Installment Sales (1) aDVAC

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Chapter # 7

Installment Sales

Sameer Hussain

www.a4accounting.weebly.com



Installment Sales

Chapter # 7

Page 104 Sameer Hussain www.a4accounting.weebly.com

SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:

Accounting for installment sales under Perpetual Inventory System.

Defaults and repossessions.

Recognition of realized gross profit. Reporting of relevant accounts on Financial Statement.

WHAT THE EXAMINER USUALLY ASK?

Computation of:

o Installment sales.

o Cost of installment sales.

o Unrealized gross profit (D.G.P.).

o Unrealized gross profit rate (D.G.P. %).

o

Cash collection.o Realized gross profit (R.G.P.).

o Gain or loss on repossession.

o Loss on default.

General Journal entries under Perpetual Inventory System.

Adjusting and closing entries under Perpetual Inventory System.

Income Statement.

Balance Sheet.



Installment Sales

Chapter # 7

Page 105 www.a4accounting.weebly.com Sameer Hussain

INSTALLMENT SALESGoods purchase by buyer by paying a small amount of the total amount of goods at the time of

purchase of goods and agrees to pay the remaining amount in equal installments in equal

interval of time is known as installment. The first time payment is known as “down payment”. Ininstallment sales, the risk and rewards are transferred to the buyer.

COST OF INSTALLMENT SALESThe cost of merchandise sold on installment basis is called cost of installment sales. It is

obtained by adding net purchases in the merchandise inventory beginning and subtracting

merchandise inventory ending.

UNREALIZED GROSS PROFITUnrealized gross profit is referred to the total gross profit from the sale of merchandise on

installment basis which has not been collected. It is also known as “Deferred Gross Profit”.

REALIZED GROSS PROFITThe profit on sale on merchandise on installment basis collected during the period out of total

unrealized gross profit is called realized gross profit. In other words, it is the profit which has

been collected during the period.

COMPUTATION OF COST OF INSTALLMENT SALES:Merchandise inventory (beginning) XXX

Add: Net purchases during the period XXX

Merchandise available for sale XXX

Less: Merchandise inventory (ending) (XXX)

Cost of installment sales XXX

COMPUTATION OF UNREALIZED GROSS PROFIT (D.G.P.):Unrealized gross profit (D.G.P.) = Installment sales – Cost of installment sales

COMPUTATION OF UNREALIZED GROSS PROFIT RATE (D.G.P. %):Unrealized gross profit Rate (D.G.P. %) = Unrealized gross profit X 100

Installment sales

COMPUTATION OF CASH COLLECTION:Cash collection (current year) = Installment sales – Installment accounts

receivable (ending)

OR

Cash collection (previous year) = Installment accounts receivable (beginning) –

Installment accounts receivable (ending) –

Installment accounts receivable cancelled

OR

Cash collection = Down payment + Installments received

COMPUTATION OF REALIZED GROSS PROFIT (R.G.P.):Realized gross profit (R.G.P.) = Cash collection x Unrealized gross profit rate



Installment Sales

Chapter # 7


COMPUTATION OF INSTALLMENT SALES / INSTALLMENT ACCOUNTS

RECEIVABLE (BEGINNING):Installment sales/installment accounts

receivable (beginning) =

Unrealized gross profit (D.G.P.)

Unrealized gross profit rate(D.G.P.%)

COMPUTATION OF LOSS ON DEFAULT:If the buyer is unable to pay the further installments and the seller is unable to repossess his

goods from the buyer, it is said to be default.

Installment accounts receivable cancelled XXX

Less: D.G.P. for go (Installment accounts receivable cancelled x D.G.P. %) (XXX)

Loss on default (XXX)

COMPUTATION OF GAIN OR LOSS ON REPOSSESSION:If the buyer is unable to pay the further installments and the seller repossesses his goods from

the buyer, it is said to be repossession of merchandise.

Installment accounts receivable cancelled XXX

Less: D.G.P. for go (Installment accounts receivable cancelled x D.G.P. %) (XXX)

Book value XXX

Less: Merchandise repossessed at fair market value (XXX)

Gain/loss on repossession XXX/(XXX)

GENERAL ENTRIES UNDER PERPETUAL SYSTEM:

o

Purchased Merchandise on Account: Merchandise DR. (with amount of purchases)

Accounts payable CR. (with amount of payable)

------------------------------------------------------------------------------------------------------------

o Sold Merchandise on Installment Basis:

Installment accounts receivable DR. (amount receivable as installment)

Installment sales CR. (amount of installment sales)

------------------------------------------------------------------------------------------------------------

o Cash Collection on Installment Basis / Down Payment Received:

Cash DR. (with amount of cash collection)

Installment accounts receivable CR. (amount of cash collection)------------------------------------------------------------------------------------------------------------

o Payment to Suppliers:

Accounts payable DR. (with amount of cash paid)

Cash CR. (with amount of cash paid)

------------------------------------------------------------------------------------------------------------

o Expense Paid During the Period:

Expenses DR. (with amount of expenses paid)

Cash CR. (with amount of cash paid)



Installment Sales

Chapter # 7


o Recording Loss on Default:

Unrealized gross profit (D.G.P.) DR. (with amount of D.G.P. on default)

Loss on default DR. (with amount of loss on default)

Installment accounts receivable CR. (installment A/R cancelled)

------------------------------------------------------------------------------------------------------------

o Recording Gain on Repossession:

Merchandise repossessed DR. (with repossessed value)


Gain on default CR. (amount of gain)

Installment accounts receivable CR. (installment A/R cancelled)

------------------------------------------------------------------------------------------------------------

o Recording Loss on Repossession:

Merchandise repossessed DR. (with repossessed value)


Loss on default DR. (with amount of loss on repossession)Installment accounts receivable CR. (installment A/R cancelled)

------------------------------------------------------------------------------------------------------------

ADJUSTING ENTRIES UNDER PERPETUAL SYSTEM:o Recording Cost of Goods Sold:

Cost of installment sales DR. (amount of cost of installment sales)

Merchandise CR. (amount of cost of goods sold)

------------------------------------------------------------------------------------------------------------

o Recording Unrealized Gross Profit (D.G.P.):

Installment sales DR. (with amount of installment sales)

Unrealized gross profit (D.G.P.) CR. (amount of D.G.P.)

