MODULE 7: INSTALLMENT SALES The adjusting entry to record the deferred gross profit is as follows:

Dec. 31, Income summary 240,000

Introduction 20x1
Deferred gross profit 240,000
Installment Sales Method
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 Sales 1,000,000
taxation purposes (1) or when the entity is a "micro entity" (2) and has opted to use the Cost of Sales (600,000)
income tax basis " of accounting. Deferred gross profit-beg 400,000
(1) National Internal Revenue Code 'NIRC Sec. 49) Less: Realized gross profit (160,000)
(2) A “micro entity" is an entity that has total assets or total liabilities below (SEC Deferred gross profit-end 240,000
guideline on SMEs ========
Accounting procedures ABC’s Dec. 31, 20x1 financial statements will report the following:
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 formula below: Income Statement Balance Sheet

Realized gross profit = Collection on sale x Gross profit rate Sales 1,000,000 Assets

▪ Gross profit based on sales = Gross profit ÷ Sales S=100% COS=80%=GP 20% Cost of Sales (600,000) Installment accounts receivable 600,000
▪ Gross Profit based on cost= S=120%,COS 100%= GP=20%
Deferred gross profit-beg 400,000 Liabilities
Illustration 1: Journal entries
ABC Co. uses the "installment sales method." On Jan. 1, 20X1 ABC co. sold a bulldozer Less: Deferred gross profit (240,000) Deferred gross profit 240,000
costing P600,000 for P1,000,000 payable as follows: 20% down payment and balance
due in 4 equal annual installments every Dec. 31. Realized gross profit-end 160,000
Journal entries
Jan. 1, Cash 200,000
20x1
Installment accounts receivable 800,000
The deferred gross profit, being an unearned income, is classified in the balance sheet as
Sales 1,000,000 liability.
The gross profit rate based on sales can also be computed using the following formula
Jan. 1, Cost of sales 600,000 below:
20x1
Inventory 600,000 Gross profit rate = Deferred gross profit ÷ Installment account receivable
Gross profit rate = 240,000 ÷600,000
Gross profit rate = 40%
Dec. 31, Cash (800K/4) 200,000
20x1 Illustration 2: Two periods
Installment accounts receivable 200,000 ABC Co. uses the "installment sales method." Information on ABC's transactions during
20x1 and 20x2 is shown below:
The realized gross profit in 20x1 is computed as follows: 20x1 20x2
Installment sales 1,000,000 1,200,000
Down payment – Jan 1, 20x1 200,000 Cost of sales 600,000 660,000
1st installment- Dec 31, 20x1 200,000 Gross profit 400,000 540,000
Total collections-20x1 400,000 Cash collections from:
Multiply by: GP rate based on sales (1M-600K)/1M) 40% 20x1 sales 400,000 200,000
Realized gross profit- 20x1 160,000 20x2 sales 480,000
Requirement: Compute for the total realized gross profit in 20x2. Divide by: Gross profit rate based on
sales 25%
Solution: Installment sale in 20x3 3,000,000
Prices and costs change over time, so an entity may have different gross profit rates each
year. When computing for the realized gross profit, the original gross profit rate in a Requirement b: Cash collections
particular year of sale is applied to the subsequent collections. Installment receivable – 20x1, Jan. 1, 20x3 320,000
The gross profit rates based on sales are computed as follows: Less: Installment receivable- 20x1, Dec. 31, 20x3
20x1 20x2 Cash collection 20x3 320,000
Gross profit 400,000 540,000 Installment receivable – 20x2, Jan. 1, 20x3 960,000
Installment sales 1,000,000 1,200,000 Less: Installment receivable- 20x2, Dec. 31,20x3 (384,000)
Gross profit rates based on sales 40% 45%
Cash collection 20x3 576,000
The realized gross profit in 20x2 is computed as follows: Sale in 20x3 3,000,000
Less: Installment receivable-20x1, Dec. 31, 20x3 (1,200,000)
Collections in 20x2 from: Cash collection in 20x3 1,800,000
20x1 sales: (200,000 x 40%) 80,000 Total collections 2,696,000
20x2 sales: (480,000 x 45%) 216,000
Total realized gross profit in 20x2 296,000 Requirement c: Total realized gross profit
=======
ADDITIONAL ILLUSTRATIONS: Gross profit rate = Deferred gross profit÷ installment account receivable
Illustration 1: Computation of GROSS profit rate 20x1 20x2
ABC Co. uses the "installment sales method." On January 1, 20x3 ABC Co.'s records show Deferred gross profit- 1/1x3 70,400 230,400
the following balances: Divide by: Installment receivable1/1x3 320,000 960,000
Gross profit rate based on sales 22% 24%
Installment receivable- 20x1 320,000
Installment receivable- 20x2 960,000 The gross profit rate based on sales in 20x3 is 25%
Deferred gross profit – 20x1 70,400
Deferred gross profit- 20x2 230,400 Collections in 20x3 from:
20x1 sales: (320,000x22%) 70,400
On December 31, 20x3, ABC Co.'s records show the following. 20x2 sales (576,000x24%) 138,240
Installment receivable- 20x1 - 20x3 sales: (1.8M X 25%) 450,000
Installment receivable- 20x2 384,000 Total realized gross profit in 20x3 658,640
Installment receivable- 20x3 1,200,000 ======
Deferred gross profit –20x1 (before adjustment) 70,400 Illustration 2: Realized gross profit
Deferred gross profit-20x2 (before adjustment) 230,400
Deferred gross profit-20x3 (before adjustment) 750,000 On Dec. 31, 20x3, ABC Co.'s records show the following:
Deferred gross profit (before year-aid adjustments) 1,050,800
Installment sales in 20x3 were made at 33 1/3% above cost. Installment receivable - 20x2 384,000
Installment receivable - 20x3 1200,000
Requirements:
a. Compute for the installment sale in 20x3. Gross profit rate in 20x2 is 24% based on sales, while gross profit rate in 20x3 is 33
b. Compute for the cash collections in 20x3. 1/3% based on cost.
c. Compute for the total realized gross profit in 20x3.
Requirement: Compute for the realized gross profit in 20x3.
Solutions: Solution:
Requirement (a): Installment sale in 20x3 Gross profit rate = Deferred gross profit ÷ Installment account receivable

