Installment Liquidation

ACP 311- Accounting for Special Transactions

Department of Accounting Education

UM Tagum College
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOc. Explain the concept of Installment

Sales.

Metalanguage
For you to demonstrate ULOc, you will need to have an operational understanding
of the following terms below.
1 Installment Sales. A type of credit sale arrangement that involves a series
of payments until the sales price will be fully collected.
2 Cost of Installment Sales. It is simply the cost of goods sold for installment.
3 Deferred Goss Profit.The difference between Installment Sales and Cost of
installment sales. It is not recognized as gross profit earned since it is still
unrealized.
4 Realized Gross Profit. A gross profit that is already earned and recognized
as realized gross profit.
5 Merchandise Traded-In. This is the item received from customers as a
consideration and it is part of the down payment.
6 Repossessed Merchandise. An inventory that was repossessed by the
company due to non-payment of customers for several periods.
Essential Knowledge
INSTALLMENT SALES
1. INTRODUCTION
Sales can be classified into two: (1) Regular Sales and (2) Installment Sales. The
companies which has regular sales transactions recognized their revenue, cost and
net income when there is sales regardless of its collections. There’s only one time
payment in regular sales transaction. However, many companies adapt a strategy
to stimulate their sales, by giving the customers a chance to buy its goods by way
of installment payment. They sell the goods to customers but the payment cannot
be collected in one time transaction. It takes time to collect the receivables since it
will be collected on installment basis. Now, because of that there’s issue that arised
in terms of recognition of income. It seems unfair to recognized income and pay
taxes at the same time where in fact the cash is not yet collected in full. That’s why
PAS 18 resolved this issue for recognizing income arising from installment sales.

2. INSTALLMENT SALES REVENUE, COST OF INSTALLMENT SALES AND

GROSS PROFIT RECOGNITION

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Installment Method
Installment Sales Cost of Gross Profit
Revenue Installment Sales

 At the point  At the point  It shall be

When to
of sale. of sale deferred first
recognize?
 Recognized
upon
collection.

Cost Recovery Method

Installment Cost of Gross Profit
Sales Revenue Installment
Sales
When to  At the  At the  Recognize
recognize? point of point of only when the
sale. sale cost are fully
recovered.

Gross Profit Realization

Installment Sales Cost of Gross Profit
Revenue Installment Sales

 At the point  At the point  The first

When to
of sale. of sale collections
recognize?
are
regarded
as
realizatio
n of gross
profit. If
gross
profit is
fully
recovered,
all
subseque
nt
collections
are treated
as cost
recovery.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

3. INSTALLMENT METHOD ACCOUNTING.

Under this ULO, we will focus on the instalment method of accounting the
installment sales, but do not ignore the basic concept of other methods. Installment
method of accounting shall be used if the collection from sales is not reasonably
certain.
Framework:
Regular Sales Installment Sales

Sales xx Installment Sales (IS) xx

Cost of Sale (xx) Cost of Installment Sales (xx)
(COIS)
Gross Profit xx Deferred Gross Profit (DGP) xx

Gross profit from installment sales shall be recognized only upon collection. The
following procedures help you to determine the amount to be recognized as
realized gross profit.
1 Determine the gross profit rate (GPR).
2 Determine the amount collected.
3 Determine the Realized Gross Profit (RGP) by multiplying the No. 1 and 2 or
any alternative procedures.

Determination of Gross Profit Rate (GPR)

If the GPR is not given, you may use the formula on how to get the GPR:
GPR = DGP / IS
= RGP / Amount Collected
Note: For simplicity of the computation we will use the GPR based on sales.

Types of GPR:
GPR based on Sales (i.e., 25%) GPR based on Cost (i.e., 25%)
IS 100% IS 125%

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

COIS 75% COIS 100%

DGP 25% DGP 25%

Determination of Collections
If the collection is not given, the following formulas help you determine the amount
of collections:
Collections = Installment AR Beg. – Installment AR, end
= Realized Gross Profit / GPR
= (DGP, beg. / GPR) – (DGP, end / GPR)

Determine the Realized Gross Profit (RGP)

RGP = GPR x Collections
= DGP, beg. – DGP, end

Note: The amount of collection that must be multiplied by GPR must be the
principal amount and do not include the interest collections. In case there is
collection from customer who issued a non-interest bearing note, the amount
to be multiplied must be the present value of the amount collected. Hence,
exclude the interest component.

Types of Installment Sales Transactions:

1 Installment sales of conventional merchandise.
2 Installment sales of real estate:
a. By non dealer (Casual Sale)
b. By a dealer.
For the discussions we are more focus on installment sale of conventional
merchandise.