Cost of installment sales CR. (amount of cost of sales)

------------------------------------------------------------------------------------------------------------

o Recording Realized Gross Profit (R.G.P.):

Unrealized gross profit (D.G.P.) DR. (with amount of realized gross profit)

Realized gross profit (R.G.P.) CR. (with amount of R.G.P.)

------------------------------------------------------------------------------------------------------------

CLOSING ENTRIES UNDER PERPETUAL SYSTEM:o Closing Expenses:

Expense and revenue summary DR.Expenses CR.

Loss on repossession/default CR.

------------------------------------------------------------------------------------------------------------

o Closing Income:

Realized gross profit (R.G.P.) DR.

Interest income DR.

Gain on repossession DR.

Expense and revenue summary CR.

------------------------------------------------------------------------------------------------------------



Installment Sales

Chapter # 7


Realized Gross Profit (RGP)

Cash Collection X Unrealized Gross Profit Rate

(DGP%)

Installment A/R

(Beg) or

Installment

sales

-

Installment

Accounts

Receivable

(Ending)

Unrealized

Gross Profit

(DGP)

÷ Installment Sales

Installment Sales - Cost of Installment Sales

Merchandise Inventory (Beginning)

+

Total Net Purchases-

Merchandise Inventory (Ending)

ILLUSTRATION # 1: (Simple Data)Ali Company deals in radio and television sets. It sells those sets on installment basis. The

summary of transactions for the year ended 31 December 1995 is as follows:

1) Purchase on account Rs. 103,500

2) Installment sales Rs. 125,000

3) Cost of installment sales Rs. 100,000

4) Collection of installment accounts receivable Rs. 90,000

5) Payment to accounts payable Rs. 95,000

6)

Selling expenses paid Rs. 1,200

7) General expenses paid Rs. 2,300

8) Repossessed merchandise at fair market value Rs. 3,000

9) Installment accounts receivable written off by repossession Rs. 10,500

REQUIRED

Give journal entries for the year ended 31st Dec. 1995 including adjusting and closing entries.

SOLUTION # 1:Computation of Unrealized Gross Profit (DGP):

Unrealized gross profit = Installment sales – Cost of installment sales

Unrealized gross profit = 125,000 – 100,000

Unrealized gross profit = 25,000

Computation of Unrealized Gross Profit Rate (DGP%):

Unrealized gross profit rate = Unrealized gross profit x 100

Installment sales

Unrealized gross profit rate = 25,000 x 100

125,000

Unrealized gross profit rate = 20%

Computation of Realized Gross Profit (RGP):

Realized gross profit = Cash collection X DGP%

Realized gross profit = 90,000 x 20%Realized gross profit = 18,000



Installment Sales

Chapter # 7


Computation of Gain or Loss on Repossession:

Installment accounts receivable cancelled 10,500

Less: Unrealized gross profit (10,500 x 20%) (2,100)

Book value 8,400

Less: Merchandise repossessed at fair market value 3,000

Loss on repossession 5,400

ALI COMPANY

GENERAL JOURNAL

Date Particulars P/R Debit Credit

1 Merchandise 103,500

Accounts payable 103,500

(To record the merchandise purchased on account)

2 Installment accounts receivable 125,000

Installment sales 125,000

(To record the good sold on installment basis)

3 Cash 90,000Installment accounts receivable 90,000

(To record the cash collected on installment basis)

4 Accounts payable 95,000

Cash 95,000

(To record the payment to suppliers)

5 Selling expenses 1,200

Cash 1,200

(To record the selling expenses paid)

6 General expenses 2,300

Cash 2,300

(To record the general expenses paid)7 Merchandise repossessed 3,000

Unrealized gross profit 2,100

Loss on repossession 5,400

Installment accounts receivable 10,500

(To record the repossession of merchandise)

8 Cost of installment sales 100,000

Merchandise 100,000

(To record the cost of installment sales)

9 Installment sales 125,000

Cost of installment sales 100,000


(To adjust the unrealized gross profit)

10 Unrealized gross profit 18,000

Realized gross profit 18,000

(To adjust the realized gross profit)

ALI COMPANY

CLOSING ENTRIES


1 Expense and revenue summary 8,900

Selling expenses 1,200

General expenses 2,300

Loss on repossession 5,400(To close the all expense accounts)



Installment Sales

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2 Realized gross profit 18,000

Expense and revenue summary 18,000

(To close the all income accounts)


Capital 9,100

(To close the expense and revenue summary

account)

ILLUSTRATION # 2: (Different Years’ Data) The selected balances of ABC Installment Sales Co. are as follows:

2007 – Jan. 1 2007 – Dec. 31

Installment accounts receivable - 2005 90,000 -

Installment accounts receivable – 2006 285,000 135,000

Installment accounts receivable – 2007 - 337,500

Deferred gross profit – 2005 22,500 18,750

Deferred gross profit – 2006 85,500 85,500Installment sales - 450,000

Cost of installment sales - 306,000

Repossessed merchandise - 12,000

Installment account receivable–2005 cancelled on repossession - 15,000

REQUIRED

a) Gross profit realized during 2007.

b) General Journal entries including adjusting entries during 2007.

SOLUTION # 2:Computation of Unrealized Gross Profit (DGP) (2007):

Unrealized gross profit = Installment sales – Cost of installment salesUnrealized gross profit = 450,000 – 306,000

Unrealized gross profit = 144,000


Unrealized gross profit rate (2007) = Unrealized gross profit x 100

Installment sales

Unrealized gross profit rate (2007) = 144,000 x 100

450,000

Unrealized gross profit rate (2007)= 32%

Unrealized gross profit rate (2006) = Unrealized gross profit (Beg) x 100

Installment A/R (Beg)


285,000





90,000




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Chapter # 7


Computation of Cash Collection:

Cash collection (2007) = Installment sales – Installment accounts receivable (ending)

Cash collection (2007) = 450,000 – 337,500

Cash collection (2007) = 112,500

Cash collection (2006) = Installment A/R (Beg) – Installment A/R (End)

Cash collection (2006) = 285,000 – 135,000


Cash collection (2005) = Installment A/R (Beg) – Installment A/R (End) – Installment

A/R cancelled

Cash collection (2005) = 90,000 – 0 – 15,000


Computation of Realized Gross Profit:


Realized gross profit (2007) = 112,500 x 32% 36,000Realized gross profit (2006) = 150,000 x 30% 45,000

Realized gross profit (2005) = 75,000 x 25% 18,750

Total realized gross profit = 99,750


Installment accounts receivable cancelled 15,000

Less: Unrealized gross profit (15,000 x 25%) (3,750)

Book value 11,250

Less: Merchandise repossessed at fair market value (12,000)

Gain on repossession 750

ABC INSTALLMENT SALES CO.

