Question

On January 1, 2020, an entity sold a car to a customer at a price of P320,000 with a production cost of P240,000. It is the entity’s policy to employ installment method to recognize gross profit from installment sales.

At the time of sale, the entity received cash amounting to 25% of the selling price and old car with trade-in allowance of P40,000. The said old car has fair value of P120,000. The customer issued a 5-year note for the balance to be payable in equal annual installments every December 31 starting 2018. The note payable is interest bearing with 10% rate due on the remaining balance of the note.

The customer was able to pay the first annual installment and corresponding interest due. However, after the payment of the second interest due, the customer defaulted on the second annual installment which resulted to the repossession of the car sold with appraised value of P88,000. On December 31, 2019, the repossessed car was resold for P112,000 after reconditioning cost of P8,000.

3. What is the entity’s realized gross profit for the year ended December 31, 2018?

4. What is the loss on repossession for the year ended December 31, 2019?

Answer 1

Solution:

Under the installment method, only the gross profits on those sales for which cash payment has been received are recognized. All gross profits associated with uncollected receivables are parked on the balance sheet as an offset to receivables, where they remain until customer payments are received.

Trade in allowance: The potential buyer brings in a vehicle that is owned free and clear, and surrenders ownership to the dealer. In return, the dealer subtracts the amount of the allowance from the cost of a new vehicle.

Selling price 3,20,000

Production cost 2,40,000

Gross Profit 320000 - 240000

80000

Realised Grossprofit 80000(Cash,25% of 320000) + 40000(Trade allowance)

120000

So Out of 320000 only 120000 recieved that constitute 37.5 % of total amount (120000/320000= 37.5%)

Hence out of 120000 realised profit constitute 37.5% of 120000

Realised profit 45000

2. Loss on repossession on dec 31 2019

Balance amount of sales price

320000 - 120000(8000+40000) = 200000

5 equal installments 200000/5 =40000

Interest rate 10%(10% on 40000) = 4000

First installment and interest pais = 44000

2nd installment , interest paid = 4000

Remainig amount due 160000(4 installment amount) + 3 instalments interest

160000+12000 = 172000

Amount realised out of repossession 112000-8000= 104000

Loss on repossession 68000