AC316 Accounting for Special Transactions

ASSIGNMENT 2: Installment Sales - Explore on:

PAS 18 OR IAS 18: REVENUE

The accounting requirements for when to recognize revenue from the sale of goods,
rendering of services, and for interest, royalties and dividends. Revenue is measured at
the fair value of the consideration received or receivable and recognized when
prescribed conditions are met, which depend on the nature of the revenue.

● Installment Sales
❖ Nature and Scope
Installment Sales is a collection on a contract is regarded as representing
both a return of cost and realization of gross profit in the ratio in which these
two factors are found in the original sales price. This method serves to
spread the gross profit on an installment sale over the full life of the
installment contracts. Continuing expenses on an installment contract are
matched against the gross profit that is recognized in successive periods.

There is no reasonable basis or assurance for estimating the degree of

collectability and cost of collection. Furthermore, the collectability of the
receivable is so uncertain that gross profit or income is not recognized until
cash is actually received. To be practicable under the installment sales the
profit must be deferred first until such cash collection has already received.

❖ Differentiate from Installment Sales vs Cost Recovery, Profit Recovery,

and Cash Method.
Installment Sales Method emphasizes collection rather than sale. It
recognizes income in the period of collection rather than in the period of
sales. The installment basis of accounting is justified on the basis that when
there’s no reasonable basis for estimating the degree of collectability.
Installment Sale is generally describing any type of sale for which payment is
required in periodic installment over an extended period of time.

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 Cost Recovery Method or Sunk Cost Method is a collection on a contract
are regarded as representing first the recovery of product cost. After the
recovery of cost, all further collections are regarded as profit. This procedure
is conservative under most circumstances, it can be supported only when
there’s doubt as to any recoverable value associated with either the balance
of the installment contract or the goods subject to repossession. This
method is usually used in Franchising and Real Estate.
Profit Recovery Method is a collection are regarded as representing first
the realization of the gross profit on the contract. After recognition of the full
profit on the transaction, all further collection is regarded as a recovery of
cost. This procedure lacks sufficient conservatism under most circumstances
in view of the probability that defaults and repossession over the life o
contracts will impair the original profit margin. This method violates the
GAAP.
Cash Method is seldom used for sales of merchandise and real estate,
because the right of repossession would leaver considerable value to the
seller. However, this method might be appropriate for service contracts with
high initial cost and considerable uncertainty as to the ultimate collection of
the contract price. Under this method, all cost incurred are expenses
immediately, and cash receipts are recognized as revenue. No accruals and
deferral to be recognized. Cash Method is very extreme in terms of the
revenue and expense recognition because it would be appropriate only when
the potential losses on a contract cannot be estimated with any degree of
certainty.
❖ Application - Standards, Methods, and Accounting for Installment Sales
(Give Illustrative Example)
✔ Applicable Standard – PAS 18
✔ Accounting Methods: Installment Sales
✔ Illustrative Example:
Assume that on January 1, 2021, an installment sale of real property
costing PHP 500,000 was sold for PHP 1,000,000. A down payment of

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 PHP 100,000 is made and the balance is payable in sixty monthly payment
of PHP 15,000 at the end of each moth commencing the month of sale.

Journal Entry:

January 1, 2021
Cash 100,000
Installment Accounts Receivable 900,000
Installment Sales 1,000,000
To record the installment sales for the period.

December 31, 2021

Cash 180,000
Installment Accounts Receivable 180,000
To record the payment for the period.

Installment Sales 1,000,000

Cost of Sales 500,000
Deferred Gross Profit 500,000
To set up the deferred gross profit.

Deferred Gross Profit 140,000

Realize Gross Profit 140,000
To record the realize gross profit for the period.

December 31, 2022

Cash 180,000
Installment Accounts Receivable 180,000
To record the payment for the period.

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 Deferred Gross Profit 90,000
Realize Gross Profit 90,000
To record the realize gross profit for the period.

December 31, 2023

Cash 180,000
Installment Accounts Receivable 180,000
To record the payment for the period.

Deferred Gross Profit 90,000

Realize Gross Profit 90,000
To record the realize gross profit for the period.

December 31, 2024

Cash 180,000
Installment Accounts Receivable 180,000
To record the payment for the period.

Deferred Gross Profit 90,000

Realize Gross Profit 90,000
To record the realize gross profit for the period.

December 31, 2025

Cash 180,000
Installment Accounts Receivable 180,000
To record the payment for the period.

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 Deferred Gross Profit 90,000
Realize Gross Profit 90,000
To record the realize gross profit for the period.

Collection Receivable, Gross Cost Realized on Recovered Deferred

Year
s Ending Balance Profit Rate Rate Installment Sales Cost Gross Profit

2021 280,000 720,000 50% 50% 140,000 140,000 360,000

2022 180,000 540,000 50% 50% 90,000 90,000 270,000
2023 180,000 360,000 50% 50% 90,000 90,000 180,000
2024 180,000 180,000 50% 50% 90,000 90,000 90,000
2025 180,000 -0- 50% 50% 90,000 90,000 -0-
Total 1,000,000 -0- 50% 50% 500,000 500,000 -0-

END