GENERAL JOURNAL


1 Installment accounts receivable (2007) 450,000



2 Cash 337,500

Installment accounts receivable (2007) 112,500




3 Merchandise repossessed 12,000Unrealized gross profit (2005) 3,750

Gain on repossession 750


(To adjust the repossession of merchandise)


Merchandise 306,000




Unrealized gross profit (2007) 144,000




Installment Sales

Chapter # 7



6 Unrealized gross profit (2007) 36,000





ILLUSTRATION # 3: (Data Based on Units)The following are transactions for 2008 of XYZ Installment Sales Company which follows the

perpetual system and FIFO method for inventory valuation had 25 machines @ Rs.290 per

machine in beginning inventory:

(a) Purchased 150 machines @ Rs.300/- per machine.

(b) Sold 125 machines @ Rs.500/- per machine.

(c) Received down payment @ Rs.100/- per machine.

(d) Received 497 installments @ Rs.50/- per installment.

(e) Repossesses one machine from a customer at a fair market value of Rs.200, who had

paid only down payment and one installment.REQUIRED

Give General Journal entries including adjusting entry supported by proper computations. Also

determine ending inventory of merchandise.

SOLUTION # 3:Computation of Merchandise Inventory Ending:

Merchandise inventory opening units 25

Add: Units purchases 150

Merchandise available for sale in units 175

Less: Units sold (125)

Merchandise inventory ending in units 50Merchandise inventory ending = Units at end x Cost per unit

Merchandise inventory ending = 50 x 300

Merchandise inventory ending = Rs.15,000

Computation of Cost of Installment Sales:

Merchandise inventory opening (25 x 290) 7,250

Add: Purchases (150 x 300) 45,000

Merchandise available for sale 52,250

Less: Merchandise inventory ending (15,000)

Cost of installment sales Rs.37,250

Computation of Installment Sales:

Installment sales = Units sold x Selling price per unit

Installment sales = 125 x 500

Installment sales = Rs.62,500

Computation of Unrealized Gross Profit:



Unrealized gross profit = Rs.25,250



Installment Sales

Chapter # 7

3 www.a4accounting.weebly.com Sameer Hussain


Unrealized gross profit rate = Unrealized gross profit x 100

Installment sales

Unrealized gross profit rate = 25,250 x 100

62,500

Unrealized gross profit rate = 40.4%


Down payment (125 x 100) 12,500

Add: Installment received (497 x 50) 24,850

Total cash collection Rs.37,350



Realized gross profit = 37,350 x 40.4%

Realized gross profit = Rs.15,089


Installment sales 500

Less: Down payment (100)

Installment accounts receivable 400

Less: Installment received (50)

Installment accounts receivable cancelled 350

Less: Unrealized gross profit (350 x 40.4%) (141)

Book value 209

Less: Merchandise repossessed at fair market value (200)

Loss on repossession Rs.9

XYZ INSTALLMENT SALES COMPANY

GENERAL JOURNAL


1 Merchandise (150 x 300) 45,000


(To record the goods purchased on account)

2 Installment accounts receivable 62,500



3 Cash 12,500


(To record the down payment received)

4 Cash 24,850



5 Merchandise repossessed 200

Unrealized gross profit 141

Loss on repossession 9

Installment accounts receivable 350

(To adjust the repossession of merchandise)


Merchandise 37,250




Installment Sales

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8 Unrealized gross profit 15,089



INCOME STATEMENTSales XXX

Less: Cost of goods sold (XXX)

Gross profit XXX

Add: Realized gross profit (RGP) XXX

Total gross profit XXX

Less: Operating expenses (XXX)

Net profit XXX

BALANCE SHEET Assets (Rupees) Equities (Rupees)

Current Assets: Liabilities:

Cash XXX Accounts payable XXX

Accounts receivable XXX Other liabilities XXX

Installment A/R (1st year) XXX Total liabilities XXX

Installment A/R (2nd year) XXX

Merchandise inventory XXX Owner’s Equity: Other current assets XXX Capital XXX

Total current assets XXX Add: Net profit XXXAdd: D.G.P (1st year) XXX

Fixed Assets: Add: D.G.P (2nd year) XXX

Land XXX Total owner’s equity XXX

Other fixed assets XXX

Total fixed assets XXX

Total assets XXX Total equities XXX

ILLUSTRATION # 4: (FINANCIAL STATEMENTS)The following trial balance has been prepared from the ledger of Imran & Co:

IMRAN & CO.

TRIAL BALANCE AS ON DECEMBER 31, 2001

Debit (Rs.) Credit (Rs.)

Cash 33,750

Installment accounts receivable – 2001 123,750


Accounts receivable 60,750

Inventory January 1, 2001 117,000

Land and building 45,000


Deferred gross profit – 2000 81,000

Share capital 225,000Retained earnings 16,250



Installment Sales

Chapter # 7


Sales 418,750


Purchases 750,000


Shipment on installment sales 540,000

Operating expenses 416,250

Total 2,113,500 2,113,500

Other Information:

Inventory of merchandise on December 31, 2001 was Rs.123,750. The following account

balances were found in the post-closing trial balance prepared on January 1, 2001.



REQUIRED

(a) Prepare Income Statement and Balance Sheet for the year ended on Dec. 31, 2001.

(b) Pass the adjusting and closing entries.

