INSTALLMENT SALES ACCOUNTING

 IN SOME CASES , THERE ARE CIRCUMSTANCES SURROUNDING A REVENUE TRANSACTIONS SUCH THAT CONSIDERABLE UNCERTAINTY OF FULL COLLECTION WOULD  EXISTS SIMPLY BECAUSE OF THE INSTALLMENT SALES WHICH NORMALLY HAS  A VERY LONG COLLECTION TERMS  .  THIS SITUATION CAN OCCUR IF THE SALES IS UNUSUAL IN NATURE OR SALES TO CUSTOMERS WHERE IN CASE OF DEFAULT OF THIS CUSTOMER , A LITTLE COST OR PENALTY IS CHARGED.

UNDER THIS CIRCUMSTANCES,  WHERE UNCERTAINTY OF COLLECTION SUGGEST THAT REVENUE RECOGNITION SHOULD BE BASED ON  THE ACTUAL COLLECTION RATHER THAN THE TIME OF SALE.


THERE ARE APPROACHES THAT REVENUE RECOGNITION DEPENDS ON COLLECTION.

  1.  INSTALLMENT SALES
2. COST RECOVERY METHOD
3. CASH METHOD.


INSTALLMENT SALES METHOD

ACCOUNTING FOR INSTALLMENT SALES METHOD IS WHERE AT THE TIME OF SALE  the following entry is made.  ( IF USING PERPETUAL INVENTORY METHOD)
THIS IS THE REGULAR ENTRY:

     INSTALLMENT ACCOUNTS RECEIVABLE               50,000
              INSTALLMENT SALES                                                   50,000
to record sales made on installment.

    COST OF INSTALLMENT SALES                           25,000
             INVENTORY ( USING PERPETUAL)                              25,000
 to record the cost of the sales made. this is based on qty sold x the cost of the product. 

   CASH                                                                    10,000
            INSTALLMENT ACCTS. RECEIVABLE                 10,000
to record collection

NOW CONSIDERING THAT  IN INSTALLMENT SALES METHOD , THE INSTALLMENT SALES ACCOUNT IS NOT CONSIDERED A  REVENUE YET,   AND EVEN THE COST OF SALES FOR  INSTALLMENT SALES this two accounts  are  REVERSED.at the end of the period.   THEREFORE THE  CREDIT  ENTRY ON THE SALES AND THE DEBIT ENTRY ON  COST OF INSTALLMENT SALES  NEED TO BE REVERSED .  OF COURSE IF ONLY THESE ACCOUNT  WILL BE THE ONE TO BE  REVERSED  , THERE IS A DIFFERENCE IN AMOUNT BECAUSE THE DEBIT IS BIGGER THAN THE COST OF SALES WHICH IS CREDITED,  THAT DIFFERENCE IS ACTUALLY THE GROSS PROFIT , HENCE , AN ACCOUNT NAME "" deferred gross profit " is to be credited. and will not be a nominal accounts but a REAL ACCOUNTS OR BALANCE SHEET account .

NOW YOU MAY ASK,  HOW TO COMPUTE FOR THE ACTUAL REVENUE OR ACTUAL GROSS PROFIT THAT WILL BE REFLECTED ON THE PROFIT AND LOSS. BECAUSE THE FACT IS THE GROSS PROFIT WAS TRANSFERRED TO THE BALANCE SHEET.

