In: Accounting
Numbers 12 and 13 On January 1, 2020, an entity sold a new car at a price of P1,300,000 with production cost of P1,170,000. At the time contract signing, the entity received P130,000 cash and old car as down payment. The entity gave a trade-in allowance of P390,000 to the old car although its fair market value on January 1, 2020 is P650,000. The remaining balance is payable in six equal monthly installments starting February 1, 2020. The buyer religiously paid the monthly installments starting February 1, 2020. However, on June 1, 2020, the buyer defaulted on the monthly installment due which is resulted to the cancellation of the contract of sale and repossession of the subject car. At the date of the repossession, the repossessed car was appraised at a fair value of P169,000. It is the policy of the entity to use installment method to account its credit sales.
12. What is the realized gross profit to be recognized by the entity for the year ended December 31, 2020?
13. What is the loss on repossession to be recognized by the entity for the year ended December 31, 2020?
In this type of transactions Gross profit is recognized only on to the proportion realized amount i.e, installment method.
Gross profit is recognized only the portion for which installment is received
1. Amount to gross profit to be recognised is
Price of car is 13,00,000
Cost of car is 11,70,000
Total Gross profit = 1,30,000 (13,00,000-11,70,000)
i.e, (1,30,000/13,00,000) = 10% of Price
Initial payment received from the buyer is 1,30,000 + Trade in allowance for old car = 3,90,000
Total initial payment = 5,20,000
Gross profit to be recognized for initial is (5,20,000*10%) = 52,000
Remaining installment amount = (13,00,000-5,20,000) =7,80,000
Total number of installments = 6
Per installment = 7,80,000/6 months = 1,30,000
4 installments were duly paid = 1,30,000 *4months = 5,20,000
Gross profit to be recognized on those installments = 52,000 (5,20,000*10%)
Total Gross profit to be recognized for year for this transaction is
Initial Gross profit = 52,000
4 months installment gross profit = 52,000
Total gross profit to be recognized is = 1,04,000
2. Loss on repossession
Remaining amount to be realized is 2 months installment amount = 1,30,000 *2 = 2,60,000
Amount that can be realized out of repossession = 1,69,000
Therefore, loss on repossession = 2,60,000 – 1,69,000 = 91,000