BA 118.

2
Assignment 2: Revenue Recognition
1. Tanner Furniture Company
Tanner Furniture Company concluded its first year of operations in which it made sales of
P1,500,000, all on installment. Collections during the year from down payments and
installments totaled P600,000. Purchases for the year totaled P900,000; the cost of
merchandise on hand at the end of the year was P180,000.
Instructions
Using the installment-sales method, make summary entries to record:
(a) the installment sales and cash collections;
(b) the cost of installment sales;
(c) the deferred gross profit;
(d) the realized gross profit.
Determine the year-end balances of Installment Receivable and Deferred Gross Profit.
2. Abbott Corporation
The Abbott Corporation sells merchandise on the installment basis, and the uncertainties of
cash collection make the use of the installment sales method of accounting acceptable. The
following data relate to two years of operations.
Installment sales
Cost of installment sales
Cash collections:
2005 Sales
2006 Sales

2005
P480,000
300,000

2006
P560,000
364,000

P190,000

P210,000
235,000

3. Farris Company
Farris Company sells office equipment. On January 1, 2004, Farris entered into an
installment sale contract with Miller Company for a six-year period expiring January 1, 2010.
Equal annual payments under the installment sale are P624,000 and are due on January 1.
The first payment was made on January 1, 2004.
The cash selling price of the equipment is P3,056,000.
The cost of sales relating to the equipment is P2,550,000.
Instructions
(a) Prepare all necessary journal entries over the six year installment periods.
(b) Determine the year-end balances of Installment Receivable, Unearned Interest Income
and Deferred Gross Profit.
(c) Determine the Realized Gross Profit every year from 2004 2010.
4. Tappan Industrial
Tappan Industrial sells machinery on the installment plan. On September 1, 2005, Tappan
entered into an installment sale contract with Western Productions for a six-year period.
Equal annual payments under the installment sale are P187,500 and are due on August 31
of each year beginning in 2006.

Additional information:
(a)
(b)

The cost of the machinery sold to Western was P637,500.

The implicit interest rate on the installment sale is 10%.

Compute the income or loss before taxes that Tappan should record for the year ended
December 31, 2005, as a result of the above transaction, assuming that circumstances are
such that the collection of the installments due under the contract
(1)
(2)

is reasonably assured.
cannot be reasonably assured.

5. Installment sales with Repossession

Carlin Co. had installment sales of $1,200,000 and cost of installment sales of $720,000 in
2004. A 2004 sale resulted in a default in 2006, at which time the balance of the installment
receivable was $15,000. The repossessed merchandise had a fair value of $5,500.
Instructions
(a) Calculate the rate of gross profit on 2004 installment sales.
(b) Make the entry to record the repossession.
6. Franchises.
Pizza Inn charges an initial fee of $600,000 for a franchise, with $120,000 paid when the
agreement is signed and the balance in four annual payments. The present value of the
annual payments, discounted at 10%, is $380,400. The franchisee has the right to purchase
$90,000 of kitchen equipment and supplies for $75,000. An additional part of the initial fee is
for advertising to be provided by Pizza Inn during the next five years. The value of the
advertising is $750 a month. Collectibility of the payments is reasonably assured and Pizza
Inn has performed all the initial services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good
form.
7. Franchises.
Ajax Dry Cleaners, Inc. charges an initial franchise fee of $195,000. When the agreement is
signed, a payment of $75,000 is due, followed by four annual payments of $30,000 at the
end of each period. Ajax's normal borrowing rate is 12%. Prepare the entries to record the
initial franchise fee on the books of Ajax under each of the following circumstances.
(1)
(2)
(3)

The franchiser has substantial services to perform and the collection of the
note is extremely uncertain.
The down payment is nonrefundable, collection of the note is reasonably
assured, and the franchiser has performed substantially all of the services
required by the initial fee.
The down payment is nonrefundable, collection of the note is reasonably
assured, the franchiser has performed services equivalent to the down
payment, but substantial services remain to be performed.