IN INSTALLMENT ACCOUNTING , THE RECOGNITION OF THE REVENUE  IS BASED ON THE AMOUNT OF COLLECTION OF THAT  SALES MADE  MULTIPLY BY THE  GROSS PROFIT RATIO OF THAT SALES MADE  .  BUT SINCE THE GROSS PROFIT WAS CLASSIFIED AS BALANCE SHEET ACCOUNT, IT IS NECESSARY THAT WHEN A COLLECTION IS MADE,  THE EQUIVALENT GROSS PROFIT OF THAT COLLECTION USING THE GROSS PROFIT RATIO WILL BE TRANSFERRED BACK TO THE PROFIT AND LOSS UNDER THE  ACCOUNT NAME "    realized gross  profit. , that means if the SALES  was totally collected the deferred or the unrealized gross profit will become zero.

that means revenue is recognized in the profit and loss depending on the amount of collection multiplied by the gross profit ratio. ( COLLECTIONS  X    GROSS PROFIT =  realized gross profit)

if that is the case.  the balance of the unrealized or deferred gross profit  if divided by the gross profit ratio will be equal to the INSTALLMENT SALES RECEIVABLE BALANCE  (  deferred gross profit  divide gross profit ratio  =  RECEIVABLE )   or  installment receivable  multiplied by the gross profit is the deferred gross profit appearing on the balance sheet.( RECEIVABLE X GROSS PROFIT RATIO = DEFERRED GROSS PROFIT )

or the realized gross profit for a particular period divide by the gross profit ratio is equal to the amount of collections made on the sales.  ( REALIZED GROSS PROFIT DIVIDE BY gross profit ratio = COLLECTIONS )

NOW HOW DO YOU COMPUTE FOR THE  GROSS PROFIT RATIO.

WHEN YOU ARE ENGAGING IN SELLING A PRODUCT , YOU PURCHASE THAT PRODUCT FROM OTHER SOURCES FOR RESALE .  WHEN YOU ARE TO SELL THAT PRODUCT , YOU MUST ADD A CERTAIN AMOUNT  FROM THE COST OF THE PRODUCT TO ARRIVE AT THE SELLING PRICE.

 THE AMOUNT THAT YOU WILL ADD ON THAT COST OF THE PRODUCT  IS DEPENDING ON HOW MUCH YOU WANT TO HAVE A GROSS PROFIT  AND THAT GROSS PROFIT WILL ANSWER FOR THE OPERATING COST AND YOUR NEEDED NET PROFIT.

THE AMOUNT YOU ADD IS THE GROSS PROFIT OF THAT PRODUCT.  DIVIDING THAT AMOUNT YOU ADDED OR THE GROSS PROFIT AGAINST THE SELLING PRICE IS THE GROSS PROFIT RATIO. DIVIDING THE COST OF THE PRODUCT AGAINST THE SELLING PRICE IS THE COST OF SALES RATIO.

NOW, IT WOULD BE IMPRACTICAL THAT EVERYTIME YOU PURCHASE A PRODUCT , YOU WILL THINK OF HOW MUCH YOU HAVE TO ADD TO ARRIVE AT SELLING PRICE. THEREFORE YOU HAVE SET A COST OF SALES RATIO AGAINST THE SELLING PRICE SO THAT EVERYTIME YOU PURCHASED A PRODUCT YOU JUST DIVIDE YOU COST TO THIS COST RATIO TO ARRIVE AT SELLING PRICE., IT'S AUTOMATIC NOW THAT THE COST LESS THE SELLING PRICE IS YOUR GROSS PROFIT , SO GROSS PROFIT DIVIDE SALES PRICE IS YOUR GROSS PROFIT RATIO.


 EXAMPLE
                       PURCHASED COST   3,300.00  AND YOU KNOW THAT YOUR COST RATIO IS 80%,  SO DIVIDE 3,300.00 BY 80%, YOU GET  4,125.00 AS SELLING PRICE.

                                SELL PRICE                    4,125
                                COST                               3,300    80%
                                 GROSS PROFIT                825    20%

This deferred gross profit account  though a  non assets accounts , can be presented  as a contra accounts of  INSTALLMENT ACCOUNTS RECEIVABLE  or can be presented as a DEFERRED ACOUNT ON THE LIABILITIES SIDE .  The following  are pro forma journal entries and  adjusting entry:

1.   SALES ON INSTALLMENT

        INSTALLMENT ACCTS. REC              50,000
             INSTALLMNET SALES                              50,000
2.    COST OF THE PRODUCT at 20% mark up on sales price.
         
