(os FT el ate) Installment Sales — {n installment sales contract is a special type of credit arrangement which provides {for a series of payments over a period of months or years. Installment sales are widely used by dealers in real estate, home appliances and cars. 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. Aninstallment plan exposes the seller to a greater risk of non-collection considering that customers who avail of this plan are generally weaker in financial condition than those who buy on open account. Furthermore, the credit standing of a customer ‘may change significantly during the period covered by an installment contract. In view of this greater risk of non-collection, the seller should protect himself by adopting a form of contract which will enable him to repossess the property if the buyer fails to make all the agreed installment payments. Inspite of the various safeguards, losses from installment sales are significantly greater than those from short-term credit sales. To minimize loss, the seller should require sufficient down payment to cover the decline in the value of the property when it moves out of the “new merchandise” category to “old merchandise” category. The installment period should also be made as short as possible thods of Gross Profit Recognition on Installment Sales nation of the net income on installment salesis one ofthe more complicated in installment sales accounting because ‘the amounts of recoveries and the “Felated costs and expenses are seldom known in the period when the sale is made. ‘Accounting procedures should be developed fora reasonable matching of costs and revenues, Two general approaches may be used in the recognition of gross profit on 321Chapre 322 pier § i e) es pric st of sales) is recognized installment sales (1) the gross profit (excess of sales price over co : at the time of sale; and (2) the gross profitis recognized in installments over the period of the contract on the basis. of cash collections, Gross Profit is Recognized at the Time of Sale. Many companies treat a sale on installment in exactly the same way as they treat any ther sale on account. The Account Receivable account is debited and the Sales; account is credited for the full Price when Accountants who favor this treatment point out that most of the expenses in selling Sood are incurred and recorded in the year of sale therefore, the revenue should also be reported at that time to properly match cost and Tevenue. However. many expenses related to installment contract include the &xpenses of accounting, interest, repossession and loss on defaulted contract. These expenses are incurred after the sale and me spread overa period of time. Thus, if revenue ie ‘eported atthe time of sale, the post- file expenses, theoretically, should be estimated ‘and the liability should be recorded for them. This procedure will equire recognition ofall expenses relating to the sales of the same Period so thatthe determi r will be a reasonable process, The year- end entries to ree Ould be a debit to the appropriate expense accounts an a a Liability for Post-Sale Collection and Repossession Expenses. This lability account will be debited When the expenses relating ‘o the installment contract become known “ dE e accounts will be provided I Gross Profit is Recognized in the Period in which Cash is c ‘Pecial method of accounting for installment sales whereby gross; the installment; receivables are collInstaliment Sates 323 for gross profit recognition. Under this approach, several alternative procedures which focus primarily on the recognition of gross profit may be applied, namely: Cost Recovery Method. Under this method gross profit is not recognized until collections are equal to the amount of cost of goods sold. That is, all collections both interest and principal portions are treated first as recovery of the property costs. After the recovery of the full cost, all collections are regarded as realization of gross profit. This deferral of gross profit until cost is fully recovered is too conservative. This method isprobably 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 recognition of the full profit ll subsequent collections are treated as recovery of cost. This method is seldom used since it lacks conservatism. Furthermore, it fails to take into consideration the probability that repossession during the life of the ight i fi Installment Method. Under thi: 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. ‘Accountants who advocate this treatment point out that it matches revenue (the gross profit) with the expenses incurred after the sale. This method is frequently used in practice and is acceptable for income tax purposes. Discussions in the succeeding sections concentrate on this method. The Installment Method of Accounting Under the installment method of accounting. the difference between the selling price and the cost of sale is recorded as deferred gross profit or unrealized gross