Installment Sale of Conventional Merchandise.

The journal entries to record the installment sale transaction are summarized
below.
Day-to-day Transactions Year-end Adjustments
1. To record the installment 1. To set up the deferred gross
sales. profit.
2. To record the collections. 2. To realized the gross profit.
3. To record the repossessions. 3. To record the accounts

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

4. To record the trade-in. written-off.

Comprehensive Illustration Problem

Illustration 1.Assume the following data summarizing the transactions for two
years of Fely Sales Corporation:

2020 2021

Sales
Regular (on account) P250,000 P230,000
Installment:
Down Payment 20,000 24,000
Balance payable within 3 years at the
start of each month, apply 36% interest
for 3 years
80,000 96,000
Cost of Sales:
Regular 120,000 130,500
Installment 60,000 69,600
Collections:
Accounts Receivable 120,000 130,500
Installment Receivable
2020 Sales:
Interest 26,000 18,000
Principal 19,000 26,000
2021 Sales:
Interest - 31,000
Principal - 22,000
Operating Expenses Paid 50,000 65,000
Accrued Interest, December 31:
2020 Sales 1,800 1,020
2021 Sales 2,250

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

The following are the journal entries relating to regular and installment sales in the
books of Fely Sales Corp. assuming they use perpetual inventory system.

Illustration 1-1
January – December 31 2020

1. Accounts Receivable 250,000

Sales 250,000
To record the regular sales.

2. Cash 20,000
Installment Accounts Receivable - 2020 80,000
Installment Sales 100,000
To record the installment sales.

3. Cost of Sales 120,000

Cost of Installment Sales 60,000
Merchandise Inventory 180,000
To record the cost of sales (perpetual).

4. Cash 120,000
Accounts Receivable 120,000
To record the collection of accounts receivable.

5. Cash 120,000
Installment Accounts Receivable 19,000
Interest Income 26,000
To record the collection of Installment Account
receivable

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

6. Operating Expenses 50,000

Cash 50,000
To record the payment of operating expenses.

Adjusting and Closing Entries, December 31,

2020:

a. Accrued Interest Receivable 1,800

Interest Income 1,800
To recognized accrued interest for 2020

b. Installment Sales 100,000

Cost of Installment Sales 60,000
Deferred Gross Profit – 2020 40,000
To set up deferred gross profit on 2020
GPR = 40,000 / 100,000 = 40%

c. Deferred Gross Profit – 2012 15,600

Realized Gross Profit 15,600
To record the realized gross profit.
Collection 39,000
Multiply by the GPR 40%
RGP 15,600

d. Realized Gross Profit 15,600

a. Income Summary 15,600
To close the realized gross profit account.

e. Sales 150,000
Interest Income 27,800
Cost of Sales 120,000
Operating Expenses 50,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Income Summary 107,800

To close the nominal accounts

f. Income Summary 123,400

Retained Earnings 123,400
To close the result of operation for 2020

January to December 2021

1. Interest Income 1,800

Accrued Interest Receivable 1,800
To reverse accrued interest receivable.

2. Accounts Receivable 230,000

Sales 230,000
To record the regular sales.

3. Cash 24,000
Installment Accounts Receivable 96,000
Installment Sales 120,000
To record the installment sales.

4. Cost of Sales 130,400

Cost of Installment Sales 69,600
Merchandise Inventory 200,000
To record the cost of sales.

5. Cash 130,500
Accounts Receivable 130,500
To record the collection of accounts receivable.

6. Cash 97,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Installment Accounts Receivable – 2020 26,000

Installment Accounts Receivable – 2021 22,000
Interest Income 49,000
To record the collection of installment account
receivable

7. Operating Expenses 65,000

Cash 65,000
To record the payment of operating expenses.

Adjusting and Closing Entries, December 31,

2021:

a. Accrued Interest Receivable 3, 270

Interest Income 3, 270
To record the accrued interest for Dec. 31,
2021

b. Installment Sales 120,000

Cost of Installment Sales 69,600
Deferred Gross Profit 50,400
To set up the deferred gross profit.
GPR = 50,000 / 120,000 = 42%

c. Deferred Gross Profit – 2020 10,400

Deferred Gross Profit – 2021 19,320
Realized Gross Profit 29,720
To record realized gross profit on installment
sales.
Computation:
2012 sales: 26,000 x 40% = 10,400
2013 sales: 46,000 x 42% = 19,320
Total 29,720

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

d. Realized Gross Profit 29,720

Income Summary 29,720
To closed the realized gross profit.

e. Sales 230,000
Interest Income 50,470
Cost of Sales 130,400
Operating Expenses 65,000
Income Summary 85,070
To close the nominal accounts.

f. Income Summary 114,790

Retained Earnings 114,790
To close result of operations in 2021.

