INSTALLMENT SALES

By Via Samantha de Austria

INSTALLMENT SALES
Special type of credit arrangement which provides for a series of payment over a
period of months or years.

METHODS OF GROSS PROFIT (GP) RECOGNITION

2 General Approaches:
1. GP is recognized at time of sale
2. GP is recognized in the period in which cash is collected
Cost Recovery Method all collections (principal and interest) are treated
first as recovery of cost.
Gross Profit Realization first collections are regarded as realization of
gross profit
Installment Method collections are regarded as a partial recovery of cost
and a partial realization of profit in their same proportion in the original price.

INSTALLMENT METHOD

Installment Sales
(Cost of Installment
Sales)
Deferred Gross Profit -decreased periodically for the amount recognized as realized
GP

Current Year Sales: Prior Year Sales:

Gross Profit Rate
Gross Profit Deferred GP, beg.
=
Installment Sales Installment Receivable, beg.

Realized Gross Profit = Total Collections (excluding interest) x Gross Profit Rate (based
on sale)

Installment Receivable,end x GP %
Deferred Gross Profit, end = or
Deferred GP, beg. Realized GP

COLLECTIONS AS TO PRINCIPAL AND INTEREST

1. Equal periodic payments

Original Balance of Installment Receivable

Periodic Payments =
PV of annuity of 1

2. Interest computed periodically on the outstanding principal balance during the

period
Date (A) (B) (C) (D)
 Cash Collection Interest Income Installment Outstanding
Receivable Principal
Installment Sale
Down payment - AB DC
Periodic payment D x Interest %
ALLOCATION OF COST OF GOODS SOLD

Assume that M Corp sells merchandise for cash, charge and on installment sales basis.
The following accounts are available at the end of 2015:

Installment sales P
937,500
Regular sales:
Cash sales 187,500
Charge sales 375,000
Cost of goods 975,000
sold

1. According to the ratio of each type of sale to total sales

(Applicable when selling price is uniform for different type of sales)

(A) (B)
Type of Sale Amount of Sales Ratio to Total Allocated Cost
Cash 187,500 1875/15000 121,875
Charge 375,000 3750/15000 243,750
Installment 937,500 9375/15000 609,375
TOTAL 1,500,000 975,000

2. Based on cash price

Assume that selling price for charge and installment sales are higher than cash
sales price by 20% and 25% respectively.

(A) (B) (C)

Type of Sale Amount of Sales Amount Ratio to Total Allocated Cost
based on
Cash Sales
Cash 187,500 187,500 1875/1250 146,250
Charge 375,000 *312,500 3125/1250 243,750
Installment 937,500 **750,000 7500/1250 585,000
TOTAL 1,500,000 1,250,000 975,000
*375,000/120% = 312,500
**937,500/125%= 750,000

3. Based on gross profit rate

Assume that the gross profit % on selling price is 30% on cash sales, 25% on
charge sales and 40% on installment sales.
 (A) (B) (C)
Type of Sale Amount of Sales Gross Profit Cost Ratio (%) Allocated Cost
Rate (%)
Cash 187,500 30 70 131,250
Charge 375,000 25 75 281,250
Installment 937,500 40 60 562,500
TOTAL 1,500,000 975,000

DEFAULTS AND REPOSSESSIONS

when a customer does not make installment payment at a specified time, the
merchandise is repossessed to minimize loss.

Estimated Selling Price/ Resale xx

Price
Reconditioning Cost xx
Normal Profit Margin xx (xx)
Fair Value of repossessed xx
merchandise
Unrecovered Cost: (xx)
Gain (Loss) on repossession xx

Unpaid balance Unpaid balance

Unrecovered Cost = or
Less: Deferred GP x Cost Ratio

Entry to recognize repossession:

Repossessed Merchandise xx
(Periodic Inventory System)
Merchandise Inventory-Repossessed xx
account
(Perpetual Inventory System)
Deferred Gross Profit xx
Loss on Repossession xx
Installment Receivable xx

TRADE INS
Accepted as a part payment or a down payment on a new contract
Recorded at the value allowed

Allowable trade-in value xx

Less: Net Realizable Value of trade-
in:
Estimated resale value xx
Less: Reconditioning cost xx
Normal Profit Margin xx xx xx
(Over) Under allowance xx

**Over allowance reduction in the sales price

**Under allowance addition to the sales price
Installment Sales xx
Gross Profit
(Over) Under allowance xx Gross Profit
Adjusted installment sales xx Rate = Adjusted installment
sales
Down payment (xx)
Actual Value of mdse-trade (xx)
in
Installment Receivable xx

Down payment xx Entry to record trade-ins:

Installment as to Principal xx (Assuming Perpetual Inventory System is
used)
Actual Value of mdse-trade xx Merchandise inventory- trade in xx
in
Total cash collection xx Over allowance on Trade-in xx
GP % % Installment Receivable xx
Realized Gross Profit xx Installment Sales xx
Under Allowance on Trade- xx
in

ACCOUNTS WRITTTEN-OFF
Receivables proven to be worthless should be accounted for under direct write-
off method.