profit. This is decreased periodically for the amount recognized as revenue in the proportion pee ape soles peices Simply, the amount of gross profit jiven peric upon the gross rate on the sale and the cash_ ofinstallment receivables. At the end ‘period, a balance of deferred "gross profit account may appear in the books. This balance is equal to the: rate multiplied by the balance of installment receivablesasofthisdate, © Mlustration. Assume that on March 31,2016 an installment sale of property costing 60,000 was made. The selling price was P100,000. A down payment of P20,000 was required, the balance payable in forty monthly payments of P2,000 at the end of each month. “The gross profit on this sale is P40,000 (P100,000 - P60,000) hence, the gross profit rate ig 40° (P40,000 + P100,000) of sales price, Using the installment method, the Computations of annual realized gross profi and deferred gross profit are shown in the next page.Chapter § 324 Mustration 8-1 ed Gross profit Reolind Oras Poi - = — Gross profit Recei ae Year Collections x Rate = RGP Balances, end 216 P 38000" 40% = P5200 P 62,000 x es 2017 24,000 40 9,600 38,000 oa 2018 24,000 ” 9,600 14,000 a y 19 14000 5600 = pata 100,000 144,000 45,600 “*P20,000 down payment plus P18,000 (P2,000 x 9 months) installment collections. Expenses on Installment Sales Zhe deferral of gross profitrecognition, whichis the Primary objective of the installment Mathod, constitutes adelayed recognition of bin aetee TeVenue and cost of goods sold. Tequires the examination of the consistency inthe ‘treatment of the related expenses. Operating expenses incurred in making the ce are revenues and expenses on installment leg applies onl ‘o-and directly related with the acquis In other’ words, i incurred in making the sales has some itresultstoabettermatchine difficultto determine the matching of revenui es and expenses, itis ‘exact amount of ey i : Which shall be deferred. *Penses applicable tothe installment sales Expenses that will be incurred in periods sub: i foethas problem. Take the example of bad ie ee the period of sae also La for this expense? Since itisassimeart ppetse: Should Provisions be made the seller an opportunity is sold atl Sales is usually and may invol ten charges aay mai lan iod for installment es, intere interestInstallment Sales 325 ‘The interest charged to customers may be computed using one of the following plans: 1. Equal periodic payments from customer, with a portion of each payment representing interest on the outstanding balance of the principal and the remainder representing a reduction from the aforementioned balance. 2. Interest computed each month on the outstanding principal balance during the 3. Interest computed on the installment due, from the date of the sales contract to the date of the installment payment. ‘The first plans the one most widely used in practice because of the convenience it gives to the customers to make monthly payments in equal amounts. Under this plan, the outstanding principal balance decreases after each payment. Asa result, in each periodic payment from the customer which is equal to those in the other periods, aportion ofthe payment representing interest decreases because of the diminishing balance of the outstanding principal. Conversely, the portion applicable to the principal increases. Ilustration. To illustrate the first plan (equal periodic payments) of computing interest, assume the following data: ‘60,000.00 Note: Sometimes, thea computed, as follows: Present Values of Annuity of | for 6 periods at 3% 40,000 S.A17191 7,383.90326 Chapter § ing i ion, si 83.90 will fllly settle the From the preceding information, six monthly payments of P7,31 h installment contracts, receivable of P40,000 plus the 3 percent interest. ‘each month. This is shown in the table below. Illustration 8-2 Table of Entries for Periodic Collections MD Q a a Installment Cash Interest Contracts Collection Income Receivable Outstanding Date (Debit) (Credit) Credit) Principal (1-2) (4-3) June 30 60,000.00 30 P20,000.00 E 20,000.00 40,000.00 July 31 7,383.90 P1,200.00 6,183.90 33,816.10 Aug 31 7,383.90 1,014.48 6,369.42 27,446.68 Sept 30 7,383.90 823.40 6,560.50 20,886.18 Oct 31 7,383.90 626.59 675731 14,128.87 Nov 30 7383.90 423.87 6,960.03 7168.84 Dec 31 7,383.90 215.06 7.168.84 ae 2383.90 215.06 168. 