ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1

Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson Title: Revenue Recognition –Installment Sales Materials:

Method Columnar notebook; calculator;
textbook
Learning Targets: References:
At the end of the learning session, Millan, Zeus Vernon B.; Accounting for
Special Transactions; 2018 Edition
1. I can state the applicability of the “installment sales method”
Ballada, Winlu; Partnership and
of recognizing revenues. Corporation Acctg

2. I can apply the “installment sales method”. Dayag, Antonio J.; Advanced Financial
Accounting, Vo. 1; 2017 Edition

Productivity Tip:
Only one thing at a time
By now, you should be familiar with the idea that batch processing is more efficient (and finishing a task
before you start a new one helps you focus better.

A. LESSON PREVIEW/REVIEW

1) Introduction (2 mins)
An entity applies PFRS 15 Revenue from Contracts with Customers to account for revenues from
contacts with customers. The installment sales method is a special case of revenue recognition that
deviates from the revenue recognition principles of PFRS 15. This method may be used for taxation
purposes or when the entity is a micro entity and has opted to use the income tax basis of accounting.
The installment sales method has originated from the traditional U.S. GAAP and was applied typically
by entities providing financing through long-term installment sales of real property and other assets with
relatively high value when there is uncertainty in the collectability of the consideration.

2) Activity 1: What I Know Chart, part 1 (3 mins)

Please write in the first column what you know about the questions in the second column. The third
column is left blank at this time.

What I Know Questions: What I Learned (Activity 4)

What is micro entity?

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

What is trade in value?

What is over allowance?

B.MAIN LESSON
Activity 2: Content Notes
Basis of Revenue Recognition under the Time of Collection Method.
Methods Criteria for Use Reason for Departing from Treatment of Product of
Time of Sale (Sales Basis) Direct Cash Under Service
Contract
Cost Recovery No reasonable basis Collectibility of the Defer the costs to be
(sunk cost) (assurance) for estimating receivable is so uncertain matched against total cash
dgree of collectibility and that gross profit (or income) collected
costs of collection. is not recognized until cash
is actually received.
Installment Sales No reasonable basis Collectibility of the Defer the costs to be
(assurance for estimating receivable is so uncertain matched against part of
degree of collectibility and that gross profit (or income) each cash collection.
costs of collection. is not recognized until cash Usually done by deferring
is actually received. the estimated profit
Profit Recovery No criteria Unconservative approach - Defer the profit to be
violation of GAAP matched agaionst total cash
collected.
Cash Method Acceptable for reporting Collectibility of the No deferral of costs.
only if the probability of receivable is so uncertain Charged to expense as
recovery of product is that gross profit (or income) incurred.
slioght is not recognized until cash
is actually received.

Installment Sales Method

Installment sales method emphasizes collection rather than sale. It reconizes income in the periods
of collection rather than in the period of sale. The installment basis of accounting is justified on the basis
that when there is no reasonable basis for estimating the degree of collectibility, revenue should not be
recognized unitl cash is collected.

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

The expression “installment sales” is generally used to describe any type of sale for which payment is
required in periodic installment over an extended period of time.
Core principle of PFRS 15
• An entity recognizes revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services.
Applicability of the “Installment sales method”
• The “installment sales method” is a special case of revenue recognition that deviates from the revenue
recognition principles of PFRS 15. This method may be used:
1. for taxation purposes; or
2. when the entity is a “micro entity” and has opted to use the “income tax basis” of accounting.
Accounting procedures
• Under the “installment sales method,” gross profit from an installment sale is initially deferred and
periodically recognized as the installment payments are received by multiplying the gross profit
rate by the installments received. This is exemplified by the formula below:

Realized gross profit = Gross profit rate x Collection on sale

• The unrealized portion of the gross profit is deferred and presented as deferred gross profit in
noncurrent liabilities.
Other formulas

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Repossession

Trade-ins
1. The merchandise received is debited to an inventory account at “fair value.” For purposes of applying
the installment sales method, “fair value” is either:
a. the appraised value of the traded-in merchandise; or
b. the estimated selling price less reconditioning costs and normal profit margin, at date of trade-in.
2. The seller gives the buyer a trade-in value for the traded-in merchandise.
3. The difference between the trade-in value and fair value is accounted for as follows:
a. If the trade-in value is greater than the fair value, the difference is an “Over allowance.” “Over
allowance” is treated as reduction to the installment sale price of the new merchandise sold
when computing for the gross profit and gross profit rate.
b. If the trade-in value is less than the fair value, the difference is an “Under allowance.” “Under
allowance” is treated as addition to the installment sale price of the new merchandise sold
when computing for the gross profit and gross profit rate.