SOLUTION # 4:Computation of Unrealized Gross Profit:



Unrealized gross profit = Rs.180,000


Unrealized gross profit rate (2001) = Unrealized gross profit x 100

Installment sales


720,000





270,000



Cash collection (2001) = Installment sales – Installment accounts receivable (ending)

Cash collection (2001) = 720,000 – 123,750

Cash collection (2001) = Rs.596,250

Cash collection (2000) = Installment A/R (Beg) – Installment A/R (End)

Cash collection (2000) = 270,000 – 27,000

Cash collection (2000) = Rs.243,000





Total realized gross profit = Rs.221,963



Installment Sales

Chapter # 7


Imran & Co.

Income Statement

For the Period Ended 31 December 2001

(Rupees) (Rupees)

Sales 418,750

Less: Cost of Goods Sold:

Merchandise inventory (beginning) 117,000

Add: Net purchases 750,000

Merchandise available for sale 867,000

Less: Shipment on installment sales (540,000)

Less: Merchandise inventory (ending) (123,750)

Cost of goods sold (203,250)

Gross profit 215,500

Add: Realized gross profit (R.G.P) 221,963

Total gross profit 437,463

Less: Operating expenses (416,250)

Net profit 21,213

Computation of Retained Earnings Ending Balance:

Retained earnings (unadjusted balance) 16,250

Add: Net profit for the period 21,213

Retained earnings adjusted balance Rs.37,463

Imran & Co.

Balance Sheet

As on 31 December 2001

Assets (Rupees) Equities (Rupees)

Current Assets: Liabilities:Cash 33,750 Accounts payable 112,500

Accounts receivable 60,750 Total liabilities 112,500

Installment A/R (2001) 123,750

Installment A/R (2000) 27,000 Owner’s Equity: Merchandise inventory 123,750 Share capital 225,000

Total current assets 369,000 Add: Retained earnings 37,463

Add: D.G.P (2001) 30,937

Fixed Assets: Add: D.G.P (2000) 8,100

Land and building 45,000 Total owner’s equity 301,500

Total fixed assets 45,000

Total assets 414,000 Total equities 414,000



Installment Sales

Chapter # 7


Imran & Co.

Adjusting & Closing Entries



Merchandise 540,000






3 Unrealized gross profit (2001) 149,063




4 Expense and revenue summary 1,283,250

Merchandise inventory (beginning) 117,000

Purchases 750,000Operating expenses 416,250

(To close the various expense accounts)

5 Sales 418,750


Merchandise inventory (ending) 123,750


Expense and revenue summary 1,304,463

(To close the various income accounts)


Retained earnings 21,213

(To record the transfer of net profit to retainedearnings account)



Installment Sales

Chapter # 7


PRACTICE QUESTIONSQuestion # 1: 1996 – Private (Advanced & Cost Accounting) – UOK

Standard Company sells merchandise on installment basis and uses perpetual system. Its

transactions relating to sales for 1995 are as follows:

1. Installment sales Rs.800,000

2.


3. Collection of installments 500,000

REQUIRED

General Journal entries including adjusting entries.

Question # 2: 1996 – Private (Advanced & Cost Accounting) – UOK

Merchandise sold on installment at a gross profit of 30% was repossessed at a market value of

Rs.4,000 and installment accounts receivable of Rs.5,000 were cancelled on repossession.

REQUIRED

Give journal entries.

Question # 3: 2013 – Private (Advanced & Cost Accounting) – UOKA merchant sells merchandise on installment basis, at a gross profit of 42%. The invoice price of

merchandise is Rs.8,000. One customer defaults and the amount receivable from him is

Rs.6,600. The merchandise was repossessed and given an inventory of Rs.3,250.

REQUIRED

Give necessary entries in General Journal on repossession.

Question # 4: 2007 – Regular (Advanced & Cost Accounting) – UOK

Irfan and Company sells refrigerators at 20% above cost and keeps accounts for sales by the

installment method. In 2007, repossessions were made on unpaid installment contract balances

of Rs.60,000. Repossessed units had a total resale value of Rs.54,000. The company records such

repossessions at a value that will permit the normal margin on sales.

REQUIRED

Give the entry to summarize the repossessions for 2007.


Rehan Co. Ltd. reports profits on installment basis. It uses perpetual inventory system, for

recording merchandise. The transactions for the year ended Dec. 31, 2007 are as under:

1. Purchased merchandise on account for Rs.360,000.

2. Sales on installment basis Rs.450,000.

3. Cost of installment sales Rs.250,000.

4. Collection of installment accounts receivable Rs.300,000.

5. Payment of accounts payable Rs.155,000.

6.

Repossession of goods sold on installment basis:Installment account receivable cancelled Rs.22,000.

Repossession of goods valued Rs.11,000.

7. Expenses incurred but not paid Rs.8,000.

REQUIRED

Give entries in General Journal to record the above transactions including adjusting and closing

entries.



Installment Sales

Chapter # 7



Irfan Limited sells merchandise on installment basis. Data relating to the inventory, purchases

and sales of equipment during the year 2010 are as follows:

Inventory of equipment January 1, 2010 Rs. 150,000

Purchases of equipment on account 500,000

Sales of equipment during the year 750,000

Cash collection from customers 250,000

Inventory of equipment December 31, 2010 200,000

REQUIRED

Give journal entries in the General Journal to record the above transactions including adjusting

and closing entries.


The Kabir Company sells merchandise on installment basis. Data relating to the inventory,

purchases and sales of equipment during the year 1996 are as follows:

Inventory of equipment January 1, 1996 Rs. 100,000

Purchases of equipment on account 500,000Sales of equipment during the year 750,000


Inventory of equipment December 31, 1996 150,000

REQUIRED

Give journal entries in the General Journal to record the above transactions including adjusting

and closing entries.


Pak Traders sell merchandise in installment basis. The following data relate to their operations

for the year 2012:

Merchandise inventory (1 – 1 – 2012) Rs. 16,250Purchases on account 44,250



Merchandise inventory (31 – 12 – 2012) 15,500

REQUIRED

(i) Find out the cost of installment sales.

(ii) Give journal entries under installment method including adjusting entry/entries, using

perpetual system.

Question # 9: 2004 – Private (Advanced Accounting) – UOK

Nizam Sons use perpetual inventory system for recording merchandise. Summarized data for

the year 2004 are as under:1. Sales made on installment basis 500,000.