Basic formula: GPR based on sales = Gross profit ÷sales Variation:

Variation: Sales = Gross profi t÷ GPR based on sales Installment account receivable X gross profit rate = DGP
Formula: DGP, beg. — Realized gross profit = DGP, end.
Deferred gross profit- 20x3 (before adjustment) 750,000 Variation: DGP, beg. — DGP, end. = Realized gross profit
 Installment receivable - 20x1, Dec. 31, 20x2 — Reqt. (a) 320,000
DGP (before year-end adjustments) 1,050,800 Add back: Collections (1,200,000 in 20x1 + 480,000 in 20x2) 1,680,000
LES.' DGP (after year-end adjustments): Installment sale - 20x1 — Requirement (b) 2,000,000
Installment receivable, 20x2 x GPR (384K x 24%) 92,160
Installment receivable,20x3 x GPR Deferred gross profit - 20x2 sale, Dec. 31, 230,400
[1.2M x (33½ %+ 1331/3%)] or (1.2M x 25%) 300,000 392,160 Divide by: Gross profit rate in 20x2 24%
Decrease in DGP - Realized gross profit in 20x3 658,640 Installment receivable - 20x2, Dec, 31, 20x2 — Reqt.(a) 960,000
Add back: Collections from 20x2 sales 1,440,000
Illustration 3: Reconstruction of information Installment sale-20x2-Requirement b 2,400,000