          COST OF SALES ON INSTALLMENT      10,000
                INVENTORY( perpetual)SHIPMENTS( periodic)     10,000
3.    EXPENSES OF THE COMPNAY
             SELLING AND GEN . EXP                     1,000
                CASH OR ACCTS. PAY                                  1,000
4.  COLLECTIONS

             CASH                                                  20,000
                   INSTALLMENT REC. 2011                     5,000
                   INST. RECE                 2012                    10,000
                  INST RECE                   2013                      5,000
5.  CLOSING OF INSTALLMENT SALE ACCOUNT AND COST OF SALES AND SET UP OF DEFERRED GROSS PROFIT. FOR SALES THIS PERIOD.

        INST. SALES                         50,000
                 COST OF SALES INST.             10,000
                 DEFERRED GROSS PROFIT     40,000                                
 6. TO RECOGNIZE THE REALIZED GROSS PROFIT  BASED ON COLLECTION X GROSS PROFIT RATIO

         DEFERRED GROSS PROFIT      2013         1,000
         DEF.  GROSS PROFIT                 2012         2,000
         DEF. GROSS PRFIT                     2011         1,500
              REALIZED GROSS PROFIT                                4,500

7. CLOSING ENTRIES( PERPETUAL INV. METHOD)        PERIODIC  

    REALIZED GROSS PROFIT            4,500                           cost of sales/inst(inc/exp).          xxx
         SELLING AND GEN EXP                       1,000                  inv. beg                                       xxx
         INCOME EXP SUMM                             3,500                  close beg inv
                                                                                                  inc.exps summ           xxx
                                                                                                       purchases                 xxx
                                                                                                      close purch.
                                                                                                   INV. END            XXX
                                                                                                       inc. exp summ             xxx
                                                                                                     set up inv. end

                                                                                                 realized g.p.           xxx
                                                                                                 shipments              xxx
                                                                                                    expenses                   xxx
                                                                                                    inc.exp summ            xxxx

  LET ME GIVE YOU AN EXAMPLE OF INSTALLMENT SALE METHOD

TAKE NOTE THAT THE PRE TRIAL BALANCE  WOULD SHOW YOU THE INSTALLMENT SALES ACCOUNT AND THE COST OF INSTALLMENT SALES ACCOUNT OF THE CURRENT PERIOD  BECAUSE THE CLOSING OF THAT ACCOUNTS ARE MADE AS PART OF THE ADJUSTING JOURNAL ENTRIES

 THE DEFERRED GROSS PROFIT AND THE INSTALLMENT ACCTS. RECEIVABLE OF PREVIOUS SHALL BE INDICATED IN THE BALANCE SHEET WITH INDICATION OF WHAT YEAR  IT  WAS JOURNALIZED

ILLUSTRATIVE EXAMPLE..

A PRE TRIAL BALANCE DEC  31, 2013  APPEARS BELOW

CASH                                            70,000
INSTALLMENT REC  2013        137,500
INST. REC                   2012          30,000
INST. REC                   2011             7,500
ACCOUNTS RECEIVBLE           42,500
MDSE INV. BEG                          130,000
OTHER ASSETS                         120,000
ACCTS PAYABLE                                                        80,000
DEFERRED GROSS PROFIT 2012                            112,500
DEF. GROSS PROFIT            2011                               24,000
CAPITAL STOCK                                                        212,500
RETAINED EARNINGS                                              171,000
SALES REGULAR                                                       312,500
INSTALLMENT SALES                                               800,000
PURCHASES                               875,000
COST OF INST. SALES             580,000
COST OF SHIPPED INSTALLMENT GOODS         580,000
EXPENSES                                  300,000    

TOTAL                                          2,292,500            2,292,500

REQUIRED: 1. CALCULATE THE GROSS PROFIT RATIO OF 2011,2012,2013
2,  MAKE THE ADJUSTING ENTRIES,  SETTING UP THE DEFERRED GROSS PROFIT AND CLOSING THE INSTALLMENT SALES ACCOUNT AND THE COST OF INSTALLMENT SALES ACCOUNT.
3.  PREPARE PROFIT AND LOSS AND BALANCE SHEET.