2. Collecting from installment A/R 200,000.

3. Operating expenses paid 32,000.

4. Operating expense payable 3,000.

5. Cost of installment sales 400,000.

6. Installment accounts receivable cancelled 30,000.

7. Repossessed goods valued at 22,000.

REQUIRED

(a) Calculate gross profit rate.

(b) Find out loss/gain on repossession.

(c)

Pass journal entries for recording the above transactions including adjusting and closingentries.



Installment Sales

Chapter # 7



Umar & Sons Ltd. uses perpetual inventory system for recording merchandise and installment

method for recognizing profit. Their transactions for the year ended June 30, 2005 were as

under:

1. Sales on installment basis Rs.450,000

2.


3. Purchased merchandise on account for 500,000


5. Payment of accounts payable 200,000

6. Expenses paid 4,000

7. Installment accounts receivable cancelled 25,000

8. Repossessed merchandise was valued 16,000

REQUIRED

Record the above transactions in General Journal giving adjusting and closing entries.


Mulla & Co. uses perpetual inventory system for recording merchandise and installment methodfor recognizing profit. Their transactions for the year ended June 30, 1993 were as under:

1. Purchased merchandise on account Rs.500,000

2. Purchased merchandise for cash 150,000

3. Sales on installment basis 600,000


5. Payment to creditors 250,000

6. Cost of merchandise sold on installment 450,000

7. Paid expenses 14,000

8. Repossession of merchandise sold on installment basis:

o Installment accounts receivable cancelled 40,000

o Value of repossessed goods 20,000

REQUIREDRecord the above transactions in General Journal giving adjusting and closing entries.


Ahmad Installment Sales Company uses perpetual inventory system for recording merchandise

and installment method for recognizing profit. The following transactions were incurred for the

year ended June 30, 1992:

1. Installment sales Rs.300,000

2. Cash collection during the year 200,000

3. Cost of installment sales 225,000

4. Office expenses paid 10,000

5.

General expenses paid 5,000REQUIRED

(a) Give the journal entries that would be made to record the above transactions along with

adjusting and closing entries for the year ended June 30, 1992.

(b) Prepare Income Statement and Balance Sheet on June 30, 1992.

(c) Show how the relevant accounts will be reported in balance sheet on June 30, 1992.



Installment Sales

Chapter # 7


Question # 13: 2006 – Regular (Advanced Accounting) – UOK

Jadid Homes sells bedroom furniture on installment basis. Following information pertains to the

accounting records for three years of operations:

2003 2004 2005

Installment sales 150,000 200,000 250,000

Cost of installment sales 100,000 150,000 200,000

Selling & administrative expenses 50,000 60,000 80,000

Collection from Customers:

Installment sales 2003 80,000 40,000 20,000

Installment sales 2004 --- 100,000 80,000

Installment sales 2005 --- --- 150,000

The firm uses installment method of recognizing revenue.

REQUIRED

(a) Compute the following for each year:

1. Deferred gross profit 2. Rate of deferred gross profit

3. Realized gross profit 4. Net profit or loss

(b)

Record collection of cash and realize gross profit for each year separately in the GeneralJournal of Jadid Homes.


Rashid Company sells all merchandise on installment basis. Following information obtained

from the accounting records for first three years of operations:

Year 1 Year 2 Year 3

Installment sales 180,000 240,000 200,000

Cost of installment sales 108,000 139,200 112,000

Operating expenses 50,000 55,000 54,000

Collection from Customers:

Installment sales of year 1 75,000 60,000 40,000

Installment sales of year 2 --- 100,000 80,000Installment sales of year 3 --- --- 85,000

REQUIRED

(a) Determine the amount of net profit or net loss that would have been reported in each of

the three years if the installment method of recognizing revenue had been employed.

(b) Record collection of cash and realize gross profit in each of the three years.


The Ghareeb Nawaz Co. sells merchandise on installment basis. It uses perpetual system for

recording merchandise and installment method for recognizing profits. The data related to

installments sales of the Co. for the years 2010 and 2011 are:

2010 2011Installment sales 360,000 480,000

Cost of installment sales 60% of sales 65% of sales

Cash collection of accounts receivable 2010 installment sales 200,000 140,000

Cash collection of accounts receivable 2011 installment sales 242,000

REQUIRED

(i) Give the necessary journal entries including those for adjustment recording the above

data for 2010 and 2011 respectively on the books of the company.

(ii) Assume that the customer default on installment sales of 2010 after cash collection in

2011 and the merchandise was repossessed and was valued at Rs.5,000. Give journal

entries for recoding the default.



Installment Sales

Chapter # 7



Sarwar Associates sell merchandise on installment basis. The transactions for the year ended

December 31, 2009 are as under, with merchandise inventory on January 1, 2009 Rs.110,000.

1. Purchase of goods on Rs.750,000 of which Rs.225,000 was for cash.

2. Collection of installment accounts receivable were as under:

2007 Rs.70,000

2008 120,000

2009 300,000

3. Total sales on installment basis for the year Rs.650,000.

4. Accounts payables of Rs.400,000 were settled through bank.

5. Installment accounts receivable of 2007 were cancelled amounted to Rs.20,000 and the

repossessed merchandise was assigned a resale value of Rs.14,700.

6. Expenses totaled Rs.40,000 of which expenses amounting to Rs.25,000 were paid.

Ending inventory of merchandise was valued Rs.340,000.

Gross profit rate in 2007 was 30% and in 2008 25%.

REQUIRED

Record all above transactions including adjusting and closing entries under perpetual system.

Question # 17: 2002 – Regular & Private (Advanced Accounting) – UOK

Umair & Company sells merchandise on installment basis. The transactions for the year ended

December 31, 2001 are as under:-

1. Merchandise inventory Jan. 1, 2001 150,000.

2. Purchased merchandise on account 400,000.

3. Purchased merchandise for cash 200,000.

4. Sold merchandise on installment basis 800,000.

5. Collection of installment accounts receivable of 2001 300,000.

6. Collection of installment accounts receivable 1999 50,000.

7. Collection of installment accounts receivable of 2000 100,000.

8.

