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Solutions:: Problem 2

Norkis Company sells a new car for $756,000, accepting a used car as a down payment valued at $144,000. The used car can be resold for $162,000 after $21,600 in reconditioning costs. The gross profit rate on the new car sale is 25%. In 2019, $90,000 was collected on the contract, including $5,000 in interest. The realized gross profit for 2019 is $14,450.

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621 views

Solutions:: Problem 2

Norkis Company sells a new car for $756,000, accepting a used car as a down payment valued at $144,000. The used car can be resold for $162,000 after $21,600 in reconditioning costs. The gross profit rate on the new car sale is 25%. In 2019, $90,000 was collected on the contract, including $5,000 in interest. The realized gross profit for 2019 is $14,450.

Uploaded by

Alex
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem 2

On June 1, 2019 Norkis Company sells a new car costing P540,000 for P756,000. A used car is accepted
as down payment, P144,000 being allowed on the trade-in. The used car can be resold for P162,000
before reconditioning costs of P21,600. The company expects to make a 20% gross profit on the sale of
used cars. During 2019, P90,000 is collected on the contract which includes P5,000 interest. The
company uses the installment method in recognizing profit.

Required: (3 pts. each)


1. What is the gross profit rate on the sale of brand new car? .25 or 25%
2. How much is the realized gross profit during the year 2019? 14,450
3. Prepare the entry to record the sale on June 1, 2019.

SOLUTIONS:

Trade-in Value 144,000


Less: Realizable Value 162,000
Reconditioning cost (21,600)
*Normal Profit Margin (32,400) 108,000
Over Allowance 36,000

Normal Profit Margin =162,000 x .20


=32,400

Selling Price 756,000


Less: Over Allowance 36,000
Net Sales 720,000
Less: Cost of New Car 540,000
Gross Profit 180,000
Divided By: Net Sales 720,000
Gross Profit Rate 0.25 or 25%

Realized Gross Profit= Collections net of interest x Gross Profit Rate


=85,000x.25
=21,250
Journal Entries

Merchandise Inventory-Trade in 108,000


Over Allowance- Trade in 36,000
Installment Contracts Receivable 612,000
Installment Sales 756,000
#

Cost of Installment Sales 540,000


Merchandise Inventory 540,000
#
Cash 90,000
Interest Income 5,000
Installment Contracts Receivable 85,000
#

Installment Sales 756,000


Cost of Installment Sales 540,000
Deferred Gross Profit 216,000
#

Deferred Gross Profit 21,250


Realized Gross Profit 21,250
#

Realized Gross Profit 21,250


Income Summary 21,250
#

Income Summary 21,250


Retained Earnings 21,250
#

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