2. Installment Sales Method

Accounting for Special Transactions
Installment Sales
2 Types of Sales
• Regular Sales – it may be either cash or credit sales. Under this type of
sale, revenue is recognized at the time of sales rather than
collection. It applies the accrual method in recognizing revenue.
• Installment Sales- it requires periodic installment collections of cash. It
recognized revenue at the time of collection rather than in the period of
sale.
Methods of Gross Profit Recognition on Installment Sales
• Time of Sales- the revenue and costs of sales are not deferred and gross
profit is recognized at the time of sale.
• Time of Collection- Both revenue and cost of sales are recognized in the
period of sales but the related gross profit is deferred and only realized
when the collection are made.
Methods of Realizing Gross Profit at the time of Collection
• Cost recovery method- The collections should be applied first to the recovery of costs
of installment sales. Then once the cost of installment sales is fully recovered, all
succeeding collections will be considered as profit.
• Profit Realization method - the collections should be applied first to the realization
of gross profit, then once the gross profit is fully recovered, all succeeding collections
will be for the recovery of costs of installment sales.
• Installment Method – the collection are regarded as partly recovery of cost of
installment sales and partly a realization of profit.
Illustration
Irvin Corporation which began business on January 1, 2030, appropriately uses
installment method. The following information is available for 2030.
Installment Accounts Receivable, December 31,2030 320,000
Deferred Gross profit, December 31,2030
(Before recognition of realized GP for 2030) 224,000
Gross Profit on sales 40%
The realized gross profit on installment sales for the year ended December 31,
2030 is
Answer:
96,000
Illustration
Billy Enterprise uses installment method of accounting and it has the following
data at year end
Gross margin on cost 66 2/3%
Unrealized Gross Profit 192,000
Cash collected includes downpayment 360,000
What was the total amount of sales on installment basis?

Answer:
840,000
Additional Problems of Installment Sales Method Accounting
1. Interest on Installment Contract
2. Uncollectible Account
3. Default and Repossession
Interest on Installment Contract
• Interest is usually charged to the buyer on the unpaid balance of the
contract because the installment receivable is collected over the long
period of time.
• Each periodic collection is composed of interest and principal.
• The interest should be deducted to the total amount of collection to
determine only the collection applying to principal in computing the
realized gross profit.
Illustration
On January 1, 2019, Toyota Motors sold a luxury car costing P1,080,000 for an
installment price of P2,200,000 collectible as follows:
- 20% down payment
- Balance is payable in 5 annual equal installment of P352,000 starting Dec
31,2019
- The imputed rate of interest is 10%
Required:
1. Installment Sales revenue to be recorded
2. Give all the entries for 2019 to 2020
Uncollectible Account
• Uncollectible accounts are not usually set up because the company has
the opportunity to recover any uncollectible accounts through
repossession and resale again to other buyer.
Default and Repossession
• The seller can repossess the merchandise sold if the buyer fails to make its periodic
instalment payments. The repossesed merchandise may be reconditioned before it is
resold again to other buyer.
• Gain or Loss on Repossession
Estimated Resale Price after Reconditioning Cost xx
Less: Reconditioning Cost xx
Normal Profit xx
FMV of Repossessed Merchandise xx
Less: Unrecovered Cost:
-IAR Repossessed xx
Less: Deferred Gross Profit xx xx
Gain or Loss on Repossession xx
Illustration
The Japan Homes Corporation started operation on January 1, 2022 selling Home
appliance and furniture sets both for cash and on instalment basis. Data on the
installment sales operations of the company gathered for the years ending
December 2022 and 2023 were as follows:
Illustration
On January 6, 2023 an instalment sale in 2022 was defaulted and the merchandise was
repossessed. The fair value of the merchandise after reconditioning cost amounted to
P15,000. There is a 10% normal profit based on estimated resale value, the corporation
incurred P3,000 disposal cost and P5,000 reconditioning cost. Related instalment receivable
balance on January 6, 2023 was P17,000. The operating expenses incurred in 2022 and 2023
amoounted to P50,000 and P100,000 respectively
Required:
a. Gross Profit Rate 2022 and 2023
b. Deferred Gross Profit as of 2023 from 2022 sales?
c. Estimated resale value
d. What amount to be debited as the value of Repossessed Merchandise at time of
repossession
e. Gain or Loss on repossession

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Accounting for Special Transactions

What was the total amount of sales on installment basis?

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