Entry to record write-offs:

Doubtful accounts expense (operating xx
expenses)
Deferred Gross Profit xx
Installment Receivable xx

ALTERNATIVE PROCEDURES FOR COMPUTING REALIZED GROSS PROFIT FOR A SERIES OF YEARS

1. Compute collections and the gross profit rates.

20x6 Sales 20x7 Sales

Installment Receivable, xx xx
beg.
Installment Receivable, (xx) (xx)
end
Total credit for the period xx xx
Repossessions (xx) (xx)
Collections xx xx
DGP, beg. DGP, end
Gross Profit Rate IR, beg % Installment %
Sales
Realized Gross Profit xx xx

2. Obtain the difference of the DGP before and after adjustment

20x6 Sales 20x7 Sales

DGP before adjustment xx xx
DGP after adjustment (xx) (xx)
(Installment Receivable x Gross Profit Rate)
Realized Gross Profit xx x

STATEMENT OF COMPREHENSIVE INCOME

Sales xx
Cost of Sales:
Merchandise Inventory, beg. xx
Add: Purchases xx
Trade-in Merchandise xx
Repossessed Merchandise xx
Goods available for sale xx
Less: Shipments on Installment Sales (xx)
Merchandise Inventory, end (xx) xx
Gross Profit-Regular Sales xx
Realized Gross Profit-Installment Sales xx
Total Realized Gross Profit xx
Operating Expenses (xx)
Operating Income xx
Interest Income xx
Income before loss on repossession xx
Loss on repossession (xx)
Income after loss on repossession xx
PROBLEMS:

1. Since there is no basis for estimating the degree of collectability, Castor Co. uses the
installment method of revenue recognition for the following sales:

2016 2015
Sales 900,000 600,000
Collections from:
2015 sales 100,000 200,000
2016 sales 300,000 -
Accounts written off:
2015 sales 150,000 50,000
2016 sales 50,000 -
Gross Profit % 40 30

What amount should Castor Co. report as deferred gross profit in its December 31,
2016 balance sheet for the 2015 and 2016 sales?

2. These data pertain to installment sales of MCs store:

Down payment, 20%

Installment sales: P45,000 in year 1; P785,000 in year 2; P968,000 in year 3.
Mark-up on cost, 35%
Collections after down payment, 40% in the year of sale, 35% in the year after
sale, 25% in the third year.

a. Realized gross profit in year 1

b. Unrealized gross profit for installment sales made during year 2, as of the end of
year 2.
c. Installment accounts receivable at the end of year 3
 d. Unrealized gross profit at the end of year 3

3. The following selected amounts appeared in the trial balance of Bakes Sales as of
December 31, 2015:
Debit Credit
Installment receivable, 15,000
2014
Installment receivable, 200,000
2015
Inventory, 12/31/2014 70,000
Purchases 555,000
Repossession 3,000
Installment Sales 425,000
Regular Sales 385,000
Unrealized gross profit, 54,000
2014

Additional information:
Installment receivable, 2014 sales as of December 120,0
31, 2014 00
Inventory of new and repossessed merchandise as of
December 31, 2015 95,00
0
Gross Profit Percentage on regular sales during the 30%
year on
sales
Repossessions was made during the year. It was a
2014 sale and the corresponding uncollected amount
at the time of repossession 7,750

a. Gross profit realized on collections for installment sales in 2014

b. Gross profit realized on collections for installment sales in 2015
c. Loss on repossession made on 2014 sales

4. M Realty bought two adjoining lots (Lot A and B) with total area of 1,600 sq. m.. Lot A
was bought for P160,000 in 2009 and Lot B was bought for P240,000 in 2010. M
Realty re-subdivided the two lots and made a 400 sq. m. lot out of the original two
lots by taking 200 sq. m. from each to make Lot C. The cost of Lot C was by allocating
a portion of the cost of the original two lots. M realty build a house on Lot C at a cost
of P152,000. It was completed on June 30, 2014, and had an estimated useful life of
20 years.

The 3 lots and house were sold during 2014 on the following terms:

LOT DATE OF SALES DOWN BALANCE

SALE PPRICE PAYMENT
A Mar. 31 171,428 51,428 120,000
B Oct. 31 240,000 80,000 160,000
C & House June 30 420,000 180,000 240,000
 Balance payable in equal installment
Lot A 12,000 every 3 months
Lot B 20,000 every 2 months
Lot C & House 40,000 every 6 months

Installment payment is to be applied first to accrued interest and the balance to a

reduction of principal. The rate of interest is 10% per annum on the carrying balance
of the principal. After repeated demand from the buyer of Lot C and house, he failed
to meet the installment due on June 30, 2010, and the property was repossessed.

a. Realized gross profit from the sale of lots and house on December 31, 2014
b. Gain (Loss) on repossession of Lot C and house on June 30, 2014

5. In its first year of operations, MM Corp. reported cost of goods sold in the amount of
P900,000 and sales were as follows:
Mark-up on cost Sales
(%)
Cash basis 25 250,000
Charge basis 33 1/3 400,000
Installment 50 600,000
basis

If collections on installment sales during the year amounted to P240,000, how much
was the total gross profit realized at year end?