INSTALLMENT SALES

Conventional Merchandise
Installment Sales of Conventional Merchandise
The accounting procedures used for sales of merchandise on an installment basis
should conform with the following:
1. Sales, receivable and cost of sales should be given separate account designation
by affixing the word “installment” before the account names.
2. Installment receivable and deferred gross profit accounts should be maintained
separately according to year of sale.
3. The journalizing process should include gross profit deferral, either at the date of
sale or at the end of the period. The latter is preferable.
4. Realized gross profit on installment sales should be periodically recognized in
proportion to the current collection of installment accounts receivable (net of
interest).
The accounting procedures will vary depending upon the inventory system used, either
the inventory system is perpetual or periodic.
 2015 2016

Sales:

comprehensive Regular (on account)

Installment-
P250,000 P230,000

illustrative
Down payment 20,000 24,000
Balance (payable within 3
yrs. at the start of each

problem
month, apply 36%
interest for 3 yrs.) 80,000 96,000
Cost of Sales:
Regular 120,000 130,500
Installment 60,000 69,600
Collections:
Assume the following data Accounts receivable 120,000 130,500
Installment contracts
summarizing the transactions for two receivable
years of Fely Sales Corporation 2015 Sales:
Applying to interest 26,000 18,000
Applying to principal 19,000 26,000
2016 Sales:
Applying to interest - 31,000
Applying to principal - 22,000
Operating expenses
paid 50,000 65,000
Accrued interest
receivable,
December 31
2015 Sales 1,800 1.020
2016 Sales 2.250
Illustration 8-3
January-December 2015
(1) To record regular sales
Accounts receivable 250,000
Sales 250,000

(2) To record installments sales

Accounts receivable 20,000
Installment Contracts Receivable-2015 80,000
Installment Sales 100,000

(3) To record cost of sales

Cost
Cost of
of Sales
Installment Sales 120,000
60,000
Shipments on Installments 60,000
Cost of Installment Sales Sales 60,000
Merchandise Inventory 180,000
Note : If the periodic inventory system is used –
(4) To record collection of accounts receivable
Cash 120,000
Accounts Receivable 120,000

(5) To record collection of installment contracts receivable

Cash 45,000
Installment Contracts Receivable- 2015 19,000
Interest Income 26,000

(6) To record payment of operating expenses

Operating Expenses 50,000

Cash 50,000

(7) Adjusting and closing entries, December 31, 2015.

(a) To recognize accrued interest receivable for December 31, 2015
Accrued Interest Receivable 1,800
Interest income 1,800
(b) To set up deferred gross profit on 2015
Computation:
Installment Sales 100,000
Collections applying to principal P 39,000
Cost of Installment Sales 60,000
Multiply by gross profit rate 40%
Deferred Gross Profit,2015 Realized gross profit 40,000 P 15,600

(c) To record realized gross profit on installment sales:

Deferred Gross Profit,2015 15,600
Realized Gross Profit 15,600

(d) To close realized gross profit account

Realized Gross Profit 15,600
Income Summary 15,600

(e) To close other nominal accounts

Sales 250,000
Interest Income 27,800
Cost of Sales 120,000
Operating Expenses 50,000
Income Summary 107,800
January – December, 2016

(1) To reverse accrued interest receivable

Interest Income 1,800
Accrued Interest Receivable 1,800

(2) To record regular sales

Accounts Receivable 230,000
Sales 230,000

(3) To record installments sales

Cash 24,000
Installment Contracts Receivable 96,000
Installment Sales 120,000
(4) To record cost of sales
Cost of Sales 130,400
Cost of Installment Sales 69,600
Merchandise Inventory 200,000
January – December, 2016
(5) To record collection of accounts receivable
Cash 130,500
Accounts Receivable 130,500

(6) To record collection of accounts receivable

Cash 97,000
Installment Contracts Receivable, 2015 26,000
Installment Contracts Receivable,2016 22,000
Interest Income 49,000

(7) To record payment of operating expenses

Operating Expenses 65,000
Cash 65,000

(8) Adjusting and closing entries, December 31, 2016

(a) To recognize accrued interest receivable for December 31, 2016
Accrued Interest Receivable 3,270
Interest Income 3,270
(b) To set up deferred gross profit on 2016 sales
Installment Sales 120,000
Gross
Cost profit rate = P50,000
of Installment Sales / 120,000 = 42% 69,600
Deferred Gross Profit,2016 50,400

(c) To record realized gross profit on installment sales

Deferred Gross Profit,2015 10,400
Deferred Gross Profit,2016 19,320
Realized Gross Profit 29,720

(d) To close realized gross profit account

Realized Gross Profit 29,720
Income Summary 29,720

(e) To close other nominal accounts

Sales 230,000
Interest Income 50,470
Cost of Sales 130,400
Operating Expenses 65,000
Income Summary 85,070
(f) To close result of operations in 2016
Income Summary 114,790
Retained Earnings 114,790
ALLOCATION OF COST
OF GOODS SOLD
 Illustration. Assume that Felipe Company sells merchandise for
cash, on short-term credit and on the installment basis. The
company employs the periodic inventory method in determining
costs. At the end of 2016, the following information are available.
A company selling on the installment plan
will normally have cash sales and sales on
short term credit. If the company employs
the perpetual inventory system, the cost of
each type of sales is determined and
recorded simultaneously with the
recording of each sales transaction.
However, if the company uses periodic or
physical inventory method in the
determination of cost, then the problem of
proper allocation of the total cost of goods
sold among the different types of sales will
arise. The procedure to be followed in
allocating the cost of goods sold will
depend upon the circumstances and
information available