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Installment Method
Under this method, income is recognized only when collections are made. Problems requiring
the use of the installment method of recognizing income have appeared quite regularly in the
CPA exam. The following are the typical problems often encountered in the CPA exam:
To compute the realized gross profit in proportion to the collections made, it is necessary to
determine the gross profit rate for each year’s operations. The following are the formulas in
computing gross profit rate:
Gross Profit
Current year sales: Gross Profit Rate =
Installment Sales
Once the gross profit rates are known, it is possible to compute the realized gross profit based
on cash collections. The formula to be used is:
Realized Gross Profit = Collections (excluding interest) x Gross Profit Rate (based on sale)
Missing Factors. In as much as the realized gross profit under the installment method depends
upon cash collections of receivables, it is important that the amounts collected must be known.
However, in some problems, the collections are not specifically stated. Such collections must be
reconstructed from related information available from the data given. The candidate should
remember the following format in computing the collections:
Current Prior
Year Year
Sales Sales
Installment accounts receivable – beginning xx xx
Installment accounts receivable – end (xx) (xx)
Total credits xx xx
Credit for repossessions (unpaid balance) (xx) (xx)
Credit for installment A/C written off (xx) (xx)
Credit representing collections xx xx
Computation of Deferred Gross Profit, End
To compute the balance of Deferred Gross profit at the end of the year, the following formula
may be used:
If a customer does not make an installment payment at the specified time, it is necessary to
repossess the merchandise in order for the seller to minimize his loss.
This type of installment sales used by car dealers, whereby an old car is received as down
payment from the buyer for sale of the new car. Usually the old car traded-in is overvalued to
induce the trade-in. for problem solving purposes the overvaluation is computed using a
formula below:
a. P720,000 b. 520,000
c. 460,000 d. 280,000
2. Roco Corp., which began business on January 1, 2013, appropriately uses the
installment sales method of accounting for income tax reporting purposes. The
following data are available for 2013:
Under the installment method, what would be Roco’s deferred gross profit at December
31, 2013?
a. P20,000 b. 90,000
c. 80,000 d. 60,000
3. Gray Co., which began operations on January 1, 2013, appropriately uses the installment
method of accounting. The following information pertains to Gray operations for the
2013:
a. P250,000 b. 200,000
c. 160,000 d. 75,000
4. Filstate Co. is a real estate developer that began operations on January 2, 2013. Filstate
appropriately uses the installment method of revenue recognition. Filstate sales are
made on the basis of a 10% downpayment, with the balance payable over 30 years.
Filstate gross profit percentage is 40%. Relevant information for Filstate first year of
operations is as follows:
Sales P16,000,000
Cash collections 2,020,000
The realized gross profit and deferred gross profit at December 31, 2013 are:
5. Long Co., which began operations on January 1, 2013, appropriately uses the installment
method of accounting. The following information pertains to Long’s operations for the
year 2013:
a. P400,000 b. 200,000
c. 300,000 d. 100,000
6. Kiko Co. began operations on January 1, 2013 and appropriately uses the installment
method of accounting. The following information pertains to Kiko’s operations for 2013:
7. Tayag Corp., which began operations in 2013, accounts for revenues using the
installment method. Tayag’s sales and collections for the year were P60,000 and
P35,000, respectively. Uncollectible accounts receivable of P5,000 were written off
during 2013. Tayag’s gross profit rate is 30%. On December 31, 2013, what amount
should Tayag report as deferred revenue?
a. P10,500 b. 9,000
c. 7,500 d. 6,000
8. Laya Corp., which began operations on January 2, 2013, appropriately uses the
installment sales method of accounting. The following information is available for 2013:
a. P320,000 b. 340,000
c. 320,000 d. 240,000
9. Dulce Co., which began operations on January 1, 2012, appropriately uses the
installment method of accounting to record revenues. The following information is
available for the years ended December 31, 2012 and 2013:
2012 2013
Installment sales P1,000,000 P1,800,000
Gross profit realized on sales made in:
2012 150,000 90,000
2013 - 200,000
Gross profit percentages 30% 40%
What amount of installment accounts receivable should Dulce report in its December 31,
2013, statement of financial position?
a. P1,225,000 b. 1,300,000
c. 1,700,000 d. 1,775,000
10. On January 2, 2012, Black Co. sold a used machine to White, Inc. for P900,000, resulting
in a gain of P270,000. On that date, White paid P150,000 cash and signed a P750,000
note bearing interest at 10%. The note was payable in three annual installments of
P250,000 beginning January 2, 2013. Black appropriately accounted for the sale under
the installment method. White made a timely payment of the first installment on
January 2, 2013, of P325,000, which included accrued interest of P75,000. What amount
of deferred gross profit should Black report at December 31, 2013?