ABC Co. has the following information: Illustration 5: Deferred gross profit
20x1 20x2 ABC Co.'s records show the following:
Installment sales ? ? 20x1 20X2
Cost of sales 1,560,000 1,824,000 Installment sales 2,000,000 2,400,000
Installment receivable-20x1 800,000 320,000 Cost of sales 1,560,000 1,824,000
Installment receivable-20x2 960,000 Cash collections from:
Gross profit rates based on sales 22% 24 20x1 sales 1,200,000 480,000
20x2 sales 1,440,000
Requirement: Compute for the total realized gross profit in 20x2.
Collections in 20x2 from: Requirement: Compute for the total deferred gross profit on Dec. 31, 20x2
20x1 sales: (480,000 X 22%) 105,600
20x2 sales: (1,440,000 x 24%) 345,600 Solution:
Total realized gross profit in 20x2 451, 200 Formula: Gross profit rate = Deferred gross profit ÷ Installment account receivable
Variation: Installment account receivable X gross profit rate = DGP
Gross profit rate in 20x1: I(2M -1.56M) ÷ 2M] 22%
Illustration 4: Reconstruction of information Gross profit rate in 20x2: [(2.4M-1.824M) ÷ 2.4M] 24%
ABC Co.'s records show the following information
20x1 20x2 Installment sale-20x1 2,000,000
Deferred gross profit (adjusted ending Cash collections (1,200,000 add 480,000) (1,680,000)
balances): 176,000 70,400 Installment Receivable-20x1, Dec. 31, 20x2 320,000
from 20x1 sale Multiply by: Gross profit rate in 20x1 22%
Deferred gross profit-20x1, dec. 31, 20x2 70,400
230,400
from 20x2 sale 22% 24% Installment sale-20x2 2,400,000
Gross profit rates based on sales Cash collections (1,440,000)
Cash collections from: Installment receivable-20x2 Dec. 31, 20x2 960,000
20x1 sales Multiply by: Gross profit rate in 20x2 24%
1,200,000 480,000
Deferred gross profit-20x2 Dec. 31, 20x2 230,400
20x2 sales 1,440,000 Total deferred gross profit- Dec. 31, 20x2 300,800
=======
Requirements: Compute for the following” Illustration 6: Cash collection
a. Balances of installment receivables on December 31, 20x2. ABC Co. has the following collection policy on its installment sales:
b. Installment sales in 20x1 and 20x2. • 20% down payment
• Balance due as follows: 50% in the year of sale, 30% in the second year, and 20% in
Solutions: the third year.
Formula: Gross profit rate = Deferred gross profit ÷ Installment account receivable • Installment sales during 20x1, 20x2 and 20x3 were P2,000,000, P2,400,000, and
Installment account receivable P3,000,000 respectively.
Variation: Installment account receivable = DGP ÷ Gross profit rate • Gross profit rates based on sales in 20x1, 20x2 and 20x3 were 22%, 24% and 25%,
respectively.
Deferred gross profit - 20x1 sale, Dec. 31, 20x2 70,400 Requirement: Compute for the total realized gross profits in each of years 20x1, 20x2
Divide by: Gross profit rate in 20x1 22% and 20x3.
 Multiply by: Cost ratio in 20x2 (100%-24%) 76%
Solution: Cost of sales- 20x2 1,824,000
20x1 20x2 20x3
20x1 sales: -Observe that the previous problems all revolve arOund the two formulas below (and
Downpayment (2Mx20%)X 22% 88,000 their variations):
20x1: [(2Mx80%) x 50%]x22% 176,000
20x2: [(2Mx80%) x 30%]x22% 105,600 Realized gross profit = Collection on sale x Gross profit rate
20x3: [(2Mx80%) x 20%]x22% 70,400 Gross profit rate = Deferred gross profit ÷ Installment account receivable
20x2 sales:
Downpayment (2.4Mx20%)X 24% 115,200 Repossession
20x1: [(2.4Mx80%) x 50%]x24% 230,400 The seller may repossess the good sold in case of default by the buyer. On repossession
20x2: [(2.4Mx80%) x 30%]x24% 138,240 date:
20x3 sales: a. The repossessed good is debited to an inventory account at "fair value." For
Downpayment (3Mx20%)X 25% 150,000 purposes of applying the installment sales method, "fair value" is either:
20x1: [(3Mx80%) x 50%]x25% 300,000 i.the appraised value of the repossessed good; or
Realized gross profit 264,000 451,200 658,640 ii. the estimated resale price of the repossessed good less reconditioning costs and
normal profit margin.
Illustration 7: Reconstruction of information b. The carrying amounts of the related installment receivable and deferred gross
ABC Co’s incomplete records show the following: profit are derecognized.
c. The difference between (a) and (b) is recognized as gain or loss on
20x1 20x2 20x3 repossession.
Installment sales 2,000,000 2,400,000 ? Pro forma entry
Cost of sales ? ? 2,250,000 Date Inventory (at fair value) xx
Gross profit ? ? ? Deferred gross profit (at carrying amount) xx
Gross profit rates ? ? 25% Loss on repossession (debit balancing figure) xx
Collections Installment receivable (at carrying amount) xx
From 20x1 sales 1,200,000 480,000 320,000 Gain on repossession (credit balancing figure) xx
From 20x2 sales 1,440,000 576,000
From 20x3 sales 1,800,000 illustration 1: Repossession — Appraised value
ABC Co. repossessed a good that was previously sold to a defaulting buyer. Relevant
Realized gross profit 264,000 ? 658,640
Requirement: Compute for the cost of sales in 20x2 information follows:
• Appraised value of the repossessed good — P6,000.
Solution: • Balance of installment receivable — P10,000
Realized gross profit-20x1 264,000
• Gross profit rate on the sale 30%.
Divide by: Collections in 20x1 1,200,000
Gross profit rate-20x1 22% Requirement: Compute for the gain or loss on repossession
Solution
Date Inventory 6,000
Deferred gross profit (10kX 30%) 3,000
Total realized gross profit in 20x3 658,640
Loss on repossession 1,000
Realized gross profit in 20x3 from 20x1 sales (320k X 22%) (70,400)
Installment account receivable 10,000
Realized gross profit in 20x3 from 20x3 sales (1.8M X
25%) (450,000)
Realized gross profit in 20x3 from 20x2 sales 138,240
Illustration 2: Repossession — Estimated resale price
Realized gross profit in 20x3 from 20x2 sales 138,240 Information on ABC Co.'s installment sales is as follows:
Divide by: collections in 20x3 from 20x2 sales 576,000 20x1 20x2
Gross profit rate-20x2 24% Sales 200,000 320,000
Cost of sales 160,000 224,00
Installment sales-20x2 2,400,000 Gross profit rate 20% 30%
 Installment receivable - 20x1 90,000 30,000
Installment receivable - 20x2 144,000