64,303.40 4303.40 60,000.00 = ——= __ 200,000.00 *Computation ofInstallment Sales 327 Under the installment method, only the portion of the payment applied to the principal (Column 3) is considered in the computation of realized gross profit, as shown below. Total collections, June 30 - Dec. 31 (Column 1) 64,303.40 Less Total interest income (Column 2) 4303.40 Collections applying to prineipal (Column 3) 60,000.00 Multiply by Gross profit rate: Gross Profit P60,000 - P42,000 18,000 30% Installment Sales 60,000 P60,000 Realized gross profit on the contract P18,000.00 ACCOUNTING PROCEDURES UNDER INSTALLMENT METHOD ‘Various accounting procedures may be used to record transactions using the installment method but there are no significant differences in the applications of these procedures. ‘There are several types of items sold on the installment basis but discussions in this text regarding installment revolve only around these two basic types of property sold on installment basis, namely: 1. Installment sales of conventional merchandise. allment sales of real estate: conform with the following: tae <4 1. Sales, receivable and cost of sales should be given separate account designations 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.328 Chager4 3. The jouralizing process should include gross profit deferral, of sale or atthe end of the period, The latter is preferable. ; 4. Realized gross proton installment sales should be Periodically recognizein Proportion to the current collection, of installment accounts receivable (netof interest), either at the de The accounting, Procedures will: Vary depending upon the inventory system used, either the inventory ‘System is perpetual or periodic, COMPREHENSIVE ILLUSTRATIVE PROBLEM Assume the following data: Summarizing the transactions for two years of Fely Sales Corporation: 2015 2016 Sales Regular (on account) Installment — 250,000 230,000 Down payment Balance (payable within 3 y nth “2's atthe start of each ®PPly 36% interest for 3 years) 20,000 24,000 mor : Cost of Sales: ReyInstallment Sales 329 ‘The entries of Fely Sales Corporation relating to regular and installment sales for 2015 and 2016, assuming the use of the perpetual inventory system, are shown below and in the following pages. Illustration 8-3 January — December 2015 (1) To record regular sales. Accounts Receivable 250,000 Sales 250,000 (2) To record installment sales. Cash 20,000 Installment Contracts Receivable ~ 2015 80,000 Installment Sales 100,000 (3) To record cost of sales. Cost of Sales 120,000 Cost of Installment Sales 60,000 “Merchandise Inventory 180,000 Note: If the periodic inventory system is used — 60,000 120,000 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oy Chapter § in ir ic 1, 2015 (7) Adjusting and closing entries, December 31, (a) To recognize accrued interest receivable for December 31, 2015 Accrued Interest Receivable 1,800 Interest Income 1,800 (2) To set up deferred gross profit on 2013 Installment Sales 100,000 Cost of Installment Sales 60,000 Deferred Gross Profit, 2015 40,000 Gross profit rate = P40,000 = P100,000 = 40% (©) To record realized gross profit on installment sales: Deferred Gross Profit, 2015 15,600 Realized Gross profit’ 15,600 Computation: ; Collections applying’ to principal P 39,000 Multiply by gross profit rage 40% Realized gross profit P15,600 (4) To close realized gross profi, aceouns Realized Gross Profit’ * Income Summary 15,600 15,600 Operating Expenses — , p00 10 Income Summary os 500 @ To close result of perations for 2015- 3 : ee : 123,400 ‘arnings 123,400 January ~ December, 2016 (1) To reverse accrued interest i Income 1,800Installment Sales 331 (2) To record regular sales. Accounts Receivable 230,000 Sales 230,000 (3) To record installment sales. Cash 24,000 Installment Contracts Receivable 2016 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 (5) To record collection of accounts receivable. Cash 130,500 Accounts Receivable 130,500 (6) To record collection of installment contracts receivable. Cash 97,000 Installment Contracts Receivable, 2015 26,000 Installment Contracts Receivable, 2016 22,000 Interest Income 49,000 Prin’ To record payment of operating expenses. a Operating Expenses 65,000 Cash 65,000 (3) 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 Cost of Installment Sales 69,600 Deferred Gross Profit, 2016 50,400 Gross profit rate = P50,000 + 120,000 = 4296332 (©) To record realized gross profit on installment sales, Deferred Gross Profit, 2015 10,400 Deferred Gross Profit, 2016 19,320 Realized Gross Profit 2.79 Computations: : Applying to Principal Rate = Gross Profy 2015 Sales: P26,000 4% P1040 2016 Sales : 46,000 2 19320 Total P2970 @ To close realized gross Profit account, Realized Gross Profi 29,720 Income Summary 29,720 (©) To close other nominal accounts, Sates 230,000 Interest Income 50,470 Cost of Sales 130,400 Operating Expenses 65,000 Income Summay 85,070 RP Reabey 114,790 Allocation of Cost of Goods Sotg ‘Acompany selling onthe instalimen : soe or-term cect the company et arrested ser each ype of sales Barren ingete method ns ove t gical inventor cation of the to!Installment Sales 333 Mlustration. 