AS I HAVE EXPLAINED EARLIER ABOVE , BEFORE YOU CAN COMPUTE THE REALIZED GROSS PROFIT ,SO THAT AN ADJUSTING ENTRY CAN BE MADE ,  YOU MUST KNOW THE GROSS PROFIT RATIO OF THE  PRODUCT SOLD, IN THE ABOVE EXAMPLE IT WOULD APPEAR THAT EVERY YEAR THERE IS DIFFERENT GROSS PROFIT RATIO.

ALSO AS EXPLAINED THE BEGINNING BALANCE OF RECEIVABLE AND THE DEFERRED GROSS PROFIT ( even those end of the year before adjustment is also a beginning balance )  IS DIRECTLY RELATED TO EACH OTHER BECAUSE THE RECEIVABLE DECREASES THE SAME AMOUNT OF THE DEFERRED GROSS PROFIT AS  A RESULT OF THE COLLECTION MADE  AND BEING MULTIPLIED TO THE GROSS PROFIT RATIO TO  REDUCE THE DEFERRED GROSS PROFIT.  THAT MEANS , IF YOU DIVIDE THE DEFERRED GROSS PROFIT  WITH THE COST PROFIT  RATIO , THE ANSWER IS THE BEGINNING LAST YEAR OF THE  RECEIVABLE AMOUNT.

NOW CONSIDERING THAT THE ABOVE EXAMPLE DID NOT SPECIFY HOW MUCH COLLECTION WAS MADE FOR 2011, 2012,  A RECONSTRUCTION OF THE installment receivable account must be made to determine how much collection was made on a particular year..

THE LAST YEAR BALANCES OF INSTALLMENT RECEIVABLE ARE AS FF:
  2011                          75,000
2012                          375,000

IT IS ASSUMED THAT THE ENDING DEFERRED GROSS PROFIT  THIS YEAR  IS THE LAST YEAR ENDING BALANCE ALSO BECAUSE THAT BALANCE IS BEFORE ADJUSTING ENTRIES.

GROSS PROFIT RATIO  IS COMPUTED AS FF::

   FOR  2011         DEFERRED GROSS PROFIT                          24,000
                               DIVIDE  INST. RECEIVABLE  beg                75000
                               equals                                                                32% gross profit ratio

 FOR 2012              deferred gross profit per trial balance               112,500
                          divide receivable  beg.                                          375,000
                                   equals                                                          30%

FOR 2013
                         INSTALLMENT SALES AMOUNT                 800,000
                          COST OF INSTALLMENT SALES                 580,000
                             GROSS PROFIT                                            220,000
                               220,000 DIVIDE 800,000  EQUALS           27.5%               
                      DIVIDE INSTALLMENT  SALES AMOUNT      800,000

THE ADJUSTING JOURNAL ENTRIES.

1.  IS TO ADJUST THE DEFERRED GROSS PROFIT  FOR 2011, 2012 BY KNOWING THE COLLECTION MADE FOR 2011, 2012 THIS YEAR.. THIS IS HOW TO RECONSTRUCT THE RECEIVABLE TRANSACTIONS SINCE THERE IS NO DATA ON HOW MUCH WAS COLLECTED FOR 2011, 12  .

SINCE THE ENDING RECEIVABLE AND THE BEGINNING RECEIVABLE IS GIVEN , AND THE ENDING BALANCE IS SMALLER THEREFORE THERE IS A CREDIT MADE ON THE RECEIVABLE ACCOUNT WHICH REPRESENT  COLLECTION.,  HENCE THAT REDUCTION IS THE COLLECTION ITSELF.