During 20x2, ABC Co. repossessed a property that was sold in 20x1 for P20,000. Prior to a. On repossession date, the inventory account is debited at the appraised value of
repossession, P5, OOO were collected from the buyer. The repossessed property is the repossessed good in its present condition without the further reconditioning (i.e.,
expected to þe resold for P17,000 after reconditioning costs of P3,000. The normal profit 6,000-5,000=5,500).The reconditioning costs are subsequently capitalized when
margin is 30%. incurred as follows:
Requirements: Date Inventory 500
Compute for the gain or loss on repossession. Cash 500
Compute for the total realized gross profit in 20x2.
Compute for the profit recognized in 20x2 Requirement (b):
Solution:
Requirement a The new cost basis of the repossessed inventory is P6,000(i.e., the sum of the debits to
Date Inventory 8,900 the inventory account.)
Deferred gross profit (15kX 30%) 3,000
Loss on repossession 3,100 Illustration 4: Profit on resale of repossessed inventory
Installment account receivable(20k-5k) 15,000 ABC Co. uses the "installment sales method." ABC Co. sold inventory costing P30,000 to a
customer for P40,000. After paying P28,OOO, the customer defaulted and ABC Co.
Estimated resale price 17,000 repossessed the good. Upon repossession, the good was appraised at P10,000. ABC Co.
Reconditioning cost (3,000) subsequently spent P2,000 in reconditioning the good before selling it to another
Normal profit margin (17kx30%) (5,100) customer for P15,000. The second buyer made total payments of P6,000.
Fair value of repossessed property 8,900 Requirements: Compute for the following:
====== a. Gain or loss on repossession.
The gross profit rate in the year the repossessed good was originally sold is used in b. Realized gross profit from the resale.
computing for the related deferred gross profit.
Requirements (b) and (c): Solution
The collections in 20x2 are computed as follows: Req.a
Realized gross profit from: Date Inventory (appraised value 10,000
20x1 sale (45K x20%) 9,000 Deferred gross profit (12k x 25%) 3,000
20x2 sale (175Kx30%) 52,800 Installment receivable (40k-28k) 12,000
Total realized gross profit in 20x2-Req.b 61,800 Gain on repossession (squeeze) 1,000
Loss on repossession (3,100) [(40k-30K÷40K]=25%GPR
Profit in 20x2-req.c 58,700 Req. b
====== Resale price 15,000
Illustration 3: Repossession — Fair value after reconditioning costs Cost of sale (10k appraised value + 2k reconditioning cost (12,000)
Information on a repossessed good from a defaulting buyer is as follows: Gross profit 3,000
• The appraised value (fair value) is P6,000 after reconditioning costs of P500. Gross profit rate 20%
• The balance of the installment receivable is P10,000. The gross profit rate on
the sale is 30%. Collections from the resale 6,000
Multiply by: gross profit rate 20%
Requirement: Compute for the following: Realized gross profit from the resale 1,200
a. Gain or loss on repossession.
b. New cost basis of the repossessed inventory. Illustration 5: Repossession — installments w/ interest
ABC Co. uses the installment sales method. On Jan. 1, 20x1, ABC Co. sold inventory
Solution costing P180,000 for P240,OOO payable as follows: down payment of P48,OOO and
Requirement(a) twelve monthly payments of P16,525 due at the beginning of each succeeding month.
Date Inventory (exclusing reconditioning cots) 5,500 The installments include interest of 1/2 of 1% per month. After making three succeeding
Deferred gross profit (10K x 30%) 3,000 monthly payments, the customer defaulted and ABC Co. repossessed the inventory. The
Loss on respossession (squeeze) 1,500 fair value of the repossessed inventory is P180,000.
Installment account receivable 10,000 Requirements: Compute for the following:
a. Realized gross profit from the sale.
b. Gain or loss on repossession. Purchases 25,000
Repossessed inventory 1,500
Solutions Total goods available for sale 26,500
Date Collections Interest income Principal Balance Inventory end(2,500+1,500) (4,000) (22,500)
1/1/20x1 240,000 Gross profit 15,000
1/1/20x1 48,000 - 48,000 192,000 Gross profit rate (15,000÷37,500) 40%
2/1/20x1 16,525 960 15,565 176,435
3/1/20x1 16,525 882 15643 160,792
4/1/20x1 16,525 804 15,721 145,071
Collections pertaining to principal 94,929
Trade-ins
Collections pertaining to principal 94,929 A seller may accept from a buyer a trade-in of old merchandise as part payment for the
Multiply by: Gross profit rate(240K-180K)÷240k 25% sale of new merchandise. Trade-ins under the "installment sales method" are accounted
Realized gross profit 23,732 for as follows:
===== a. The traded-in merchandise is debited to inventory at "fair value." For purposes
Req. b: Gain or loss on repossession of applying the installment sales method, "fair value" is either:
Date Inventory 180,000 i.The appraised value of the trade-in merchandise; or
Deferred gross profit (145,071x 25%) 36,268 ii.the estimated resale price of the traded-in merchandise less reconditioning costs and
Installment receivable (40k-28k) 145,071 normal profit margin.
Gain on repossession (squeeze) 71,197 b. The seller gives the buyer a trade-in value for the old merchandise.
The trade-in value is the amount that is treated as part payment of the
Illustration 6: Repossession — Error new merchandise being sold. There is no accounting problem if the
ABC Co. uses the installment sales method. After its first year of operations, ABC had the trade-in value is equal to the fair value in (a) above. If this is not the
following balances: case, the seller recognizes either an over allowance or an under
Installment sales 37,500 allowance for the difference.
Purchases 25,000 • If the trade-in value is greater than the fair value, the difference is debited to an
Inventory - new merchandise, Dec. 31, 20x1 2,500 "Over allowance" account. The over allowance is deducted from the sale price
Loss on repossession 4,500 when computing for the gross profit rate.
Installment receivable, Dec. 31, 20x1 20,000 • If the trade-in value is less than the fair value, the difference is credited to an
"Under allowance" account. The under allowance is added to the sale price
During the year, ABC Co. repossessed an inventory sold to a defaulting buyer. The when computing for the gross profit rate.
inventory had an appraised value of 1,500. However, this was not recorded. Instead, the Pro forma entry
janitor/bookkeeper of ABC Co. erroneously accounted for the repossession as a debit to Date Inventory-traded in (at fair value) xx
"Loss on repossession" and a credit to "Installment receivable" for the unpaid balance. Over allowance (if traded in >FV) xx
This came to light when the security guard made an audit. The janitor and the guard Installment receivable (balancing figure) xx
were classmates in college when they took up BS Accountancy. Sadly, they did not Installment sale xx
graduate because they only studied half-heartedly and failed in Advanced Accounting. Under allowance (if trade-in value<FV) xx
Requirement: Compute for the correct amount of gain or loss repossession. Illustration: Trade In
Solution: ABC Co. uses the "installment sales method." merchandise costing P12,000 to a customer
Date Inventory 1,500 for P20,000. ABC accepts sold merchandise as trade-in. The old merchandise's fair value
Deferred gross profit (4,500x40%) 1,800 is P5,000.
Loss on repossession (squeeze) 1,200
Installment receivable 4,500 Case1: Trade in value equal to fair value
The balance of the installment receivable is equal to the loss on repossession of P4,500, ABC Co. grants the customer a trade-in value of P5,000 for the old merchandise. Subsequen
This is because the janitor recorded the repossession as a debit to "Loss on repossession" collection during the year amount to P7,000.
equal to the balance of the receivable.

