INSTALLMENT SALES

Methods in Gross Profit (GP) Recognition

1. GP is Recognized @ the time of Sale.

 The usual type of recording sales on acct. wherein AR is debited w/ Sales acct. on the credit
side
2. GP is Recognized @ the Collection of Cash
 The amt. of cash collection becomes the basis for gross profit recognition.
 Under this method are several procedures, w/c are:
o Cost Recovery Method
o GP Realization Method
o Installment Method

Procedures Under Method #2

 Cost Recovery Method (CRM)

 GP is not recognized until cash collections are equal to COGS.
 GP Realization Method (GPRM)
 Opposite of CRM
 Installment Method (IM)
 Every cash collection is treated partly GP and partly COGS; most used method; focus

Installment Sales

DOWN PAYMENT
 Deduction on the selling price
 Part of the payment
TRADE IN
 Valuation: Allowance vs. Fair Market Value; any under (over) allowance is added (deducted)
from the selling price to get the DGP rate
Where; FMV = Estimated Resell Value less reconditioning cost and/or normal GP
 Part of the payment
INTEREST: the periodic payment is equal and it’s not given:

𝑎 1 − (1 + 𝑖)−𝑛
𝑌= 𝑏=
𝑏 𝑖
Where: Where:
Y = periodic payment n = total no. of periods
𝑎 = original balance of installment contracts rcvbl i = interest rate per month
𝑏 = PV of annuity

 Interest does not affect computation of collection (DGP, RGP, and IAR)
 It is an add’l to the income (P/L)
 REPOSSESSION/DEFAULT
 Valuation: Lower of Cost and Net Realizable Value (LCNRV)
Where; NRV = Estimated Resell Value less reconditioning cost and/or normal GP
Where; Cost = Unrecovered cost or the balance of IAR before repossession
DISCOUNT
 Deduction from the selling price to arrive at the new one which is recorded as IAR

Journal Entries

@ the time of sale

 To record the sale
Installment Receivable (IAR) xx
Cash (Downpayment) xx
Trade In xx Note: @ FMV
Installment Sales (IS) xx
 Entry (if there is over allowance on Trade In)
Installment Sales xx
IAR xx
 To record the Cost of Installment Sale (COIS)
COIS xx
Inventory xx
To record Collection
Cash xx
IAR xx
To record Write-Off (Direct Method)
Bad Debt Expense xx
Deferred GP xx
IAR xx
To record the Deferred Gross Profit (DGP) @ year-end
 To establish the beginning balance of DGP
Installment Sales xx Note: same amount
Deferred GP xx
COIS xx
 To establish the DGP collected or the Realized Gross Profit
Deferred GP xx
Realized GP xx
To record Repossession
Repossessed Mer. Inventory xx
DGP xx
Loss on Repossession (if there’s any) xx
Installment AR xx
Computations

IAR, beg xx DGP, beg xx

Installment Sales xx
(Downpayment) (xx) (Downpayment*) (xx)
(COIS) (xx)
(Trade In) (xx) (Trade In*) (xx)
DGP xx
(Collections) (xx) (Collections*) (xx)
(Write Off)_____ (xx) (Write Off*)_____ (xx)
DGP ÷ IS = DGP rate (%)
IAR, end xx DGP, end xx
COIS ÷ IS = COIS rate (%) *multiply by DGP rate

DGP, beg xx
(Write Off*) (xx)
(DGP, end) (xx)
RGP xx