Cost recovery method (of Traditional accounting)

• Under the “cost recovery method” (of Traditional accounting based on US GAAP), the initial collections
on the sale are treated as recovery of the cost of the inventory sold. Thus, no gross profit or interest
income is recognized until total collections from the sale exceed the cost of inventory sold.

Activity 3: Skill-building Activities

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Instruction: Answer what is asked in the following problems.

Time of Sale versus Time of Collection

In July 2020, GBC sold for P24,000 real estate that had cost P9,000, receiving P3,500 cash and a mortgage
note for the balance payable monthly installments. Installment received in 2020 reduced the principal of the
note to a balance of P20,000. The buyer defaulted on the note at the beginning of 2021, and the property was
repossessed. The property had an appraised value of P16,500 at the time of repossession.
Required: Prepare the entries that would be made on the books of the seller in 2020 and 2021, assuming:
1. Full profit is recognized when the sale is made (Time of Sale) and
2. Gross profit on the sale is recognized in proportion to the periodic collections (Time of Collection - Installment
Sales Method).

Time of Collection: Revenue, cost and Gross Profit Recognition

At the end of 2020, RAB sells for P10,000 property acquired in 2020 at a cost of P4,250. Terms of the sale are
P4,000 down with the balance to be paid in annual installments of P1,000.
Required: Indicate the profit to be recognized by RAB in 2020 and each of the next 6 years, assuming that:
1. Collection on the contract are first considered a return of the property cost; after recovery of the cost,
collections are regarded as profit (Cost Recovery Method or Sunk Cost Method)
2. Collects are first considered realization of the profit on the contract; after recovery of the profit, collections
are regarded as a return of cost (Profit Recovery Method)
3. Each collection is considered both a return of cost and of profit in the ratio in which thse are found in the
sales price (Cost-Profit REcovery or Installment Sales Method)

Time of Collection (Installment Sales Method)

The FF Company reports profits on the installment basis. Perpetual inventory records are kept for stock on
hand. Transactions during 2020 are summarized as follows:
A. Sales on installment basis, P250,000.
B. Collections on installment accounts, P120,000.
C. Shipments of merchandise on installment sales; cost, P200,000.
D. Repossessions of merchandise sold on installment basis: installment accounts canceled, P20,000;
repossessed merchandise valued at P14,500.
E. Expenses paid, P16,000.

Required: Prepare the entires:

1. To record the above transactions, and
2. To recognize gross profit on installment sales and close the accounts for 2020.

Journal Entries - Regular Sales and Installment Sales of Merchandise

Assume the following detailing the transactions for the two years of Omega Corporation:

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

2020 2021
Sales:
Regular
2020: Cash, P360,000, On account, P240,000 P 600,000
2021: Cash, P480,000, On account, P600,000 P 1,080,000
Installment Sales:
Down payment 60,000 144,000
Balance 300,000 336,000
Cost of Sales:
Regular 480,000 864,000
Installment 252,000 312,000
Collections:
Accounts Receivable 144,000 360,000
Installment Accounts Receivable -
2020 Sales, applying to Principal 72,000 72,000
Interest 36,000 28,800
2021 Sales, applying to Principal 60,000
Interest 43,200
Accrued Interest Receivable, December 31:
2020 Sales 1,440 1,080
2021 Sales 1,080
Operating Expenses paid 90,000 102,000
Required: Prepare enries:
1. To record the above transactions, and
2. To recognize gross profit and close the accounts for 2020 and 2021

Journal Entries - Allocation of cost of Goods Sold

Assume that Rolex Company sells merchanside for cash, credit and on installment sales basis. The following
accounts are available at the end of 2020:
Installment Sales P1,125,000
Reguar Sales
Cash Sales 225,000
Credit Sales 450,000
Merchandise Inventory, January 1, 2020 180,000
Purchases 1,087,500
Freight-in 45,000
Repossessed Merchandise 52,500
Merchandise Inventory, December 31, 2020 195,000
Required: Allocate the cost of goods sold, assuming:
1. No additional facts are given other than those given above.
2. The selling prices for credit sales and installments sales are higher than cash sales price by 20% and 25%,
respectively.
3. The gross profit rate on selling price is 30% on cash sales, 25% on credit sales and 40% on installment sales.