Installment sales 37,500 Requirement: Compute for the realized gross profit in the year sale.
Cost of goods sold: Solution:
Inventory beg. 0 Date Inventory-traded-in 5,000
Installment receivable 15,000
 Installment sale 20,000 Multiply by Gross profit rate 46.67%
Realized gross profit in year of sale 5,600
Fair value of old merchandise traded-in 5,000
Collections 7,000 Installment sale 20,000
Total 12,000 Add: Under allowance 2,500
Multiply by: Gross profit rate (20k-12k)÷20K 40% Adjusted sale price 22,500
Realized gross profit in year of sale 4,800 Cost of sale (12,000)
Adjusted gross profit 10,500
The fair value of the merchandise traded-in is part of the collections in the year of sale Adjusted gross profit rate 46.67%
computing for the realized gross profit.
Case2: Over allowance
To induce sale, ABC Co. grants the customer a trade-in value of P7,000 for the old
merchandise. Subsequent collection during the year amount to P7,000. Allocation of Cost of goods sold
Requirement: Compute for the realized gross profit in the year sale.
Solution: A seller that makes both "regular" and "installment" sales may need to allocate the cost
Date Inventory-traded-in 5,000 of goods sold between the two sales.
Overallowance(7ktrade-in value>5kFV) 2,000
Installment receivable 13,000
Installment sale Illustration 1: Relative cash price equivalents
20,000 ABC co. recognizes revenue from its regular sales at the point of sale and uses the
The installment receivable can also be computed as Sale price less trade in value (20K- "installment' sales method" for its installment sales. Information at year-end is as
7K=13,000) follows:
Fair value of old merchandise traded in 5,000 Regular sales 1,000,000
Collections 7,000 Installment sales 2,400,000
Total 12,000 Cost of goods sold 1,200,000
Mutiply by gross profit rate 33.33% The installment price is higher than the regular price by 20%.
Realized gross profit in year of sale 4,000 Requirement: Compute for the allocation of the cost of goods sold.
Sale price 20,000 Solution:
Less: Over allowance (2,000) Cash sale prices Fraction Allocation of COGS
Adjusted sale price 18,000 Regular sales 1M 1/3
Cost of sale (12,000) 400,000
Adjusted gross profit 6,000 Installment sales (2.4M÷120%) 2M 2/3
Adjusted gross profit rate 33.33% 800.000
Totals 3M 3/3
Case 3: Under allowance 1,200,000
ABC Co. grants the customer a trade-in value of P2,500 for the old merchandise. Subsequent
collection during the year amount to P7,000. Illustration 2: Consistent mark-up on regular sales
ABC Co. recognizes revenue from its regular sales at the point of sale and uses the
"installment sales method" for its installment sales. ABC's trial balance on Dec. 31, 20x2
Requirement: Compute for the realized gross profit in the year sale. is shown below:
Solution: Debit Credit
Date Inventory-traded-in 5,000 Installment receivable-20x1 sales 75,000
Installment receivable 17,500 Installment receivable-20x2 sales 1,000,000
Installment sale 20,000 Inventory, Jan. 1, 20x2 350,000
Under allowance (2.5Ktrade-in,5KFV) 2,500 Purchases 2,775,000
Repossessed inventory (at appraised value) 15,000
Fair value of old merchandise traded-in 5,000 Deferred gross profit-20x1 sales, jan. 1, 20x2 270,000
Collections 7,000 Regular sales 1,925,000
Total 12,000 Installment sales 2,125,000
 • The total realized gross profit is computed as follows:
Additional Information: Collections in 20x2 from:
• Installment receivable-20x1 sales, jan 1, 20x2 600,000 20x1 installment sales: (486,250x 45%) 218,813
• Inventory, Dec. 31 20x2 (new and repossessed) 475,000 20x2 installment sales: (1,125,000 X 38%) 427,500
• Consistent gross profit rate on regular sales 30% 20x2 regular sales: (1,925,000x 30% given) 577,500
• Installment receivable from 20x1 sales written-off Total realized gross profit in 20x3 1,223,813
In 20x2. The related inventory was repossessed in 20x2 38,750 Req. b: Gain or loss on repossession
