Chapter 10

INSTALLMENT SALES

Introduction
An installment sale contract is a special type of credit arrangement which provides for a series of
payments over a period of months or years. Installment sales are widely used by dealers in real
estate, home appliances and cars. Since the seller must wait for a considerable period of time to
collect the full amount, it is customary to provide for interest on the unpaid balance.

The installment sales method is a special case of revenue recognition that deviates from the
revenue recognition principles of PFRS 15. This method may be used for taxation purposes or
when the entity is a “micro entity” and has opted to use the “income tax basis”of accounting.

Specific Objectives:
• State the applicability of the installment sales method of recognizing revenue.
• Apply the installment sales method.

Duration: 4 hours (Lecture/Discussion/Problem solving)

LESSON PROPER

1) Under the installment sales method, the gross profit from an installment sale is initially
deferred and subsequently realized on a piecemeal basis as the installment payments are
received using the following formula:

Realized gross profit = Collection on sale x Gross Profit rate

At the end of each period, a balance of deferred gross profit account may appear in the
books. This balance is equal to the gross profit rate multiplied by the balance of installment
receivable as of this date.

Illustration: Assume that on March 31, 2017, an installment sale of property costing
P60,000 was made. The selling price was P100,000. A down payment of P20,000 was
required , the balance payable in forty (40) monthly payments of P2,000 at the end of each
month.
The gross profit on this sale is P40,000, hence the gross profit rate is 40%. Using the
installment sales method, the computation of the realized gross profit and deferred gross
profit is shown below:
Realized Gross Profit Deferred Gross profit
Year Collections x Rate = RGP GP Balance, End x Rate =DGP
2017 38,000* 40% 15,200 62,000 40% 24,800
2018 24,000 40% 9,600 38,000 40% 15,200
2019 24,000 40% 9,600 14,000 40% 5,600
2020 14,000 40% 5,600
Total 100,000 40,000
====== ======
 *P20,000 down payment plus P18,000 (P2,000 x 9 months
2) Repossessions
The seller may repossess the goods sold in case of default by the buyer. On repossession
date:
a) The repossessed good is debited to an Inventory Account at fair value. For purposes of
applying the installment sales method, fair value is either:
i) The appraised value of the repossessed good;
ii) The estimated resale price of the repossessed good less reconditioning costs
and normal profit margin.

b) The carrying amounts of the related installment receivable and deferred gross profit are
derecognized.
c) The difference between (a) and (b) is treated as gain or loss on repossession.

Pro-forma entry:
Inventory (at fair value) xx
Deferred gross profit (at carrying amount) xx
Loss on repossession (debit balancing figure) xx
Installment receivable (at carrying amount) xx
Gain on repossession (credit balancing figure) xx

3)Trade-Ins
A seller may accept from a buyer a trade in of old merchandise as part payment for the sale
of new merchandise. Trade ins under the installment sales method are treated as follows:

a) The traded-in merchandise is debited to Inventory at fair value. For purposes of applying
the installment sales method, fair value is either:
i)The appraised value of the traded-in merchandise;
ii)The estimated resale price of the traded-in merchandise less reconditioning costs
and normal profit margin.

b)The seller gives the buyer a trade-in value for the old merchandise. The trade in value is
that amount that is treated as part payment of the new merchandise being sold.There is no
accounting problem if the trade in value is equal to the fair value in (a) above. If this is not
the case, the seller recognizes either an over allowance or under allowance for the
difference.

Pro-forma entry:
Inventory-traded in (at fair value) xx
Over allowance (if trade in value > FV) xx
Installment receivable (balancing figure) xx
Installment sale xx
Under allowance (if trade in value < FV) xx

Activity:
Discussion of problems uploaded in LMS.