Payment made to creditors 250,000.

9. Installment accounts receivable of 1999 in the amount of Rs.8,000 was

cancelled because of default but the merchandise could not be repossessed.

10. Expenses paid 25,000.

11. Merchandise inventory Dec. 31, 2001 270,000.

Note: Gross profit rate 1999 – 42%, 2000 – 44%.

REQUIRED

Record the above transactions in the general journal and also give adjusting and closing entries

at December 31, 2001 assuming the company follows the perpetual inventory system.


Sana Company Ltd. sells merchandise on installment basis. The transactions for the year endedDecember 31, 2011 are as under:-

1. Merchandise inventory Jan. 1, 2011 Rs.150,000.

2. Purchased merchandise on account 400,000.

3. Purchased merchandise for cash 200,000.

4. Sold merchandise on installment basis 800,000.

5. Collection of installment accounts receivable (2011) 300,000.



8. Payment made to creditors 250,000.

9. Installment accounts receivable of 2009 in the amount of Rs.8,000 was

cancelled because of default but the merchandise could not be repossessed.

10.

Expenses paid 25,000.11. Merchandise inventory Dec. 31, 2011 270,000.



Installment Sales

Chapter # 7


Note: Gross profit rate 2009 – 42%, 2010 – 44%.

REQUIRED

Record the above transactions in the general journal and also give adjusting and closing entries

at December 31, 2011 assuming the company follows the perpetual inventory system.

Question # 19: 2001 – Regular & Private (Advanced & Cost Accounting) – UOK

A-One Co. follows the perpetual inventory system and FIFO method for inventory valuation and

closes its book twice in a year at June 30, and December 31.

Balances at January 1, 2001

Installment accounts receivables – 1999 Rs.75,000


Installment accounts receivables – 2000 150,000


At June 30, 2001

Installment sales made at 25% above cost during the 6 – month period Rs.450,000

An installment accounts receivable – 1999 cancelled 5,000

Repossessed merchandise was assigned a value of Rs. 2,500Installment accounts receivables – 1999 30,000



REQUIRED

1. Compute gross profit rates of the installment sales originated in 1999 and 2000.

2. Prepare a statement showing collection of installment accounts receivables of 1999, 2000

and 2001 at June 30, 2001.

3. Give all necessary entries under installment method for recording transactions concerning

installment sales including an adjusting entry for recording realized gross profit.

4. Record repossession without recognizing loss or gain.


Alam Co. follows the perpetual inventory system and closes its books twice in a year at June 30,

and December 31.

Balance at January 1, 2003:

Installment A/Receivable – 2002 Rs.175,000

Deferred gross profit – 2002 Rs.75,000

At June 30, 2003:

Installment sales made at 40% gross profit during the 6 months period Rs.450,000

An installment A/Receivable – 2002 cancelled 5,000

Repossesses merchandise was assigned a value of 2,500

Installment A/Receivable – 2002 45,000

Installment A/Receivable – 2003 175,000REQUIRED

(1) Compute gross profit rate of the installment sales originated in 2002.

(2) Show collection of installment A/Receivable of 2002 and 2003, at June 30, 2003.

(3) Give all necessary entries under installment method for recording transactions concerning

installment sales including an adjusting entry for recording realized gross profit.

(4) Record repossession recognizing loss or gain.

Question # 21: 2004 – Regular & Private (Advanced Accounting) – UOK

Ideal Sales Company sells goods on installment basis. Its balances on Dec. 31, 2001 were:

Installment accounts receivable Rs.14,000

Unrealized gross profit Rs.4,000



Installment Sales

Chapter # 7


Summary of the transactions for the year 2002 is as follows:

(a) Installment sales Rs.49,000.

(b) Collection of installment of current year Rs.42,000.

(c) Collection of installment of 2001 Rs.5,600.

(d) Cancellation of installment contract 2001 Rs.2,100.

(e)

Repossessed goods valued at Rs.1,350.

In both years the goods have been sold at 40% above cost.

REQUIRED

1. Entries to record the transactions for 2002.

2. Adjusting and closing entries for 2002.

3. Show how the relevant account will be reported in balance sheet on Dec. 31, 2002.


The following balances are taken from the pre-closing trial balance of Hassan Co. as of

December 31, 2007:

1. Installment accounts receivable – 2006 Rs.80,000

2.

Installment accounts receivable – 2007 120,0003. Installment sales 200,000

4. Cost of installment sales 140,000

5. Unrealized gross profit – 2006 80,000

REQUIRED

(1) Prepare all entries for the year ended December 31, 2007 adjusting and closing as well,

assuming that rate of gross profit on installment sales of 2006 was 25%. Show all

computations.

(2) On January 10, 2008 a customer defaulted on his payment. Give journal entries for

repossession with the help of the following information:

1. Original sale on installment Rs.2,000

2. Date of sale 12 Aug 2006

3.

Collection up to date Rs.1,5004. Estimated market value of repossessed merchandise Rs.600


Al-Fazal Manufacturing Co. sells its finished products for cash, on credit and on installment.

Accidently, some water was spread on the accounting records of installment sales and some of

the pages were smeared. After drying, only the following portion is readable:

January 1, 1999

Installment accounts receivable 1998 Rs.80,000

Deferred gross profit 1998 Rs.32,000

December 31, 1999

(Before Adjustment)Installment accounts receivable 1998 Rs.20,000


Installment accounts receivable 1999 Rs.86,000


During 1999, installment sales were made at 45% gross profit rate.

REQUIRED

1. Reconstruct in general journal form as many summary entries as possible for 1999

under installment method including adjusting and closing entries. Show necessary

supporting computations.

2. Give an entry to record repossession assuming that the repossessed merchandise was

recorded at its book value.



Installment Sales

Chapter # 7



The selected balances of Akbar Installment Sales Co. are as follows:

1997 – Jan. 1 1997 –Dec. 31

Installment accounts receivable – 1995 120,000 ---

Installment accounts receivable – 1996 380,000 180,000

Installment accounts receivable – 1997 --- 450,000



Installment sales --- 600,000

Cost of installment sales --- 408,000

Repossessed merchandise --- 16,000

Installment accounts receivable–1995 cancelled on repossession --- 20,000

REQUIRED

a) Gross profit percentage for each year.

b) Collection of installment accounts receivable of each year during 1997.

c) Gross profit realized during 1997.

d)

General Journal entries made during 1997 on repossession.e) General Journal entries to record the realized gross profit.