Requirements: Compute for the following: Date Inventory-repossessed 15,000
a. Total realized gross profit in 20x2 from regular and installment sales. Deferred gross profit (38750x45%) 17,438
b. Gain or loss on repossession. Loss on repossession (squeeze) 6,312
Solutions: Installment receivable 38,750
Requirement (a): Total realized gross profit in 20x2
Cost recovery method
• The total cost of goods is computed as follows: Under the "cost recovery method"* of traditional US GAAP, no gross profit or interest/
Inventory - Jan. 1, 20x2 350,000
income is recognized until the total collections from the sale exceed the cost of the
Purchases 2,775,000
inventory sold.
Repossession 15,000
Total goods available for sale 3,140,000 Illustration: Cost recovery method
Inventory - Dec. 31, 20x2 (new and repossessed) (475,000) ABC Co. uses the "cost recovery method," On Jan. 1, 20x1, ABC Co. sold inventory costing
Cost of goods sold - Regular and Installment 2,665,000 P280,000 to a customer for P500,000 payable as follows: P100,000 down payment and
balance due in 4 equal annual payments every Dec. 31.
Requirement: Compute for the realized gross profit (RGP) in years 20x1 through 20x4.
• The cost of goods sold on regular sales is
Regular sales 1,925,000 Solution
Multiply by: Cost ratio on regular sales (100% - 30%) 70%
20x1 20x2 20x3
Cost of goods sold — Regular 1,347,500
20x4
========
Cumulative collections 200,000 300,000 400,000
• The cost of goods sold on installment sales is follows: 500,000
Cost of goods sold - regular and installment 2,665,000 Cost of goods sold 280,000 280,000 280,000
Cost of goods sold regular sales (1,347,500)
280,000
Cost of goods sold - Installment sales in 20x2 1,317,500
Excess collection - 20,000 120,000
220,000
RGP in previous years -
• The gross profit rate on the 20x2 installment sales is computed as follows:
(20,000) (120,000)
Installment sales in 20x2 2,125,000
Cost of goods sold - installment sales in 20x2 (1,347,500) RGP in current year - 20,000 100,000
Gross profit - Installment sales in 20x2 807,500 100,000
Gross profit rate - Installment sales in 20x2 38%
Variation:
What if the installments include imputed interest, can ABC Co. recognize interest income
in 20x1?
• The gross profit rate on the 20x1 installment sales is computed as follows:
Answer: No. Under the cost recovery method, neither gross profit nor interest income is
Deferred gross profit - 20x1 sales, Jan. 1, 20x2 270,000
recognized until the collections exceed the cost of goods sold.
Installment receivable - 20x1 sales, Jan, 1, 20x2 600,000
Gross profit rate - Installment sales in 20x1 45%
MODULE SUMMARY
• Realized gross profit= Gross profit X collection on sale
• The collections in 20x2 from installment sales in 20x1 and 20x2 are computed
as follows: • Gross Profit rate= Deferred gross profit
Installment Account Receivable
Installment receivable – 20x1 (600,000-38750-75,000) = 486,250 Repossession:
Installment receivable – 20x2 (2,125,000-1000,000) = 1,125,000 Date Inventory (at fair value) xx
Deferred gross profit xx
 Loss on repossession (squeeze) xx IAR, ending xxx
Installment account receivable
xx 1. Gain or Loss on Repossession
• Trade-in: If trade-in value exceeds fair value, the excess is an over allowance,
COMPUTATION OF FV OF REPOSSESSED MERCHANDISE:
which is deducted from sales when computing for the gross profit rate. The fair
value of the traded-in merchandise is treated as part of the collections in the
year of sale when computing for the realized gross profit. Estimated Selling Price P xxx
Reconditioning cost ( (xxx)
INSTALLMENT SALES Normal Profit ( (xxx)
If collectability of the note is REASONABLY ASSURED, ACCRUAL METHOD should be
applied. In this topic the entire amount of GP becomes part of the net income. Cost to sell ( xxx)
FV OF REPOSSESSED MERCHANDISE AFTER RECONDITIONING COST
If the collectability of the note is NOT REASONABLY ASSURED, P xxx
INSTALLMENT METHOD should be applied

