PROFE01-ACCOUNTING FOR SPECIAL TRANSACTIONS

Chapter 8 Installment Sales Method

Learning Objectives

State the applicability of the “installment sales method” of recognizing revenues.

Apply the “installment sales method” of recognizing revenues.

Core principle

• 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 which deviates
from the revenue recognition principles of PFRS 15. The installment sales method may
be used:

1. When the entity uses the “income tax basis” of accounting; or

2. When the entity makes a departure from the provisions of the PFRSs under
circumstances described in PAS 1 Presentation of Financial Statements.

Accounting procedures

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• 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

Other formulas – continuation

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Repossession

Trade-ins

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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

• Under the “cost recovery method,” 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.

To know more information about – Chapter 8- Accounting procedures

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=-ibQ7j6GFQU

To know more information about – Chapter 8- Trade-ins

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=PtFuwOWF3Is

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Reference:

TEXTBOOK-Millan, Accounting for Special Transactions (2018), Philippines: Bandolin

Enterprise

WEBSITE REFERENCES-http://www.iasplus.com/