a. P150,000 b. 172,500
c. 180,000 d. 225,000
11. 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:
a. (1) P389,250; and (2) P378,000 b. (1) 427,500; and (2) 389,250
c. (1) 330,750; and (2) 427,000 d. (1) 378,000; and (2) 339,750
12. In August, 2012, Mega World Inc. sold condominium units costing P1,440,000 for
P2,400,000 receiving P350,000 cash and a mortgage note for the balance payable in
monthly installments. Installment received in 2010 reduced the principal of the note to
a balance of P2,000,000. The buyer defaulted on the note at the beginning of 2013, and
the property was repossessed. The property had a fair market value of P1,150,000 at
the time of repossession.
Compute the gain (loss) on repossession if (1) profit is recognized at the point of sale and
(2) gross profit is recognized in proportion to collections.
a. (1) P(850,000); and (2) P(50,000) b. (1) (850,000); and (2) (450,000)
c. (1) 850,000; and (2) (450,000) d. (1) (50,000); and (2) 50,000
13. Sarao Motors sells locally manufactured jeeps on installment basis. Data presented below
related to the company’s operations for the last three calendar years:
2013 2012 2011
cost of installment sales P8,765,625 P7,700,000 P4,950,000
Gross profit rates on sales 32% 30% 38%
a. (1) P3,044,250; and (2) P4,020,500 b. (1) 3,044,250; and (2) 4,125,000
c. (1) 3,733,750; and (2) 4,020,500 d. (1) 6,993,250; and (2) 4,020,500
14. Polo Company appropriately uses the installment sales method of recognizing revenue.
On December 31, 2013, the accounting records show unadjusted balances of the
following:
For the year ended December 31, 2013, compute (1) total realized gross profit and (2) the
total cash collections in 2013:
a. (1) P182,000; and (2) P135,400 b. (1) 76,000; and (2) 233,000
c. (1) 158,000; and (2) 368,400 d. (1) 106,000; and (2) 97,600
15. Bally Company, which began operations on January 2, 2013 appropriately, uses the
installment method of revenue recognition. The following data pertains to the
company’s operations for the 2013:
16. Nike Company, which began operations on January 5, 2012, appropriately uses the
installment method of revenue recognition. The following information pertains to the
company’s operations for 2012 and 2013:
What amount should Nike Company report as deferred gross profit in its December 31,
Sales
Collections from:
2012 sales 100,000 50,000
2013 sales -0- 150,000
Accounts written off from
2012 sales 25,000 75,000
2013 sales -0- 150,000
Gross profit rates 30% 40%
2012 2013
P300,000 P450,000
2013 statement of financial position?
a. P75,000 b. 80,000
c. 112,000 d. 125,000
17. The following accounts appeared in the accounting records of Adidas Sales Company as
of December 31, 2013:
Installment accounts receivable – 2012 P15,000 Repossessions P3,000
Installment accounts receivable – 2013 200,000 Installment sales 425,000
Inventory, December 31, 2012 70,000 Regular sales 385,000
Purchases 555,000 Deferred gross profit - 2012 54,000
Additional information:
Compute (1) the total realized gross profit for 2013 and the (2) loss on repossession:
a. (1) P129,510; and (2) P960 b.(1) 129,510; and (2) 1,464
c. (1) 245,000; and (2) 960 d. (1) 85,500; and (2) 1,464
18. Mango Company, which sells appliances started operations on January 10,2013
operates on a calendar year basis, and uses the installment method of revenue
recognition. The following data were taken from the 2010 and 2011 accounting records:
2012 2013
Installment sales P480,000 P620,000 Gross profit rates based on cost 25% 20% Cash
collection on 2012 sales 130,000 240,000 Cash collection on 2013 sales 160,000
What is the amount of realized gross profit to be recognized on December 31,2013? a.
P124,500
b. P100,000
c. P92,000 d. P74,667
19. Lacoste Corporation has been using the cash method of revenue recognition. All sales
are made on account with notes receivable given by the customers. The income
statement for 2013 presented the following data:
Revenues – collection on principal P32,000
Revenues – interes 3,600
Cost of goods purchases (includes 45,200
inventory of goods on hand P2,000)
The balances due on the notes on December 31 were as follows:
Notes receivable P62,000
Unearned interest income 7,167
Assuming the use of the installment method of revenue recognition, what is the realized
gross profit on December 31,2013? a. P16,080
b. P25,586
c. P18,060 d. P43,633
20. 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: