Chapter 10 - Installment Sales Method (Problem 3: Computational)

1) B. 80,000 ; 120,000
Inst. receivable - 20x1
1/1/x1 -
Sales 1,000,000 400,000 Collections
600,000 12/31/20x1

Collections 400,000
Gross profit rate based on sales 20%
Realized Gross Profit 80,000

Gross profit rate based on sales is computed as follows:

Installment sales 1,000,000
Cost of sales (800,000)
Gross profit 200,000
Gross profit rate based on sales (200K/1M) 20%

Installment accounts receivable - Jan. 1, 20x1 600,000

Multiply by: Gross profit rate based on sales 20%
Deferred gross profit - Dec. 31, 20x1 120,000

2) C. 600,000
Inst. receivable - 20x1
beg. -
Sales 1,000,000 400,000 Collection
600,000 end.

Installment Sales is computed as follows:

Deferred gross profit - unadjusted (1M - 800K) 200,000
Realized gross profit - 20x1 20%
Deferred gross profit - Dec. 31, 20x1 1,000,000

3) C. 200,000
Inst. receivable - 20x1
beg. -
Sales 1,000,000 200,000 Collection
800,000 end.

Deferred gross profit, end. 200,000

Divided by: Gross profit rate 25%
Receivable, end. 800,000

4) D. 50,000
Sales 1,000,000
Cost of sales (750,000)
Deferred gross profit - unadjusted 250,000
Deferred gross profit, end. (200,000)
Realized gross profit 50,000

5) D. 30,000
Sales 1,000,000
Cost of sales (750,000)
Deferred gross profit - unadjusted 250,000
Realized gross profit (220,000)
Deferred gross profit, end. 30,000

6) A. 280,000
Sales 1,000,000
Cost of sales (750,000)
Deferred gross profit - unadjusted 250,000
Realized gross profit (180,000)
Deferred gross profit, end. 70,000

Deferred gross profit, end. 70,000

Divided by: Gross profit rate 25%
Ending receivable 280,000

7) B. 640,000
Realized gross profit 160,000
Divided by: Gross profit rate 25%
Total collections 640,000

8) B. 560,000
Deferred gross profit, beg. 200,000
Less: Deferred gross profit, end. 60,000
Realized 140,000
Divided by: Gross profit rate 25%
Total collections 560,000

9) B. 10,250
20x1 installment accounts 16,250
Multiply by: 20x1 GPR based on sales 30% */ 130%
DGP from 20x1 sales (adjusted balance) 3,750

20x2 installment accounts 90,000

Multiply by: 20x2 GPR based on sales 33 1/3% */ 133 1/3%
DGP from 20x2 sales (adjusted balance) 22,500

Deferred gross profit (before adjustment) 38,000

DGP from 20x1 sales (adjusted balance) (3,750)
DGP from 20x2 sales (adjusted balance) (22,500)
Realized gross profit - 20x2 11,750
Expenses relating to installment sales - 20x2 (1,500)
20x2 profit from installment sales 10,250

10) A. 277,500
20x1 20x2 20x3
Installment sales 300,000 375,000 360,000
Cost of sales 225,000 285,000 252,000
Gross profit 75,000 90,000 108,000
GPR based on sales 25% 24% 30%

20x1 Deferred gross profit, Dec. 31, 20x3 -

Divided by: Gross profit rate 25%
20x1 installment receivable, Dec. 31, 20x3 -
20x2 Deferred gross profit, Dec. 31, 20x3 9,000
Divided by: Gross profit rate 24%
20x2 installment receivable, Dec. 31, 20x3 37,500
20x3 Deferred gross profit, Dec. 31, 20x3 72,000
Divided by: Gross profit rate 30%
20x3 installment receivable, Dec. 31, 20x3 240,000
Total installment receivable, Dec 31. 20x3 (37,500+240,000) 277,500