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: Cash sales 150,000 Charge sales 300,000 Installment sales 750,000 Merchandise inventory, January 1 120,000 Purchases 725,000 Freight-in 30,000 Repossessed merchandise 35,000 Merchandise inventory, December 31 130,000 Based on the above data, the cost of goods sold to be allocated is computed below: Merchandise Inventory, January 1 ; 120,000 Add: Purchases P725,000 Freight-in 30,000 Repossessed merchandise 35,000 790,000 Cost of goods available for sale 910,000 Less Merchandise inventory, December 31 130,000 ‘780,000 PER are ihacet ee eek corso sales, as follows: 7; Type ‘Amount Ratio 10 Allocated of Sale of Sale Total Cost Cash P- 150,000 15/120 P 97,500 Charge 300,000 30/120 195,000 Installment 750,000 75/120 487,500 1,200,000. P780,000 ae ‘The above allocation is proper ifthe selling price of the merchandise is the same regardless of the type of sales. Normally, however, the selling price of the merchandise are not the same for different types of sales334 Chapa y that the selling prices for charge sales ant , ine Com euiras cash sales price by 20% and 25% respectively Therspecie sales figures must be expressed in terms of the same selling price in order to obuina Valid ratio. The allocation of the cost of goods sold should be based on. cash price as Presented below: Bpe Amount Amount Based Ratio t0 Allocated Sale ofSales on Cash Sales Total Cost Cash P 150,000 P 150,000 150/1,000 117,000 Charge 300,000 250,000a 250/1,000 195,000 Installment 750,000 600,000 600/1,000 468,000 Case 3. Where the mark-uy known, the. allocation will 1P OF Bross profit Percentage on cost price or sales prceis beasimple tion will matter. Assum i 3 ' Theale 82 ah sales 3596 on eBe Company's installment sales. The al sales, 3: : 5% on charge sales, and 37%on cation of cost of goods sold is shown below: AllocatedInstallment Sales 335 The principal problem in accounting f i i “ 1g for defaults and repossessions is the determinatior oe a : valucofthe merchandise at the time of repossession. In setting a fair value, the ‘choose an amount that will allow f itioni vi nail nebo ogeeenrtee ican for any reconditioning cost and provide The following procedures to record repossession may be used. (1) Record the repossessed merchandise in an appropriate inventory account at its fair value (estimated selling price less reconditioning cost and normal profit margin) at date of repossession. Q) Cancel the uncollected installment: receivable balance of the defaulted contract. (3) Write-off the balance of the deferred gross profit relating to the above receivable. (A) Recognize the resulting gain or loss on repossession. Mlustration. Assume the following data with respect to a default and repossession on April 30,2016: Installment contracts receivable, 2016 2,000 Gross profit rate, 2016 sales 30% Estimated market value of repossessed merchandise P1200 Estimated market value frp “The loss on repossession may be computed as follows: Fair market value of repossessed merchandise Less Unrecovered cost ~ Installment contracts receivable 2,000 Less Deferred gross profit (30% of P2,000) 600 Loss on repossession The entry to record the repossession on April 30, 2016, assuming: system, ismade a follows: Repossessed Merchandise 1,200 Deferred Gross Profit, 2016 600 Loss on Repossession 200 ‘Installment Contracts Receivable, 2016 2,000 Reconditioning costs which relate to repossessed merchandise should be charged 10 Repossessed Merchandise account. : When a perpetual inventory system is maintained, repossessed property is debited to ‘Merchandise Inventory — Repossessed account.Chapter § 336 ee ee A default by a customer followed by the repossession of the poectandine we pear the: iod of sale when the gross profit rate for the year is not yet ee circumstances, esters may be used in recording the repossession, as follows: ‘ 1. On the date of the repossession, record the tepossessed merchandise inan appropcats account with ‘acorresponding credit to Loss on Repossession, 2. After the gross profit rate is, established at the end of the Period, the installment contact receivable balance of the defaulted contract and the related deferred gross profit are closed to Loss on Repossession. The realized ross profit is determined based on collections received Prior to the default, TRADE-INS ane nS sing nstlment se plans sometimes indi to ssepnce en cedovnpamen: A fanart Se acreptance by a car dealer ofa used ear ee Partial payment fo rule, the actual value orth the asoaail fair market value ft beused in valuing the said tem, a The accounting pro - cedures to discussed in the follo dual to its net realizable S¢ Inventory —Traded-Inis » Cash is debited for any cash = eceivable is debited for forthe full amount of the Or Sales Company sells acar for down © CUsiomeris alicia og tvment of P40,000 and nach. Itis estimated that exInstallment Sales 337 ‘The computation below shows that the trade-in value is equal to its actual value. Trade-in value allowed to customer F500) Less Net realizable value of merchandise trade-in: : Estimated resale value P70,000 Less: Reconditioning cost ‘Normal profit margin (20% of P70,000) Difference 25,000 _ 45,000 ‘The entry to record the sale of the new car is: Merchandise Inventory — Traded-In 45,000 Cash 40,000 Installment Contracts Receivable, 2016 60,000 Installment Sales 145,000 When the reconditioning expense of P10,000 is actually