ACCOUNTING FOR

SPECIAL TRANSACTIONS –
INSTALLMENT SALES
REVENUE RECOGNITION PRINCIPLE
 Under PAS# 18, Revenue is recognized when:
1. It is probable that future economic benefits will flow to the enterprise.
2. These benefits can be measured reliably

DATE OF SALE
LEDGER ACCOUNT DR CR
ACCOUNTS RECEIVABLE XXX
SALES XXX

COS XXX
INVENTORY XXX

DATE OF COLLECTION
LEDGER ACCOUNT DR CR
CASH XXX
ACCOUNTS RECEIVABLE XXX
INSTALLMENT SALES
 An installment sales contract is a special type of credit arrangement which provides for
a series of payments over a period of months or years.
 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.
 Originated from the traditional US GAAP and was applied typically by entities providing
financing through long term installment sales of real property, and other assets with
relatively high value where there is uncertainty in the collectibility of the
consideration.
ACCOUNTING PROCEDURE – INSTALLMENT SALES
 The Gross Profit from an installment sale is initially deferred and
subsequently realized on a piecemeal basis as the installment payments are
received.
DATE OF SALE
LEDGER ACCOUNT DR CR
INSTALLMENT A/R XXX
SALES XXX

COS XXX
INVENTORY XXX

YEAR-END
LEDGER ACCOUNT DR CR
SALES XXX
COS XXX
DEFERRED GP XXX

DATE OF COLLECTION
LEDGER ACCOUNT DR CR
CASH XXX
INSTALLMENT A/R XXX

DEFERRED GP XXX
REALIZED GP XXX
Procedures on the recognition of Gross Profit
 Cost Recovery Method – Under this method, Gross Profit is not recognized
until collections are equal to the amount of Cost of Goods Sold. After the
recovery of the full cost, all collections are regarded as realization of Gross
Profit. Most applicable in the sale of services or products of a nature not
permitting repossession and when the customer notes have no fair market
value.
 Gross Profit Realization Method – Under this method, the first collections are
regarded as realization of Gross Profit. After the realization of the full profit,
all subsequent collections are treated as recovery of cost.
 Installment Method - Under this method, cash collection is regarded as a
partial recovery of cost and a partial realization of profit in the same
proportion that these two elements are present in the original selling price.
This method aims to spread the gross profit in the installment sale over the
life of the contract, and to anticipate possible failure to realize the full
amount of gross profit in the event of defaults and repossessions.
Cost Recovery Method
Hull Gan Co. uses Cost Recovery Method. On Jan 1, 2021, Hull Gan Co. sold
inventory costing Php300,000.00 to a customer for Php550,000.00 payable
as follows: Php100,000.00 down payment and balance due in four annual
equal payments every December 31.

Requirement:

Compute the Realized Gross Profit from Year 2021 to Year 2024
What if Installments include imputed interest, can Hull Gan Co. recognize
interest income in Year 2021?
Cost Recovery Method
1st Requirement
DESCRIPTION 2021 2022 2023 2024
Cumulative collections 212,500.00 325,000.00 437,500.00 550,000.00
Cost of Goods Sold 300,000.00 300,000.00 300,000.00 300,000.00
Excess Collection - 25,000.00 137,500.00 250,000.00
RGP in Previous Year - - 25,000.00 137,500.00
RGP in Current Year - 25,000.00 112,500.00 112,500.00

2nd Requirement
No, under the Cost Recovery Method, neither Gross Profit nor Interest Income
is recognized until the collections exceed the Cost of Goods Sold.
INSTALLMENT METHOD

Hull Gan Co. uses Installment Method. On Jan 1, 2021, Hull Gan Co. sold
inventory costing Php300,000.00 to a customer for Php500,000.00 payable
as follows: Php100,000.00 down payment and balance due in four annual
equal payments every December 31.