11) C. 367,500
20x1 Deferred gross profit, Dec. 31, 20x2 15,000
Divide by: Gross profit rate 25%
20x1 installment accounts receivable, Dec. 31, 20x2 60,000
20x1 installment accounts receivable, Dec. 31, 20x3 -
Collection in 20x3 from 20x1 sales 60,000
20x2 Deferred gross profit, Dec. 31, 20x2 54,000
Divide by: Gross profit rate 24%
20x2 installment accounts receivable, Dec. 31, 20x2 225,000
20x2 installment accounts receivable, Dec. 31, 20x3 37,500
Collection in 20x3 from 20x2 sales 187,500
Installment sales - 20x3 360,000
20x3 installment accounts receivable, Dec. 31, 20x3 240,000
Collection in 20x3 from 20x3 sales 120,000
Total collections in 20x3 (60K + 187,500 + 120K) 367,500

12) D. 96,000
Collection in 20x3 from 20x1 sales 60,000
Multiply by: Gross profit rate - 20x1 sales 25%
Realized gross profit in 20x3 from 20x1 sales 15,000
Collection in 20x3 from 20x2 sales 187,500
Multiply by: Gross profit rate - 20x2 sales 24%
Realized gross profit in 20x3 from 20x2 sales 45,000
Collection in 20x3 from 20x2 sales 120,000
Multiply by: Gross profit rate - 20x3 sales 30%
Realized gross profit in 20x3 from 20x3 sales 36,000
Total realized gross profit in 20x3 (15K + 45K + 36K) 96,000

13) C. 6,764
Date Collection Interest Amortization
9/30/20x1
9/30/20x1 4,800 - 4,800
10/31/20x1 4,800 432 4,368
11/30/20x1 4,800 388 4,412
12/31/20x1 4,800 344 4,456
Totals 19,200 1,165 18,036

18,036 x 37.50% = 6,764

37.50% is computed as follows:

(48,000 - 30,000) / 48,000 = 37.50%

14) A. 1,927
Inventory 16,800
Deferred gross profit (29,964 x 37.5%) 11,237
Loss on repossession 1,972
Receivable 29,964

15) D. 94,500

Inst. Receivable - 20x1

1/1/20x3 135,000 22,500 Write - off
52,500 Collections
60,000 12/31/20x3

Inst. Receivable - 20x2

1/1/20x3 300,000
105,000 Collections
195,000 12/31/20x3

Inst. Receivable - 20x2

Sales 300,000 105,000 Collections

390,000 12/31/20x3

Collections in 20x3 from:

20x1 sales (52,500 x 30%) 15,750
20x2 sales (105,000 x 40%) 42,000
20x2 sales (105,000 x 35%) 36,750
Total realized gross profit 94,500
16) C. (750)
20x3 Inventory
Deferred gross profit (22,500 x 30%)
Loss on reposession (squeeze)
Installment account receivable

17) C. credit to "under allowance" of 4,000

Inventory - traded -in 12,000
Installment account receivable (squeeze) 24,000
Installment sale 32,000
Under allowance 4,000
(8K Trade in value < 12K Fair value )

18) C. 10,667
Fair value of old merchandise traded-in 12,000
Collections 12,000
Total 24,000
Multiply by: Gross profit rate 44.44%
Realized gross profit in year of sale 10,667

Gross profit rase is computed as follows:

Sale price 32,000
Add: Under allowance 4,000
Adjusted sale price 36,000
Cost of sale price (20,000)
Adjusted gross profit 16,000
Adjusted gross profit rate (16K/36K) 44.44%

19) D. 0
Cash down payment 600,000
Collection from installment payment (600K + 540K) 1,140,000
Total collections 1,740,000
Cost of sale (4,000,000)
Excess collection over cost -

Explanation:
Sound Co. does not yet recognize any income because the
total collections do not yet exceed the cost of the inventory sold.

20) C. 10,000
Total collections from 20x1 sales (14K + 6K) 20,000
Cost of 20x1 sales (16,000)
Excess collection in 20x2 4,000
Total collections from 20x2 sales 24,000
Cost of 20x2 sales (18,000)
Excess collection in 20x2 6,000
Gross profit recognized in 20x2 (4K + 6K) 10,000
Principal
48,000
43,200
38,832
34,420
29,964
15,000
6,750
750
22,500