ADVANCED FINANCIAL ACCOUNTING AND REPORTING

TOPIC 3: REVENUE RECOGNITION

FRANCHISE AND INSTALLMENT SALE

INSTALLMENT SALE
 A financing arrangement in which the seller allows the buyer to make payments over an extended period of time
 The buyer receives the goods at the beginning of the installment period and makes payment over the installment
period

METHODS OF RECOGNIZING GROSS PROFIT

ACCRUAL METHOD INSTALLMENT METHOD COST RECOVERY METHOD

 Collection of the  Collection of the balance are NOT reasonably assured /  Collections is very uncertain
balance is reasonably possibility of cancellation of the installment sales contracts or highly speculative
assured  Collections for a period of time & no reasonable basis for  Cash price is determined by
estimating degree of collectability future events

Acceptability under PFRS

Accrual Method  (Point in Time)
Installment Method X  Micro Entities (income tax basis)
Cost Recovery Method X

T – ACCOUNTS

Deferred Gross Profit

Installment Accounts Receivable (IAR)
(IAR x GP Rate)
Beginning Balance XX XX Collections RGP XX XX Beginning Balance
Installment Sales XX XX Defaults Defaults XX XX Installment Sales
XX XX Write – Offs Write – Offs XX
XX XX Ending Balance Ending Balance XX
Total XX XX XX XX

SOME IMPORTANT FORMULAS:

GP Rates Unrecovered Costs

a. Current Year = GPTY / I/S a. Installment Receivable Balance – Deferred Gross Profit Balance
b. Prior year = DGP, beg / IAR, beg b. Installment Receivable Balance x Cost ratio
c. Any Year = DGP, end/ IAR, end
Deferred Gross Profit
Trade In Value XX a. DGP, beg = IAR, beg. x GPR
Divided by: Fair Market Value XX b. DGP, end = IAR, end x GPR
Over (Under) XX c. DGP, end = DGP, beg. – DGP, end
d. DGP on Repo IAR
Estimated Selling Price XX
Reconditioning Cost (XX) Realized Gross Profit
Normal Profit on Resale (XX) a. Collection x GPR
Cost to Sell (XX) b. DGP, beg – DGP, end
Fair Market Value XX
Installment Accounts Receivables (IAR)
Collections a. Current Year = IS – Collection
a. IAR, beg – IAR, end – Repo or Written Off IAR b. Prior Year = DGP, beg/ GPR
b. Cash Collections + FV of trade in c. IAR = DGP, end / GPR

Fair Market Value XX

Unrecovered Cost (XX)
Gain/Loss on Repossession XX

TRADE – INS
1. Trade – In Value = Fair Value
2. Trade – In Value > Fair Value: Over – Allowance
3. Trade – In Value < Fair Value: Under – Allowance

ACCOUNTING PROCEDURES FOR DEFAULTS AND REPOSSESSION

1. The installment account receivable and the deferred gross profit are eliminated.
2. The repossessed merchandise is recorded as used inventory at its net realizable value.
3. Bad debt expense and a gain or loss on repossession are recognized.

1
 FRANCHISE

Generally involves the grant from the business owner (franchisor) to the applicant (franchisee), the legal rights to
obtain the trade name, market the service of goods and operate business with an equivalent of a one-time fee.

FRANCHISE FEE FRANCHISE COSTS

1. Initial Franchise Fee – contractual consideration for the 1. Initial Direct Cost
franchise and initial services to be rendered by the  Cost to transfer the franchise and the know-how
franchisor embodied in it
2. Continuing Franchise Fee  Deferred and expensed in the period the relevant
 Continues payment to the franchisor for providing franchise fee is recognized
specific future services, 2. Indirect Cost
 Recognized as revenue when continuing services  Cost that cannot be traced to a particular franchise
are rendered. contract
 Expensed in the period incurred

FRANCHISE REVENUE RECOGNITION METHODS

POINT OF SUBSTANTIAL PERFORMANCE

BEFORE SUBSTANTIAL PERFORMANCE AFTER SUBSTANTIAL PERFORMANCE

INSTALLMENT METHOD
DEPOSIT ACCRUAL OR
OR
General Rule: METHOD METHOD COST RECOVERY METHOD
COST RECOVERY METHOD

………………………………………………………………………………………………………………………………………………….

DEPOSIT METHOD
Exception Rule: LIMITED METHOD
(With Revenue Recognition
(Non-refundable DP)
Precluding Issues)