                                                 2011                                           2012

BEG RECEIVABLE               75,000                                      375,000
ENDING BALANCE               7,500                                       30,000
EQUALS COLLECTION     67,500                                      345,000

FOR 2013

  INSTALLMENT SALES MADE                         800,000
  BALANCE END OF THE YEAR                        137,500
        EQUALS COLLECTION                             662,500

JOURNAL ENTRIES ADJUSTING:

1.   INSTALLMENT SALES                                    800,000
       COST OF INSTALLMENT SALES                           580,000
        DEFERED GROSS PROFIT 2013                             220,000
to recognize the deferred gross profit in view of the closing of sales and the cost of sales

2.   DEFERRED GROSS PROFIT 2011 ( 67,500 X 32%)        21,600
DEFERRED GROSS PROFIT  2012( 345,000X 30%)     103,500
DEFERRED GROSS PROFIT 2013 ( 662,500 X 27.5%) 182,187.50
      REALIZED GROSS PROFIT                                                           307,287.50

to recognize the realized gross profit and reducing the deferred gross profit.

3.   cost of sales                                   130,000
          beg. inventory                                      130,000
     to close  beg inventory
4.   COST OF SALES                             875,000
           PURCHASES                                           875,000
     to close purchases to cost of sales

5.  INVENTORY                            150,000
             COST OF SALES                           150,000
   to set up ending inventory

  CLOSING ENTRIES.

1.     INCOME EXP SUMMARY            855,000
              COST OF SALES                                    855,000
             
to close cost of sales account

   2.   REALIZED GROSS PROFIT       307,287.50
         SALES                                          312,500.00
         SHIPMENT OF INST. SALES     580,000.00
                INCOME EXP. SUMM                           1,199,787.50
   to close income account

3.  INCOME EXP SUMMARY             378,750.00
            OPERATING EXPENSES                                        378,750.00
 to close expense account.           

4. retained earnings     33962.50
          income exp summ                33,962.50
to transfer net loss to retained earnings.

EXERCISES:

1.   COMPLE THE FOLLOWING UNKNOWN DATA

                                                  1995        1996         1997
installment sales                          50,000     80,000      ?
cost of inst. sales                           ?             ?               91,800
gross profit                                    ?              ?               28,200
gross profit ratio                            ?                25%          ?
collections   1995                          ?              25,000      10,000
                   1996                                         20,000       50,000
                   1997                                                           45,000
realized gross profit                    1,100        10,500         ?

Hint:  1.  answer first the 1995 unknown.
        2.   since the realized gross profit in 1996 is given, and the gross profit ratio of 1996 is given then you can compute the realized gross profit of 1996 which is part of the 10,500.
3. since the collection in 1996 for the sales made in 1995, and the realized gross profit in 1996 for 1995 is known already then you can compute for the gross profit ratio in 1995.
4.  all the unknown now can be easily computed.
==============================================================
2.  a company has the ff: data

                                     1995                                 1996                    1997
 inst. sales                     210,000                         270,000               350,000
gross profit ratio             25%                                  29%                    27%

required:  compute gross profit, cost of sales, realized gross profit, collections.

the collection history confirms  that  the sales was collected at 10% first year , 40% 2nd year , 30% 3rd year
=====================================================================

.EXERCISE 3

IN JAN 1, 1997  A COMPANY SOLD  A  PARCEL OF LAND COSTING 85,000 FOR 140,000, 10% DOWNPAYMENT, BALANCE TO PAY ANNUALLY FOR 10 YRS AT 12% INTEREST PAYABLE EVERY END OF DEC.