incurred, it is charged to Merchandise Inventory ~Traded-In. ompany is using the perpetual inventory system, an additional entry to record. _Costof sales is made, as shown below: Cost of Installment Sales 100,000 Merchandise Inventory - New 100,000 Case 2. Trade-in value is greater than net realizable value. The seller sometimes grants a customer a trade-in value greater than the fair market value or net realizable ‘value of the item received from him asa special inducement_o the customer, An accounting problem arises if the seller grants an over allowance on | the used merchandise taken in. Over allowance is the excess of the trade-in value granted over the net realizable value of the used merchandise. The amount of the over allowance may be recorded either as acharge to Over Allowance on Trade-In account or as a reduction from Installment. Sales account to arrive at a valid amount for the net sales price. Illustration. Assume that a stereo component with a cost of P12,000 is sold for P17,000. A used stereo component is accepted as a trade-in at a valuation of P6,000. ‘The seller expects to spend P250 to recondition the used merchandise before reselling it for PS,000. The seller expects a 15% profit from the sale of the used merchandise.Chapter The net realizable value of the merchandise traded-in and the amount of the o allowance may be computed as follows: Trade-in value allowed to customer ; .. 6,000 ss Net realizable value ‘of the merchandise traded-in: P5000 Estimated resale value d tobe incured 250 ’ Less: Reconditionin, cost expected to ict * Namal poe mera 0 _ 1000 _ 4000 ‘Over allowance P2000 Assuming the over allowances changed to Over Allon In account and the perpetual inventory system is used, the journal ent e sale of the new Merchandise Inventory Over Allowance on Trade-In Installment Contracts Receivable, 2016 Installment Sales 17,000 The gross profit rate. on the installment sal cis computed as follows: Instaliment sales Less Over allowance 17,000 2000 Net installment sales 15,000 Less cost of installment sales 12,000 2,000 Gross profit Gross profitrate (P3,000-+P15,009) The above rate will bea collections, Theival Jastallment, Sales Note: In cases Wherein an is, the trade-in Value, of the: iInstallment Sales : 339 Merchandise Inventory ~ Traded-In is presented in the balance sheet as part of the ending inventory. Whena periodic inventory system is used, trade-ins are recorded in a separate nominal account, Traded-In Merchandise, and this balance is added to purchases in detennnining cost of goods sold at the end of the period. Alternative Procedures for Computing, Realized Gross Profit for a Series of Years Inthe preceding discussions, the realized gross profit is computed by multiplying the amounts collected from the installment contract by the gross profit rate for the year in ‘which the contract was perfected. In certain problems for solving purposes, collections and gross profit rates are sometimes not given. In this case, the realized gross profit can be computed by using any of these two approaches, namely: Approach 1. Compute the collections for the current year and the gross profit rates. Determine first the collections during the year of accounts generated from the different installment periods. This is done by considering the change in the balances of the installment contracts receivable at the beginning of the period: and at the end of the period. Atthis point, it shelpful to remember thatthe beginning balance of the installment contracts receivable of the current year represents the original balance of the receivables generated from installment sales made during the year. The difference between the beginning and ending balances of installment contracts receivable represents the total it for the period. Any unpaid balance of the receivable pertaining to a repossessed chandise is deducted from the total credit of the year in which the repossessed merchandise was sold to arrive at the credit representing collections. Subsequently, determine the gross profitrates on installment sales forthe different years. For the previous years, the gross profit rate is the result of dividing the deferred gross profit atthe beginning of the period by the installment contracts receivable at the beginning of the period. On the other hand, the gross profit rate of the current year is obiained in the usual manner, that is, the gross profit is divided by the installment sales, It must be noted that the gross profit amount used in the computation must be the unadjusted balance, hence, it must be the total deferred gross profit arising from the installment sales made during the year. ‘Afier the total collections and the gross profit rates have been obtained, the realized 1705s profit foreach installment period can now be computed. Multiply the total collections pade during the current year of the receivables of one period by the corresponding ‘gross profit rate.340 Crepe 4 Approach 2. Obtain the difference