Requirement:

Compute the Realized Gross Profit and Deferred Gross Profit from
Year 2021 to Year 2024
INSTALLMENT METHOD
JOURNAL ENTRIES:
DATE LEDGER DR CR
JAN 1, 2021 CASH 100,000.00
INSTALLMENT A/R 400,000.00
INSTALLMENT SALES 500,000.00
JAN 1, 2021 COS 300,000.00
INVENTORY 300,000.00
DEC 31, 2021 CASH 100,000.00
INSTALLMENT A/R 100,000.00

REALIZED GROSS PROFIT COMPUTATION:

DESCRIPTION AMOUNT
DP - JAN 1, 2021 100,000.00
1ST INSTALLMENT - DEC 31, 2021 100,000.00
TOTAL COLLECTION - 1ST YEAR 200,000.00
GPR ((500,000.00-300,000)/500,000) 0.40
REALIZED GROSS PROFIT - YEAR 2021 80,000.00

DEC 31, 2021 INCOME SUMMARY 200,000.00

DEFERRED GROSS PROFIT 200,000.00
DEC 31, 2021 DEFERRED GROSS PROFIT 80,000.00
REALIZED GROSS PROFIT 80,000.00
INSTALLMENT METHOD

REALIZED GROSS PROFIT DEFERRED GROSS PROFIT

YEAR COLLECTIONS GPR RGP INSTALLMENT AR, END GPR DGP
2021 200,000.00 40% 80,000.00 300,000.00 40% 120,000.00
2022 100,000.00 40% 40,000.00 200,000.00 40% 80,000.00
2023 100,000.00 40% 40,000.00 100,000.00 40% 40,000.00
2024 100,000.00 40% 40,000.00 - 40% -
500,000.00 200,000.00 600,000.00 240,000.00
INSTALLMENT METHOD

Hull Gan Co.'s Financial Statement as of December 31, 2021 will include below:
Income Statement
ACCOUNTS AMOUNT
Installment Sales 500,000.00
Cost of Sales 300,000.00
Gross Profit 200,000.00
Less: Deferred Gross Profit 120,000.00
Realized Gross Profit 80,000.00
Balance Sheet
ASSETS
Installment A/R 300,000.00

LIABILITIES
Deferred Gross Profit 120,000.00
INSTALLMENT METHOD – TWO YEAR PERIOD
Hull Gan Co. uses Installment Method. Information on Hull Gan Co.'s
transactions during 2021 and 2022 is shown below:
2021 2022
Installment Sales 500,000.00 800,000.00
Cost of Sales 300,000.00 400,000.00
Gross Profit 200,000.00 400,000.00
Cash Collections from:
2021 Sales 200,000.00 100,000.00
2022 Sales 160,000.00

Requirement:

Compute the Realized Gross Profit and Deferred Gross Profit in Year 2022
INSTALLMENT METHOD – TWO YEAR PERIOD

2022 Realized Gross Profit Amount

2021 Sales (100,000.00 * .40) 40,000.00
2022 Sales (160,000.00 * .50) 80,000.00
TOTAL REALIZED GROSS PROFIT 120,000.00

2022 Deferred Gross Profit Amount

END INSTALLMENT A/R - 2021 (200,000.00 * .40) 80,000.00
END INSTALLMENT A/R - 2022 (640,000.00 * .50) 320,000.00
TOTAL DEFERRED GROSS PROFIT 400,000.00
Repossession
 The seller may repossess the good sold in case of default by the buyer. On
repossession date:
a. The repossessed good is debited to an inventory account at “fair value”
(appraised value of the repossessed good or estimated selling price less
reconditioning cost 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 recognized as gain or loss on
repossession.
Date Ledger Accounts Dr Cr
Jan-21 Inventory (at fair value) xxx
Deferred gross profit (at carrying amount) xxx
Loss on repossession (debit balancing figure) xxx
Installment Receivable (at carrying amount) xxx
Gain on repossession (credit balancing figure) xxx
Repossession

Vina Wee Co. repossessed a good that was previously sold to a defaulting buyer.
Relevant information follows:

Appraised value of the repossessed good - Php7,500.00

Balance on Installment receivable - Php12,000.00
Gross Profit Rate on the sale - 30%

Requirement:
Compute for the gain / loss on Repossession.
Repossession

Date Inventory 7,500.00

Deferred Gross Profit (12,000.00 * .30) 3,600.00
Loss on Repossession 900.00
Installment Receivable 12,000.00
Repossession
Information on Vina Wee Co.'s Installment Sales is as follows:

2021 2022
Sal es 150,000.00 225,000.00
Cost of Sales 120,000.00 175,000.00
Gross Profit Rate 20% 22%
Installment Receivable - 2021 90,000.00 40,000.00
Installment Receivable - 2022 150,000.00

During 2022, Vina Wee Co. repossessed a property that was sold
in 2021 for Php30,000.00. Prior to repossession, Php8,000.00 were
collected from the buyer. The repossessed property is expected to be
resold for Php20,000.00 after reconditioning cost of Php2,500.00.
The normal profit margin is 21%.