REQUIRED: HOW MUCH IS THE ANNUAL PAYMENT.
                     JOURNAL ENTRIES FOR THE FIRST YEAR.
=====================================================================
IN INSTALLMENT SALES , IT WOULD BE COMMON THAT A DEFAULT ON PAYMENT CAN HAPPEN AND REPOSSESSIONS OF THE PRODUCT IS NECESSARY

IN THE BALANCE SHEET , THERE EXIST A  RECEIVABLE FOR THAT CUSTOMER AND A DEFERRED GROSS PROFIT  FOR THAT PRODUCT. SINCE THE PRODUCT WILL BE REPOSSESSED , THE BALANCE OF THE RECEIVABLE AND THE DEFERRED GROSS PROFIT HAS  TO BE CLOSED.

THE DIFFERENCE BETWEEN THE RECEIVABLE AND THE DEFERRED GROSS PROFIT IS ACTUALLY THE COST OF THE PRODUCT ITSELF BECAUSE ANY REDUCTION ON THAT RECEIVABLE DUE TO COLLECTION , THE DEFERRED GROSS PROFIT IS ALSO CORRESPONDING REDUCED BY APPLYING THE PROFIT RATIO ON THAT COLLECTION.

THAT MEANS ,  IF THAT PRODUCT IS REPOSSESSED , THE RECEIVABLE IS CLOSED AND THE DEFERRED GROSS PROFIT IS CLOSED ,  THE DIFFERENCE IS THE ORIGINAL COST OF THAT PRODUCT.  NOW , CONSIDERING THAT THE PRODUCT UNDERGO DEPRECIATION DUE TO WEAR AND TEAR THAT INVENTORY MAY NOT BE ANYMORE REALISTIC, HENCE A PROPER VALUATION IS NECESSARY, WHERE IS EITHER GAIN OR LOSS MAY OCCUR DUE TO REPOSSESSIONS.

EXAMPLE:
                      INVENTORY                                                        5,000
                       DEFERRED GROSS PROFIT                            10,,000
                              INST. RECEIVABLE                                                 15,000

THEREFORE , A PROPER VALUATION ON THE RETURNED PRODUCT IS NEEDED. THE FOLLOWING MAY BE THE BASIS.

1.  THE FAIR MARKET VALUE., IF MORE THAN THE COST , HENCE A GAIN, IF LESS, THEN A LOSS ON REPOSSESSIONS
2.  THE BOOK VALUE OR THE COST, NO GAIN NOR LOSS
3.  RESALE VALUE LESS RECONDITIONING COST PLUS NORMAL PROFIT
4. NO MORE VALUE, A TOTAL LOSS.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

TRADE INS

 PRODUCTS BEING TRADED IN AS PART OF PAYMENT FOR THE NEW PRODUCT PURCHASED SHOULD BE RECORDED AT VALUES AFTER RECONDITIONING COST , WILL MAKE THE PRODUCT REALIZE A NORMAL GROSS PROFIT ON IT SSALE.

AS TO INDUCE  A SALES , AN OVERALLOWANCE IS GIVEN ON THE PRODUCT BEING TRADE IN.  THIS OVERALLOWANCE AMOUNT MAY BE RECORDED AS A SEPARATE ACCOUNT AND DEDUCT ON THE SALES FIGURE ON TEH  PROFIT AND LOSS OR MAYBE APPLIED ON THE SALES FIGURE .

EXAMPLE:

    A  PRODUCT COSTING 5,000.00 IS SOLD AT 8,000. A USED SIMILAR PRODUCT IS ACCEPTED AS PARTIAL  PAYMENT FOR  1,000.  THE USED PRODUCT CAN BE RESOLD AT  1,500.00 AFTER REPAIR COST OF  400.00  THE COMPANY WANTS A 20% GROSS PROFIT ON TEH RESALE OF THE USED CAMERA.