This document is the property of PHINMA EDUCATION

 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

“Check your answers against the Key to Corrections found at the end of this SAS. Write your score on your paper.”

Activity 4: What I Know Chart, part 2 (2 mins)

For this part, review the questions in the What I Know Chart from Activity 1 and write your answers to the
questions based on what you now know in the third column of the chart.

Activity 5: Check for Understanding (5 mins)

Instruction: Answer what is asked in the following questions.

Paral Company began operations on January 2, 20x4, and appropriately used the installment sales method of
accounting. The following data are available for 20x4 and 20x5:
20x4 20x5
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P
. 3,000,000 P3,600,000
Gross profit on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30% 40%
Cash collections from:
20x4 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000
.. P1,200,000
20x5 sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- P1,400,000
The realized gross profit for 20x5 is:

2. Daily, Inc. appropriately used the installment method of accounting to recognize income in its financial
statement. Some pertinent data relating to this method of accounting include:
20x4 20x5
Installment sales P750,000 P900,000
Cost of sales 450,000 630,000
Gross profit P300,000 P270,000
Collections during year:
On 20x4 sales 250,000 250,000
On 20x5 sales 300,000
What amount to be realized gross profit should be reported on Daily’s income statement for 20x5?

3. Assume the Randall Corporation sold P30,000 worth of merchandise on the installment basis. The cost of the
merchandise was P24,000, and collectability of the receivable is uncertain. Collection in the current year on the
account is P8,000. How much gross profit should be reported as realized?

Use the following information for questions 4 to 6:

Kamus Medical Center uses the cost recovery method in accounting for recognizing revenue. The following
information is available:
20x5 20x6 20x7
Sales .............................................. P 45,000 P 60,000 P 85,000
Gross profit percentage………. 37% 41% 40%
Cash collections:
20x5 ............................................ P 24,000 P 19,000 P 2,000
20x6 ............................................ 40,000 17,000
20x7 ............................................ 53,000

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

4. Determine the amount of gross profit to be recognized for 20x5.

5. Determine the amount of gross profit to be recognized for 20x6.
6. Determine the amount of gross profit to be recognized for 20x7.

7. Leno Distribution, which began operating on January 1, appropriately uses the installment method of accounting.
The following information pertains to Leno's operations for the first year:
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P1,000,000
Cost of installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Collections on installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
The balance in the deferred gross profit account at December 31 should be:

8. Piper Co. began operations on January 1, 20x4 and appropriately uses the installment method of accounting.
The following information pertains to Piper's operations for 20x4:
Installment sales…………………………………………………………..P1,800,000
Cost of installment sales………………………………………………… 1,080,000
General and administrative expenses……………………………….. 180,000
Collections on installment sales…………………………………………. 825,000

The balance in the deferred gross profit account at December 31, 20x4 should be:

9. The Cindy, Inc. began operating at the beginning of the calendar year 20x4 and, using the installment method of
accounting, presented the following data for the first year:
Installment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P 400,000
Gross margin based on cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-2/3%
Inventory, Dec. 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 40,000
Accounts receivable, Dec. 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . 320,000
The balance of the deferred gross profit account, end of 20x4 should be:

10. Ft. Myers Co. began business on January 1, 20x3. The company uses the installment method. Additional
information follows:
20x3 20x4
Installment sales P160,000 P184,000
Cost of installment sales 136,000 158,240
General and administrative expenses 20,000 8,400
Cash receipts on installment method sales
20x3 sales 40,000 89,600
20x4 sales - 36,800
Compute the balance of Deferred Gross Profit at December 31, 20x4.

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5 mins)
Congratulations! You are done with this lesson. Mark your place in the work tracker which will help you
track how much work you have accomplished and how much work there is left to do.

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

How do you feel today?

I feel (unsatisfactory/satisfactory/excellent) because ______________________________________________

What are your challenges in learning the concepts in this module? If you do not have challenges, what is your
best learning for today?
________________________________________________________________________________________
________________________________________________________________________________________

What are the questions/thoughts you want to share to your teacher today?
________________________________________________________________________________________
________________________________________________________________________________________

FAQs

1. What gross profit rate will apply when computing for the realized gross profit to the subsequent collections?
The original gross profit rate will apply.
2. For purposes of applying the instalment sales method for repossessions, what is the basis for fair value?
Either the appraised value of the repossessed good or the estimated resale price of the repossessed
good less reconditioning costs and normal profit margin.