COMPUTATION OF NET INCOME:

• If it is BEFORE reconditioning cost, IGNORE the amount of
Gross Profit (GP) on Regular Sales P xxx reconditioning cost.
• If the problem is SILENT if the estimated selling price
Realized Gross Profit (RGP) on Installment Sales xxx is before or after recondition cost, deduct the
reconditioning cost
TOTAL RGP P xxx • If the problem says ESTIMATED WHOLESALE VALUE
or APPRAISED VALUE, the normal profit should not be
Less: Expenses
deducted anymore.
1. Selling Expenses P xxx
2. Loss on Repossession xxx
3. Loss on Write-off xxx
5.COMPUTATION OF GAIN (LOSS) ON REPOSSESSION:
(
xxx FV of Repossessed Merchandise P
)
xxx
NET INCOME P xxx
Less: Unrecovered cost
1) IAR-defaulted P xxx
*GP on Regular Sales *RGP on Installment Sales Less: DGP related to receivables ( xx)
Sales Pxxx Collection P xxx or
Less: Cost of Regular Sales (xxx) Multiplied by GP rate ( 2) IAR x cost ratio xxx (
xxx
) xxx)
GP ON REGULAR SALES P xxx RGP ON INSTALLMENT SALES P xxx GAIN (LOSS) ON REPOSSESSION P

Installment Accounts Receivable xxx

IAR, beginning (prior year) xxx xxx Collections • If Unrecovered Cost > FV or Repossessed Merchandise = LOSS ON
or REPOSSESSION
Installment sales xxx Repossessed accounts
Repossessed Merchandise @ FV xxx
(current year) or IAR defaulted
DGP xxx
xxx Write-off
Loss on Repossession xxx
 IAR – defaulted xxx 2. When the consideration receivable from an installment sale is discounted,
realized gross profit is computed
Gain on Respossession (if any) xxx
a. based on collections pertaining to the principal
If Unrecovered Cost < FV of Repossessed Merchandise b. based on the total collection during the period
GAIN ON REPOSSESSION Journal entry: c. a or b
6. Write-off d. none of these

Regular Sales 3. Under the installment sales method, when merchandise previously sold is
repossessed, the repossessed merchandise is recorded at
Allowance on Doubtful accounts xxx a. fair value c. current cost
Accounts Receivable xxx b. original cost d. any of these

Installment Sales 4. For purposes of applying the installment sales method, “fair value” is
a. the appraised value of the repossessed property or traded-in merchandise
DGP xxx b. the estimated selling price of the repossessed property or traded-in
merchandise less reconditioning costs and normal profit margin, at date of repossession
Loss on Write-off xxx or date of trade-in.
IAR xxx c. a or b
d. none of these

7. Deferred Gross Profit 5. Gain or loss on repossession is computed as

a. the fair value of the repossessed property less the sum of the balance in
COMPUTATION OF DEFERRED GROSS PROFIT: deferred gross profit and the balance in the defaulted installment account receivable
b. the sum of the fair value of the repossessed property and the balance in the
Installment Sales P xxx defaulted installment account receivable less the balance in deferred gross profit
Cost of Installment ( xxx) c. the difference between the fair value of the repossessed property and the
Sales balance in deferred gross profit
DGP P xxx d. the sum of the fair value of the repossessed property and balance in deferred
gross profit less the balance in the defaulted installment account receivable

DGP 6. Merchandise received as trade-in is recognized at

RGP (Collection x GP rate) xxx xxx DGP, beginning a. fair value c. current cost
b. original cost d. any of these
DGP on Repossessed Merchandise xxx
DGP on Write-off xxx 7. Under an installment sale where merchandise is received as “trade-in,”
xxx DGP, ending a. the fair value of merchandise traded-in is considered as part of collections
when determining the realized gross profit in the year of sale.
b. the trade-in value of merchandise traded-in is considered as part of collections
when determining the realized gross profit in the year of sale.
c. neither the fair value nor the trade in value affects the computation of realized
MODULE ACTIVTY/ASSESSMENT gross profit.
I.MULTIPLE CHOICE: THEORY/PROBLEMS d. none of these
1. When the consideration receivable from an installment sale is discounted, the gross 8. The excess of the trade-in value over the fair value of a traded-in merchandise
profit rate is computed in a sale accounted for under the installment sales method represents
a. based on the present value of the consideration receivable. a. over allowance c. no allowance
b. based on the undiscounted installment sale price b. under allowance d. small allowance
c. a or b
d. none of these 9. Under the installment sales method, an “over allowance” is
a. treated as addition to the installment sale price when computing for the gross
profit rate.
b. treated as reduction to the installment sale price when computing for the gross Deferred gross profit - 20x2 576,000
profit rate.
c. not accounted for
d. none of these On December 31, 20x3, INNOCUOUS Co.’s records show the following balances before
e. adjustments for realized gross profit:
10. Under the cost recovery method,
Installment receivable - 20x1 -
a. 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 Installment receivable - 20x2 960,000
collections from the sale equals the cost of inventory sold.
b. the initial collections on the sale are treated as recovery of the cost of the Installment receivable - 20x3 2,400,000
inventory sold. Thus, no gross profit is recognized until total collections from the sale
equals the cost of inventory sold. However, interest income may nonetheless be Deferred gross profit - 20x1 176,000
recognized.
Deferred gross profit - 20x2 576,000
c. a or b
d. none of these Deferred gross profit - 20x3 1,500,000

Installment sales in 20x3 were made at 331/3 above cost.