Requirements:
Compute for the gain / loss on repossession
Compute for the total realized gross profit in 2022
Compute for the profit recognized in 2022
Repossession
Vina Wee Co. uses the installment sales method. On Jan 1, 2020,
Vina Wee Co. sold inventory costing Php150,000.00 for Php200,000.00
payable as follows: down payment of Php50,000.00 and twelve
monthly payments of Php12,910.00 due at the beginning of each
succeeding month. After making four succeeding monthly payments,
the customer defaulted and Vina Wee Co. repossessed the inventory.
The fair value of the repossessed inventory is Php95,000.00

Requirements:
Realized Gross Profit from the Sale
Gain or loss on repossession
Trade In
 A seller may accept from a buyer a trade-in of old merchandise as part payment for the
sale of new merchandise.
 Treatment for Trade-In under Installment Sales is as follows:
a. Traded-In Merchandise is debited to Inventory at “Fair Value”
b. The seller gives the buyer a trade-in value for the old merchandise. If the trade-in
value is not equal to the fair value in above, the seller recognizes either an over
allowance or an under allowance for the difference.
 If the trade in value is greater than the fair value, the difference is debited to an Over
allowance. The over allowance is deducted from the sale price when computing for
the gross profit rate.
 If the trade in value is less than the fair value, the difference is credited to an Under
allowance. The under allowance is added to the sale price when computing for the
gross profit rate.
Trade In

Ledger Account Debit Credit

Inventory - Traded In (fair value) xxx
Over Allowance xxx
Installment Receivable xxx
Installment Sale xxx
Under Allowance xxx
Trade In

Caly W. Ann Co. uses the installment sales method. Cally W. Ann Co.
sells new merchandise costing Php25,000.00 to a customer for
Php40,000.00. Cally W. Ann Co. accepts old merchandise as trade-in.
The old merchandise's FV is Php15,000.00.

Cally W. Ann Co. grants the customer a trade-in value of Php15,000.00

for the old merchandise. Subsequent collections during the year
amount to Php12,500.00.

Requirement: Compute for the Realized Gross Profit in the yr of sale

Trade In – At Fair Value

Ledger Account Debit Credit

Inventory - Traded In 15,000.00
Installment Receivable 25,000.00
Installment Sales 40,000.00

FV of the old merchandise traded-in 15,000.00

collections 12,500.00
Total 27,500.00
Gross Profit Rate 0.25
Realized Gross Profit 6,875.00
Trade In – Over/Under Allowance
Caly W. Ann Co. uses the installment sales method. Cally W. Ann Co.
sells new merchandise costing Php30,000.00 to a customer for
Php40,000.00. Cally W. Ann Co. accepts old merchandise as trade-in.
The old merchandise's FV is Php15,000.00.

Cally W. Ann Co. grants the customer a trade-in value of Php20,000.00

for the old merchandise. Subsequent collections during the year
amount to Php12,500.00.

Requirement: Compute for the Realized Gross Profit in the yr of sale

Trade In – Over/Under Allowance
Ledger Account Debit Credit
Inventory - Traded In 15,000.00
Over Allowance 5,000.00
Installment Receivable 20,000.00
Installment Sales 40,000.00

FV of the old merchandise traded-in 15,000.00

collections 12,500.00
Total 27,500.00
Gross Profi t Rate 12.5%
Realized Gross Profit 3,437.50

Sales Price 40,000.00

Less: Over Allowance 5,000.00
Adjusted Sales Price 35,000.00
Less: Cost of Sale 30,000.00
Adjusted Gross Profit 5,000.00

Adjusted Gross Profit Rate 12.5%

END OF PRESENTATION