IF THAT CAN BE SOLD AT                            1500.00
THE MARK UP IS 20% x 1500                      (   300.00)
   THEREFORE COST IS                                  1,200.00
  less THE REPAIR COST                              (  400.00)
    cost to value the trade in                                  800.00
    ACTUAL COST ACCEPT AS TRADE IN  1,000.00
OVER ALLOWANCE                                        200.00
the entry is :

INVENTORY TRADE IN                          800
TRADE IN OVER ALLOWANCE             200
INST. RECE                                              7,000
           INSTALLMENT SALES                                8,000



COST OF INST. SALES                   5,000
      INVENTORY                                     5,000

======================================================================

INTEREST ON INSTALLMENT RECEIVABLE 

when interest is calculated , the interest revenue should be accounted for separately, that is, each payment received is separated into interest revenue.   the interest revenue should be recorded on accrual basis.


EXAMPLE :

On Oct  end , a lot is sold costing  200,000.00 for 300,000.00 . a 75,000 down was made and the balance payable in monthly installment with first payment due end nov.  payable in 75 months.  the monthly installment is 3,000 a month plus  12%  interest on the unpaid balance 


 ENTRIES
    CASH                                75,000
    Notes receivable              225,000
                  REAL ESTATE                          200,000
                  DEFERRED GROSS PROFIT   100,000

November

      Cash          5,250.00
            notes rece                        3,000
           interest income                  2,250

dec. 31

     
 cash                        5,220.00
                   notes rec                         3,000.00
                  interest                            2,220.00     
    to record collection in dec. with a principal balance of  222,000 x 1% =2220.00

deferred gross profit      27,000
         realized gross profit                        27,000
to record the realized gross profit  for the collection of 81,000 x  .33.333.% mark up
===============================================================

EXERCISE PROBLEM   INSTALLMENT SALES

 A TRIAL  IS SHOWN BELOW. AS OF DEC 31, 2013

CASH                                                                         62,500
INS. REC. 2013                                                        200,000
INST. REC 2012                                                         50,000
INST REC 2011                                                          12,500
ACCTS REC                                                             100,000
INVENTORY                                                              75,000
OTHER ASSETS                                                      130,000
ACCTS PAYABLE                                                                187,500
DEF. GROSS PROFIT 2012                                                 240,000
DEF GROSS PROFIT 2011                                                   56,250
CAPITAL STOCK                                                               250,000
RETAINED EARNINGS                                                       111,250
SALES                                                                                   480,000
INSTALLMENT SALES                                                     1,250,000
PURCHASES                                                        1,137,500
REPOSSESS INV                                                     25,000
COST OF INSTALLMENT                                     775,000
SHIPMENTS ON INST. SALES                                            775,000
LOSS ON REPOSSESS                                            32,500
EXPENSES                                                            750,000
TOTAL                                                                 3,350,000   3,350,000

THE FOLLOWING BEGININNING BALANCES  OF SOME ACCOUNTS AS OF DEC 31, 2012 LAST YEAR.

INSTALLMENT RECEIVABLE    2012                                600,000
INST. REC.                                   2011                                 125,000
DEF. GROSS PROFIT                 2012                                 240,000
DEF. GROSS PROFIT                 2011                                    56,250


THE INVENTORY AS OF DEC 31, 2013    IS  87,500

DURING THE YEAR THERE WAS  AN ENTRY WHICH IS INCOMPLETE FOR A REPOSSESSED UNITS.

    REPOSSESSED INV.                                     25,000
    LOSS ON REPOSSESSION                          32,500
                   INSTALLMENT RECE  2013                     12,500
                   INSTALLMENT REC   2012                       25,000
                  INSTALLMENT REC  2011                         20,000

REQUIRED:
    1.  compute the gross profit for the three years.
2. correct the wrong entry.
3   make adjusting and closing entries.
4. make PROFIT AND LOSS AND BALANCE SHEET.

NOTE:
When a repossession is made , the corresponding deferred  gross profit of the product should also be reversed . Since there is no debit to this account, the balancing account used was loss on repossesion
it would appear that the repossessed units below to 2013, 2012,2011  sales. because all the 3 yrs receivable were credited.

IN determining the the amount of collection , make sure you adjust first the ending balance of the installment receivable because that was reduced because of the entry made out of the repossessions.