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

KEY TO CORRECTIONS
Introduction
Micro entity is an entity that has total assets or total liabilities below P3,000,000 (SEC guideline on SMEs).

Activity 3
Time of Sale versus Time of Collection
1. Entries in 2020:
Particulars Debit Credit
Cash 3,500
Mortage Notes Receivable 20,500
Real Estate 9,000
Gain on Sale of Real Estate 15,000

Cash 500
Mortgage Notes Receivable 500

Entries in 2021:
Real Estate 16,500
Loss on Repossession of Real Estate 3,500
Mortgage Notes Receivable 20,000

2. Entries in 2020:
Particulars Debit Credit
Cash 3,500
Mortgage Notes Receivable 20,500
Real Estate 9,000
Deferred Gross Profit on Installment Sale 15,000

Cash 500
Mortgage Notes Receivable 500
Receipt P500 cash in 2020 applicable to the principal of note
Deferred Gross Profit on Installment Sales 2,500
Realized Gross Profit on Installment Sales 2,500
Gross Profit Percentages [15,000/24,000] or 62.5% x P4,000

Entries in 2021:
Real Estate 16,500
Deferred Gross Profit on Installment Sales 12,500
Mortgage Notes Receivable 20,000

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Gain on Repossession of Real Estate 9,000

Time of Collection: Revenue, cost and Gross Profit Recognition

2020 No Profit ios recognized. P4,000 down payment is treated as a return of investment.
2021 P750 is profit. P250 is treated as a return of investment.
Following Years: Each annual installment of P1,000 is profit.

2.
2020 P4,000 is profit.
2021 P1,000 is profit.
2022 P750 is profit, and P250 is treated as return of investment
Following Years: Each annual installment of P1,000 is treates as a return of investment.

3. profit percentage is P5,750 / P10,000 or 57.5% of sales

2020 P4,000 x 57.5% = P2,300 is Profit; P1,700 is treated as a return of investment.
2021/following P1,000 x 57.5% = P575 per year is regarded as profit; P425 per year is treated as a return
years of investment

Time of Collection (Installment Sales Method)

A. Installment Contracts Receivable, 2020 250,000

Installment Sales 250,000
B. Cash 120,000
Installment Contracts Receivable, 2020 120,000

C. Cost of Installment Sales 200,000

Merchandise Inventory 200,000

D. Merchandise Repossessions 14,500

Deferred Gross Profit on Installment Sales 2020 4,000*
Loss on Repossession 1,500**
Installment Contracts Receivable, 2020 20,000

E. Expenses 16,000
Cash 16,000

*Gross Profit Percentages: 50,000/250,000, or 20%

Deferred Gross Profit on Repossession: 20% of P20,000 or P4,000

**Fair value of repossessed merchandise.. P 14,500

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Less: Unrecovered cost:

Unpaid balance………………………… P 20,000
Less: Deferred Gross Profit 20% x P20,000…………………… 4,000 16,000
Loss on repossession……………………. P 1,500

2. Adjustment to Recognize Gross Profit on Installments Sales:

A. To set up Cost of Installment Sales:

No Entry (since perpetual inventory method is used)
B. To set-up Deferred Gross Profit on Installment Sales:
Installment Sales 250,000
Cost of Installment Sales 200,000
Deferred Gross Profit on Installment Sales-2020 50,000

C. Adjustment to Recognize Gross Profit in Installment Sales:

Deferred Gross Profit on Installment Sales – 2020 24,000
Realized Gross Profit on Installment Sales – 2020 24,000
GPR: 20% of P120,000 (collection) or 24,000

D. Closing of nomina accounts:

Realized Gross Profit on Installment Sales – 2020 24,000
Expenses 16,000
Loss on Repossessions 1,500
Income/Expense Summary 6,500
To close the accounts for 2020.