II. PROBLEM SOLVING:
2. How much is the installment sale in 20x3?
1. BUCOLIC RURAL Co. uses the installment method. Information on BUCOLIC’s a. 4,836,000
transactions during 20x1 and 20x2 is shown below: b. 5,800,000
20x1 20x2 c. 6,000,000
d. 7,200,000
Installment sales 2,000,000 2,400,000
3. How much is the total cash collections in 20x3?
Cost of sales 1,200,000 1,320,000
a. 5,840,000
Gross profit 800,000 1,080,000 b. 1,440,000
c. 3,600,000
Cash collections from: d. 5,640,000
20x1 sales 800,000 400,000
4. How much is the total realized gross profit in 20x3?
20x2 sales 960,000 a. 984,600
b. 1,241,200
How much is the total realized gross profit in 20x2? c. 1,520,000
d. 1,421,600
a. 160,000
b. 432,000
c. 592,000 5. DEMOTIC POPULAR Co. uses the installment method. The following
d. 642,000 information was taken from the incomplete records of DEMOTIC Co.:
20x1 20x2 20x3
Use the following information for the next three questions:
INNOCUOUS HARMLESS Co. uses the installment method. On January 1, 20x3, Installment sales 4,000,000 4,800,000 ?
INNOCUOUS Co.’s records show the following balances:
Cost of sales ? ? ?
Installment receivable - 20x1 800,000
Gross profit ? ? ?
Installment receivable - 20x2 2,400,000
Gross profit rates ? ? 25%
Deferred gross profit - 20x1 176,000
Collections:
from 20x1 sales 2,000,000 1,200,000 800,000 d. 90,000
from 20x2 sales 2,400,000 1,440,000 Use the following information for the next three questions:
from 20x3 sales 3,600,000
ARNZQUIN Co. sells household furniture both on cash and on installment basis. For each
Realized gross profit 440,000 ? 1,421,600 installment sale, a contract is entered into whereby the following terms are stated:
a. A down payment of 25% of the installment selling price is required and the
balance is payable in 15 equal monthly installments.
How much is the cost of sales in 20x2? b. Interest of 1% per month is charged on the unpaid cash sales price equivalent
at each installment.
a. 2,840,000 c. The price on installment sale is equal to 110% of the cash sales price.
b. 3,248,000
c. 3,648,000 For accounting purposes, installment sales are recorded at contract price. Any unpaid
d. 3,946,000 balances on defaulted contracts are charged ton uncollectible accounts expense. Sales of
defaulted merchandise are credited to uncollectible accounts expense. Interests are
Use the following information for the next three questions: recorded in the period earned. For its first year of operation ending December 31, 20x1,
THRALL SLAVE Co. uses the installment method. Information on installment sales in the books of the company showed the following:
20x1 and 20x2 is shown below:
Cash sales ₱378,000
20x1 20x2
Installment sales 794,970
Sales 400,000 640,000 Merchandise inventory, Jan. 1 174,180
Cash collections on installment contracts:
Cost of sales 320,000 448,000
Down payment, including defaulted contract 198,750
Gross profit rate 20% 30% Installment payments, including interest
of ₱27,758.52 (average of six
Installment receivable - 20x1 180,000 60,000 monthly installments on all
contracts, except on defaulted
Installment receivable - 20x2 288,000 contracts) 238,023
During 20x2, THRALL Co. repossessed a property which was sold in 20x1 for ₱40,000.
A contract amounting to ₱3,300 was defaulted after the payment of 3 installments.
Prior to repossession, ₱10,000 were collected from the buyer. The estimated resale price
of the repossessed property was ₱34,000 after reconditioning costs of ₱6,000.
9. The gross profit rate based on total sales at cash sales price equivalent is:
6. How much is the gain or loss on repossession? a. 33.75% c. 37.00%
a. 17,800 b. 36.34% d. 40.88%
b. 6,200
c. 12,800
d. 5,400 10. The total interest earned for the first four months on the defaulted contract is:
a. 60.94 c. 72.07
7. How much is the total realized gross profit in 20x2? b. 69.30 d. 80.85
a. 123,600
b. 352,000
c. 117,400 11. The realized gross profit for the year 20x1 is:
d. 90,000 a. 151,335.35 c. 249,674.52
b. 161,789.16 d. 291,355.96
8. How much is the profit recognized in 20x2?
a. 123,600
b. 352,000
c. 117,400