between the balances of = ofthe deferred ime fore and after adjustment. As discussed Previously, 810s profit per fete ped ance books only at the end of the peso! Grosse Tecognition is one of the required adjustments at the end of the: Period. Therefore, ay decrease in the balances of the deferred ‘gross profit ofa certain Period before ‘and af the adjustment has been made Tepresents the realized 10s profit during the peri jn Profit ofa particular ‘Period is the producto, fale cne Bed Cmpulsin proach Dante seg of installment contracts; Teceivable of the same: Period. Mlustration. Assume the following account balances on December 31,2016 before adjustments have been made: January 1 December 31 Installment contracts receivable, 2015 Installment contract receivable, 2016 Deferred gross profit, 2015 Deferred gross profit, 2016 {Installment sales 2016 re = BP°Ss profit, January 1 " "| ns Hen Son recat, Jguay Fa fe 1S a fered gros Profit before adjustment, December 3] P3500 38h lnstallment salesInstallment Sales 1 *If there is a repossession in 2016 of goods sold in 2016, the deferred gross profit relating to the unpaid balance of the repossessed merchandise should be added back to the deferred gross profit balance before adjustment at the end of the period. ‘Approach 2 2015 Sales _ 2016 Sales Deferred gross profit before adjustment, December 31 17,400 35,000 Less Deferred gross profit, December 31 ~ (Installment Contracts Receivable x Gross Profit Rate) 8 2015: P30,000 x 30% 2016: 70,000 x 35% 24500 P 8,400 10,500 Realized gross profit Nore: From the preceding computations it may be observed thatthe realize gross i with collections of i a ‘with both regular and installment sales, the details to be reported ce of the installment sales in relation to the total sales revenues. at of i it sales is not significant, then it need not be shown as a in the ‘statement of comprehensive income. Data about collections and of realized gross profit are reported by means of a supporting schedule.342 Chapter § a eee The following type of presentation may be appropriate: Mlustration 8-4 Fely Sales Corporation ‘Statervent of Comprehensive Income / Year Ended December 31,2016 (Installment Sales Not Shown) Me 230,000 Cost of goods sold 130,400 Gross profit on regutar sales 99,600 ‘Add Realized gross profit on installment sales (Schedule 1) 29,720 Total gross profit 129,320 Operating expenses * __ 65,000 Operating income 64,320 Add interest income 50,470 ‘Net Ingome 114,790 oe saree Schedule 1 oe Computation of Realized Gross Profiton Installment Sales {Installment sales Cost Presented separately with resented in Hlustration 8-5.Installment Sales Mlustration 8-5 Fely Sales Corporation Statement of Comprehensive Income Year Ended December 31, 2016 (Installment Sales Shown) a ec Regular Installment 230,000 120,000 130,400 69,600 P_ 99,600 50,400 31,080 19,320 Sales Cost of sales Gross Profit Less Deferred gross profit, 2016 Realized gross profit, 2016 ‘Add Realized gross profit on 2015 installment sales 10,400 Total realized gross profit Operating expenses Net operating income Add interest income Net Income P114,790 Repossessed Merchandise is an addition to Purchases in determining cost of goods sold. Traded-In Merchandise is treated in the same manner. Shipments on Installment Sales, which is used in the periodic inventory system, is deducted from the cost of goods available for sale. Gain (Loss) on Repossession is presented in the income Statement as an adjustment to realized gross profit and the resulting balance is labeled as Total Realized Gross Profit after Adjustment for Gains (Losses) on Repossession. Statement of Financial Position. With respect to statement of financial position presentation, /nstal/ment Contracts Receivable is usually classified as part of current assets as shown below: Installment contracts receivable qualifies forinch " since it accords with the accepted notion of current assets aS Co other assets that are reasonably expected to be realized in cash or: during the normal operating cycle of the business”. This teatmentis: of the length of time required for its collection.Chapter § 4 ir iti ing the proper classification of the Deferred fli itions have been taken regarding, at a i aa en This account has been reported in the —— ol ofthe statement of financial position. Some suggest that this balance be presented as: 1, Avvaluation account to be deducted from the related installment contracts receivable. 2. Cunrentliability. In accordance with generally prevailing practice. Deferred Gross profit account is classified in the liabilities section of the statement of financial position as noncurrent liability shown as follows: Tiabittes Noncurrent Liability: Deferred gross profit, 2015 P14,000 Deferred gross profit, 2016 31,080 31,080 Repossessed Merchandise account is i Presented i Ssacumentasset san inventory account. Traded fe Naot Financial Position assuch, ‘ ‘state will depend on whether dealer in real estate,