Journal Entries - Regular Sales and Installment Sales of Merchandise

January to December 31 20x4 20x5

(1) To record regular sales:
Accounts receivable 600,000 1,080,000
Sales 600,00 1,080,000

(2) To record installment sale:

Cash 60,000 144,000
Installment accounts receivable 300,000 336,000
Installment Sales 360,000 480,000

(3) To record cost of sales:

Periodic Method: No entry

Perpetual Method:
Regular Sales:

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Cost of Sales 480,000 864,000

Merchandise inventory 480,000 864,000
Installment Sales:
Cost of installment sales 252,000 312,000
Merchandise inventory 252,000 312,000
(4) To record collections:
Regular Sales:
Cash 144,000 360,000
Accounts receivable 144,000 360,000
Installment Sales:
Cash 108,000 204,000
Installment Accounts receivable –2020 72,000 72,000
Installment Accounts receivable –2021 60,000
Interest income 36,000 72,000
(5) to record payment of operating expenses:
Operating expenses 90,000 102,000
Cash 90,000 102,000
2.

Adjusting entries (end of the year):

(6) To recognize accrued interest receivable
Interest receivable 1,440 2,880
Interest income 1,440 2,880

(7) To set-up Cost of Sales:

Periodic Method:
Cost of sales 480,000 864,000
Merchandise inventory 480,000 864,000

Perpetual Method: No entry

(7) To set-up Cost of Installment Sales:

Periodic Method:
Cost of installment sales 252,000 312,000
Shipment s on installment sales 252,000 312,000

Perpetual Method: No entry

(8) To set-up Deferred Gross Profit

Installment sales 360,000 480,000
Cost of installment sales 252,000 312,000

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Deferred gross profit – 2020 108,000

Deferred gross profit – 2021 168,000
Gross profit rate – 2020: P 108,000 / P360,000 = 30%.
Gross profit rate – 2021: P168,000 / P480,000 = 35%.

(9) To record realized gross profit on installment sales:

Deferred gross profit – 2020 39,600 *21,600
Deferred gross profit – 2021 71,400
Realized gross profit 39,600 93,000
*P72,000 x 30%
2020: Realized gross profit on installment sales:
Collections applying as to principal..…………………………… P132,000
Multiplied by: Gross profit rate…………………………………… . 30%
Realized gross profit…………………………………………………P 39,600
2021: Realized gross profit on installment sales;
2020 2021
Collections – principal…………… P 72,000 *P204,000
Multiplies by: Gross profit %.......... ____30% ____35%
Realized gross profit…… P 21,600 P 71,400 P 93,000
*P144,000 + P60,000
Closing entries:
(10) To close realized gross profit account:
Realized gross profit 39,600 93,000
Income summary 39,600 93,000
(11) To close other nominal accounts
Sales 600,000 1,080,000
Interest income 37,440 74,880
Cost of sales 480,000 864,000
Operating expenses 90,000 102,000
Income summary 67,440 188,880
(12) To close results of operations:
Income summary 107,040 281,880
Retained earnings 107,040 281,880

Journal Entries - Allocation of cost of Goods Sold

Ratio to Total
Type of Sale Amount Sales Allocated Cost
Regular Sales:
Cash sales P 225,000 P *146,250
Credit sales ___450,000 **292,500
Total regular sales P 675,000 675/1,800 P 438,750

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 ACC110: ACCOUNTING FOR SPECIAL TRANSACTIONS PART 1
Student Activity Sheet Module #19 & 20

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Installment Sales _ 1,125,000 1,125/1,800 __731,250

Total Sales P 1,800,000 P 1,170,000
*P225,000/P1,800,000 x P1,170,000 = P146,250
**P450,000/P1,800,000 x P1,170,000 = P292,500
The allocation above was based on the assumptions that the markup for each type of sale is the same. Normally, the selling prices
of the merchandise are not the same for each type of sales.
2.
Amount based on
Type of Sale Amount Cash Sales (100%) Ratio to Total Sales Allocated Cost
Cash sales P 225,000 P 225,000 225/1,500 P 175,500
Credit sales 450,000 375,000* 375/1,500 292,500
Installment Sales 1,125,000 900,000** 900/1,500 __ 702,000
Total Sales P 1,500,000 P 1,250,000 P 1,170,000
*P450,000 / 120% = P375,000
**P1,125,000 / 125% = P900,000
3.
Type of Sale Amount Gross profit rate Cost ratio Allocated Cost*
Cash sales P 225,000 30% 70% P 157,500
Credit sales 450,000 25% 75% 337,500
Installment Sales 1,125,000 40% 60% 675,000
Total Sales P 1,800,000 P 1,170,000
* Amount of sale x cost ratio.

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