The following are the selected assets and equities of Gulbahar Installment Co. on Dec. 31, 1991:

Assets Equities

Cash 12,000 Accounts Payable 2,000

Merchandise Inventory 8,000 Deferred Gross Profit – 1991 4,000

Installment Receivable – 1991 20,000 Capital 34,000

40,000 Total Equities 40,000

Transactions During 1992 are as under:

Merchandise purchased on accounts 32,000


Collection from installment accounts receivable – 1991 10,000

Collection from installment accounts receivable – 1992 20,000

Payment of accounts payable 25,000

Installment accounts receivable – 1991 defaulted of 8,000

Merchandise repossessed at fair market value 2,000

Operating expenses paid 1,000

Merchandise inventory-ending (including repossessed merchandise) 12,000

Company uses perpetual inventory system (FIFO basis) for recording merchandise and

installment method for recognizing profits.

REQUIRED:

Give entries in General Journal to record the above data, including adjusting and closing entriesfor the year 1992.


Naseem & Company sells merchandise on installment basis. The summary of transactions for

the year ended December 31, 1985 and December 31, 1986 are as follows:

1985 1986

Installment sales 500,000 750,000

Collection in respect of 1985 installment sales 300,000 150,000

Collection in respect of 1986 installment sales --- 450,000

Purchase on account 410,000 500,000

Selling & general expenses 75,000 170,000

Payment of accounts payable 250,000 500,000

Merchandise inventory ending 100,000 150,000



Installment Sales

Chapter # 7


REQUIRED:

Give journal entries for the years ended December 31, 1985 and 1986 including adjusting

journal entries.


The following are transactions for 1998 of Lahore Installment Sales Company which follows the

perpetual system and FIFO method for inventory valuation had 50 machines @ Rs.580 per

machine in beginning inventory:

(a) Purchased 300 machines at the rate of Rs.600/- per machine.

(b) Sold 250 machines at the rate of Rs.1,000/- per machine.

(c) Received down payment at the rate of Rs.200/- per machine on 250 machines.

(d) Received 997 installments at the rate of Rs.100/- per installment.

(e) Repossesses one machine from a customer, who had paid only down payment and one

installment.

REQUIRED

General journal entries including adjusting entry supported by proper computations. Also

determine ending inventory of merchandise.


Smart Home Company sells local vacuum cleaners on installment basis. The company uses

periodic system and first in first out method for inventory valuation. The company has 100

vacuum cleaners of Rs.600 each in the beginning inventory. The company completed the

following transactions during the year:

(a) Purchased 300 vacuum cleaners at Rs.650 each.

(b) Sold 250 vacuum cleaners at Rs.1,000 each.

(c) Collected down payment at Rs.200 on each vacuum cleaner.

(d) The balance to be collected in 4 equal quarterly installments of Rs.200 each.

(e) All installments were collected in full except a customer who failed to pay the last

installment.

(f) The equipment was repossessed. The value of repossessed equipment was Rs.100.

REQUIRED

(a) General journal entries including adjusting.

(b) Cost of installment sales.

(c) Gain or loss on repossession.

(d) Gross profit realized.


The following transactions relate to Al-Abid Co. for 2006 which follows the perpetual inventory

system and FIFO method for valuation of inventory.

Opening inventory consist of 50 machines @ Rs.560 per machine. They completed the followingtransactions:

(1) Purchased 350 machines @ Rs.600 per machine on account.

(2) Sold 250 machines @ Rs.1,000 each on installments.

(3) Received down payment @ Rs.200 per machine on all the sold machines.

(4) Received 996 installments @ Rs.100 per installment.

(5) Repossessed one machine from a customer who had paid only down payment having

market value of Rs.500.

REQUIRED

Journal entries including adjusting and closing entries. Show all computations.



Installment Sales

Chapter # 7



Mifta Installment Company purchased 15 computers from Alam & Bilal Traders @ Rs.33,600

each on credit. The company sold 7 computers on installment @ Rs.42,000 each on September

1, 2008. The terms of installment sales were to pay 25% on each computer as a down payment

and the remaining amounts to be collected in 15 monthly installments starting from October 1,

2008.

All installments collected on the first day of each month. Three of the computer holders

defaulted to pay the installments after the payment of 5th installment and company repossessed

the computers which have the fair market value of Rs.17,000 each computer.

Mifta Installment Company closes its accounting year on June 30 each year.

REQUIRED

Compute the following:

1. Amount of installment sales.

2. Amount of down payment received.

3. Monthly installment amount of each computer.

4. Unrealized (deferred) gross profit.

5.

Rate of Unrealized (deferred) gross profit.6. Total amount of installment accounts receivable cancelled.

7. Book value of repossessed merchandise.

8. Gain or loss on repossession.

9. Total amount collected during the period.

10. Amount of realized gross profit.


On January 1, 1997 the X.Y. Co. sold a car for Rs.60,000 on installment basis Rs.10,000 was

received as down payment and balance amount in five quarterly installments including interest.

The rate of interest charge on unpaid balance is 6% per annum. The cost of the car was

Rs.45,000. All payments were dully received. The accounting year ends on December 31, each

year.REQUIRED

Give journal entries including adjusting and closing entries for the year 1997 only. Also give

necessary computations.


On July 1, 1993, Shaheen Autos sold 10 Suzuki cars on installment basis at Rs.135,000 per car,

the cost being Rs.114,750 per car. The terms of sale were:

a) Rs.35,000 per car should be paid at the time of signing the agreement.

b) The balance should be paid in 20 quarterly of Rs.5,000 per car.

c) Interest at 8% should be paid on the unpaid balances, and be paid along with the

installment amount.d) Ownership would be transferred on the payment of the final installment.

REQUIRED

Make necessary journal entries including adjusting and closing of entries in the books of

Shaheen Autos in respect of the above transactions for the year ended December 31, 1993

assuming that Shaheen Autos closes its books on December 31, every year. Shaheen Autos

follows installment method for recognizing profits.



