755,000
December 31, 2020 840,000
Unrealized Gross Profit, January 1, 2020 339,750
Installment sales 950,000

13. How much is the balance of Unrealized Gross Profit as at December 31, 2020?
a. P378,000
b. P339,750
c. P427,500
d. P389,250

DGP end= 840,000 x 45%= 378,000

14. Slaughter Enterprises uses the installment method of accounting and it has the
following data at the year-end:
Gross margin on cost 66-2/3%
Unrealized gross profit P192,000
Cash collections including down payments 360,000
What was the total amount of sales on installment basis?
a. P480,000
b. P552,000
c. P648,000
d. P840,000

Unrealized gross profit year end P192,000

GP rate(sales) 66-2/3% / 166-2/3% 40%
Inst Acct Rec, year end 480,000
Cash collections including down payments 360,000
Total Installment sales 840,000
Questions 15 and 16 are based on the following information:
15. From various documents and records which were recovered immediately after a fire gutted its
premises, Lamoyang Marketing Co. gathered the following information:

2019 2020 2021

Installment sales P500,000 P800,000 P (?)
Cost of installment sales P (?) 600,000 P (?)
Gross Profit P (?) P (?) P282,000
Collections on:
2019 inst. accounts 50,000 250,000 100,000
2020 inst accounts - 200,000 500,000
2021 inst. accounts - - 400,000
Realized gross profit 11,000 (?) 241,000

Based on the information given above, the total realized gross profit in 2020 was:
a. P 50,000
b. P105,000
c. P112,500
d. P200,000

2020 GP rate 800k- 600k /800k = 25% x 200k= 50,000

2019 GP rate 11k / 50k = 22% x 250k= 55,000
Total RGP 105,000
Questions 15 and 16 are based on the following information:
16. From various documents and records which were recovered immediately after a fire gutted its premises, Lamoyang Marketing Co.
gathered the following information:

2019 2020 2021

Installment sales P500,000 P800,000 P (?)
Cost of installment sales P (?) 600,000 P (?)
Gross Profit P (?) P (?) P282,000
Collections on:
2019 inst. accounts 50,000 250,000 100,000
2020 inst accounts - 200,000 500,000
2021 inst. accounts - - 400,000
Realized gross profit 11,000 (?) 241,000
16. The cost of installment sales for the year 2021 was:
a. P900,000
b. P918,000
c. P932,000
d. P940,000
Total RGP in 2021 241,000
Less 2020 GP rate 800k- 600k /800k = 25% x 500k= - 125,000
2019 GP rate 11k / 50k = 22% x 1000k= - 22,000
RGP for collections in 2021 accounts 94,000
Divide collection in 2021 400,000
GP rate in 2021 23.5%
 
2021 Installment sales (282,000 / 23.5%) 1,200,000
Less Gross profit 282,000
Cost of installment sales 918,000
17. On January 1, 2019, Blackwater Co. sold a used machine to Trooper, Inc. for P525,000. On this
date, the machine had a depreciated cost of P367,500. Trooper paid P75,000 cash on January 1, 2019
and signed a P450,000 note bearing interest at 10%. The note was payable in three annual
installments of P150,000 beginning January 1, 2020. Blackwater appropriately accounted for the sale
under the installment method. Trooper made a timely payment of the first installment on January 1,
2020 of P195,000, which included interest of P45,000 to date of payment. at December 31, 2020,
Blackwater has deferred gross profit of

a. P105,000
b. P 99,000
c. P 90,000
d. P 76,500

GP rate (525000-367500)= 157500/ 525000= 30%

30% x (150000 x 2) = 90,000
18. Holmes Corporation started operations on January 1, 2016 selling home appliances and furniture sets both for cash
and on installment basis. Data on the installment basis sales operations of the Company gathered for the years ending
December 31, 2016 and 2017 were as follows:
  2016 2017
Installment Sales 400,000 500,000
Cost of Installment Sales 240,000 350,000
Collections 210,000  
2016 Installment Sales   150,000

2017 Installment Sales   300,000

Additional information:
On January 5, 2018, an installment sales on 2016 was defaulted and the merchandise with an appraised value of ₱5,000
was repossessed. Related installment receivable balance on January 5, 2018 was ₱8,000.
Recording the repossessed merchandise at its appraised value, gain or loss on the repossession
should be:
a. No gain or loss
b. ₱200 gain
c. ₱1,800 gain
d. ₱3,000 loss
Answer: B
Appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₱5,000
Less: Unrecovered cost:
Unpaid balance – 2016 . . . . . . . . . . . . . . . . . ₱8,000
Less: Deferred gross profit – 2016
(8,000 x 160/400) . . . . . . . . . . . . . ₱3,200 ₱4,800
19. On January 1, 2018, Augustus Company sold land that cost ₱60,000 for ₱80,000, receiving a note bearing
interest at 10%. The note will be paid in three annual installments of ₱32,170 starting on December 31, 2018.
Because collection of the note is very uncertain, Colt will use the cost recovery method. How much revenue
(profit from sale and interest) from this sale should Colt recognize in 2018?

a. ₱0
b. ₱6,000
c. ₱8,000
d. ₱20,000

Answer: A
Under the cost recovery method, no income is recognized on a sale until the cost of
the item sold is recovered through cash receipts. All cash receipts, both interest and
principal portions are applied first to the cost of the items sold. Then, all subsequent
receipts are reported as revenue. Because all costs have been recovered, the
recognized revenue after the cost recovery represents income (interest and realized
gross profit). This method is used only when the circumstances surrounding a sale are
so uncertain that earlier recognition is impossible.
20. Zero, Inc. was involved in two default and repossession cases during the year:

I. A refrigerator was sold to Sweet Sixteen for P 18,000, including a 35% mark up on selling price. Sweet made a down payment of
20%, four of the remaining 16 equal payments, and then defaulted on further payments. The refrigerator was repossessed, at which
time the fair value was determined to be P 6,000.

II. An oven that cost P 12,000 was sold to Teen Eighteen for P 16,000 on the installment basis. Teen made a down payment of P 2,400
and paid P 800 a month for six months, after which he defaulted. The oven was repossessed and the estimated value at the time of
repossession was determined to be P 7,500.
What is the gain or loss on repossession that Zero, Inc. must report for financial reporting
purposes?
a. P1,100 loss
b. P1,020 loss
c. P 900 gain
d. P 120 loss

Answer: B
In Case A, the loss on repossession is computed as follows:
Fair value of repossessed merchandise P 6,000
Less: Unrecovered cost
(P18,000 - 3,600 - (900* x 4)) x 65% 7,020
Loss on repossession P 1,020
*Remaining equal payments (P18,000 x 80%) / 16 = P900
In Case B, there is a gain on repossession of P900. It is not reported in the financial
statements as the repossessed merchandise should be carried at the lower of cost or
net realizable value.