Installment Sales

Chapter # 7



Hasnain & Brothers follows installment method for recognizing profits & closes its accounting

year on June 30, every year.

On September 12, 2010 Hasnain & Brothers purchased 30 computers from Tauseef Computers

for Rs.36,000 each on credit.

On October 1, 2010 Hasnain & Brothers sold 25 computers @ Rs.45,000 each. The customers

paid Rs.20,000 per computer as down payment of October 1, 2010 and agreed to pay the

balance in 8 equal quarterly installments (The first quarter started from October 1, 2010). The

ownership would be transferred on the payment of the final installment. The installments

received on the last day of each quarter.

REQUIRED

Prepare journal entries including adjusting and closing to record the above transactions only for

the year ended June 30, 2011.


On January 1, 2010 Star Installment Co. has 5 computers in stock costing Rs.20,000 each. On

January 6, 2010 Co. purchased 7 computers for Rs.175,000 on account from M/S Sun ComputerHouse. On March 20, 2010 Star Installment Co. sold 9 computers for Rs.270,000. The customers

paid Rs.3,000 for each computer as down payment on the same date and rest will be paid in 10

equal quarterly installments. The agreement shows that the amount of installment will be

received on the last day of each quarter and buyer will pay 6% interest on unpaid balance. The

first installment due on June 30, 2010. Star Installment Co. uses FIFO method of inventory

valuation and Co.’s accounting year ends on December 31, each year.

REQUIRED

Prepare journal entries including adjusting and closing for the year 2010 only.


City Cars deals with two brands of fuel economy local cars namely GL and XL. The selling price

of GL cars is Rs.450,000 each while the XL cars are sold for Rs.400,000. The selling priceincludes a profit margin of 5 percent. A down payment of 20 percent is collected on each car.

The balance is collected on 10 monthly installments of equal amounts.

The business completed the following transactions during the year:

Purchased 10 units of GL cars and 15 units of XL cars on account from New Age Motors

Company.

Sold 10 units of each type of cars.

The down payment and all installments were collected in full by cheque except the following:

(i) A customer failed to pay last three installments due on the XL cars he had purchased.

The vehicle was fortified and assigned a value of Rs.150,000. The car was taken by the

owner for his personal use.

(ii)

A cheque amounting to Rs.72,000 received from a customer who bought a GL car wasdishonored.

City Cars incurred and paid the following expenses during the year:

Selling expenses 30,000

Administrative expense 70,000

REQUIRED

(a) General Journal entries in City Cars’ book (adjusting and closing are not required).

(b) Cost of installment sales for each brand separately.

(c) Gross profit realized on each brand of cars.

(d) Net profit of City Cars for the year.



Installment Sales

Chapter # 7



Kamran Electric Company’s deals in the sales of generators on installment basis. The company

has two plans which are summarized below:

Explanation Plan “A” Plan “B”

Down payment for each

generator

10% of the sales price Rs.7,000

No. of installments 15 equal monthly

installments

5 equal quarterly installments

Rate of interest on unpaid

balance

Nil 6% per annum

Installment amount due At the start of the each

month

At the end of each month

Kamran Company had inventory of 20 generators 2500KV costing Rs.800,000.

Under Plan – A, company sold 6 generators to Sardar Industries on October 5, 2009 at a profit of

35% on cost. Sardar Industries will start to pay installments from November, 2009.

Under Plan – B, company sold 5 generators to Shahani & Sons for Rs.50,000 each on June 28,

2009. Quarter starts from July 1, 2009.REQUIRED

Prepare dated journal and adjusting entries, separately under each plan for the year 2009 only.


The following trial balance has been prepared from the ledger of M/S. Rehman & Co. traders

dealing in installment sales. Taking the facts and figures from the trial balance you are asked to:

(c) Find the gross profit percentage on installment sales in 1989, 1990 and 1991.

(d) Prepare Income Statement and Balance Sheet for the year ended on Dec. 31, 1991.

(e) Pass the adjusting and closing entries.

M/S. REHMAN & CO.

TRIAL BALANCE

AS ON DECEMBER 31, 1991

Cash Rs.45,000




Accounts receivable 81,000

Inventory December 31, 1990 156,000

Land and building 40,000

Furniture and fixture 20,000



Deferred gross profit – 1989 24,180Share capital 300,000

Profit and loss account balance 217,920

Sales 345,000


Purchases 998,100



Operating expenses 555,000

Total 2,825,100 2,825,100



Installment Sales

Chapter # 7

Other Information:

Inventory of merchandise on December 31, 1991 was Rs.165,000. The following account

balances were found in the post-closing trial balance prepared on January 1, 1991.






The Daniyal Electric Products Company manufactures table fans. It is a practice of the company

to sell 30% of its production on installment basis. The company recognizes profit on sales on the

basis of cash collected from customers. The following are the data for three years:

Years Profit Installment Receivable on

January 1, 2010

Collection During

2010

Installment Receivable on

December 31, 2010

2008 44% Rs.80,000 Rs.80,000 ---

2009 42% Rs.165,000 Rs.75,000 Rs.90,000

2010 40% Rs.150,000 Rs.300,000REQUIRED

Prepare all journal entries for 2010 from the data above, including those required for the

recognition of gross profit at the end of year.

Question # 39:

Khan and Company reports profits on installment basis. It uses perpetual inventory system for

recording merchandise and installment method for recognizing profits. Transactions during

2011 are summarized below:

a) Cost of installment sales Rs.400,000.

b) Installment accounts receivable (ending) – 2011 Rs.300,000.

c) Installment accounts receivable cancelled – 2010 Rs.40,000.

d)

Merchandise repossessed at book value which is Rs.32,000.

e) Unrealized gross profit (beginning) – 2010 Rs.30,000.

f) Installment accounts receivable (ending) – 2010 Rs.20,000.

g) Unrealized gross profit percentage remains constant in both the years.

REQUIRED

a) Give the necessary General Journal entries including adjusting entries. Show necessary

computations.

b) Prepare partial balance sheet as on 31 December 2011 showing installment accounts

receivable and unrealized gross profit.

Installment Sales (1) aDVAC

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