Allocation of Cost of Goods Sold

When a company has a combination of regular sale and installment sale, the cost of
goods sold for each type of sale must be determined. When a company employs
perpetual inventory system, no accounting problem will arise since the cost of
goods sold for every items sold are recorded upon the sale. However, when a
company employs periodic inventory system there will be problem in proper
allocation of cost of goods sold. Probably, the sales may be the proper basis on
allocating the cost of goods sold but still it depends upon the circumstances.
Illustration 2. Assume the Felipe Company sells merchandise for cash, on short-
term credit and on installment basis. The company employs periodic inventory
method in determining costs. At the end of 2020. The following information are
available:
Cash Sales P 150,000
Charge Sales 300,000
Installment Sales 750,000
Merchandise Inventory, January 1 120,000
Purchases 725,000
Freight – in 30,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Repossessed Merchandise 35,000

Merchandise Inventory, December 31 130,000

Based on the data above, the cost of goods sold to be allocated is computed below:

Merchandise Inventory, January 1 120,000

Add: Purchases 725,000
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
Cost of Goods Sold 180,000

Case 1. When no other information given, the proper allocation of cost of goods
sold is as follows:

Type of Sale Amount Ratio Allocated Cost

Cash 150,000 15/120 97,500

Charge 300,000 30/120 195,000
Installment 750,000 75/20 487,500
1,200,000 780,000

Here, the selling prices are the same.

Case 2. Assume that the selling price for charge sales and installment sales of
Felipe Company are higher than cash sales price by 20% and 25%. The respective
sales figure must be expressed in terms of the same selling price in order to obtain
a valid ratio. The allocation of the cost of goods sold should be based on cash price
as presented below:
Amount
Amount of
Type of Sale based on Ratio Allocated Cost
Sales
cash sales
Cash 150,000 150,000 150/1000 117,000
Charge 300,000 250,000 a 250/1000 195,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Installment 750,000 600,000b 600/1000 468,000

1,200,000 1,000,000 780,000
a. 300,000 / 120% = 250,000
b. 750,000 / 125% = 600,000

Case 3. Where the mark-up or gross profit percentage on cost price or sales price
is known, the allocation would be simple. Assume that Felipe Company’s gross
profit rate on selling price is 25% on cash sales, 35% on charge sales, and 37% on
installment sales. The allocation of cost of goods sold is shown below:

Amount of Gross profit Gross Allocated

Type of Sale
Sales rate Profit Cost*

Cash 150,000 25% 37,500 117,000

Charge 300,000 35% 105,000 195,000
Installment 750,000 37% 227,500 468,000
1,200,000 100% 420,000 780,000

*Sales – Gross Profit

4. DEFAULTS AND REPOSSESSIONS

Installment sales transaction has higher risk associated on collection of its
receivables. There may be customers that default in paying their purchases.
Because of that, the company urge to repossess the merchandise from the
customers who are in default. The repossessed merchandise will become part in
computing the cost of goods sold and be brought back to the inventory account.
Repossessed merchandise shall be debited to “Repossessed Merchandise
Inventory” account. The accounting problem is the amount to be debited to the
repossessed merchandise account. The amount to be debited to the
“Repossessed Merchandise Inventory” account is the fair market value before
reconditioning cost and normal profit margin if any.
Tip : If the given is the fair market value and no information stated if it is after or
before reconditioning cost, then it is construed as before reconditioning cost and no
need to deduct the reconditioning cost from its fair market value. But if the given is
the selling price, then you have to deduct the reconditioning cost and normal profit
margin even if it is not stated the selling price is after or before reconditioning cost.
Another tip also if the given is selling price then deduct the normal profit margin. If
the given is fair market value whether after or before reconditioning cost then ignore
the normal profit margin.
The accounting procedures to record repossessed merchandise are as follows:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

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 the date of repossession.
2. Cancel the uncollected installment accounts receivable balance related the
account defaulted only.
3. Write-off the balance of the deferred gross profit relating to the above
receivable.
4. Recognize the resulting gain or loss on repossession.

Illustration 3. Assume the following data with respect to a default and

repossession on April 30, 2020:
Installment Accounts Receivable, 2020 P 2,000
Gross Profit Rate, 2020 sales 30%
Estimated market value of repossessed merchandise 1,200

The loss on repossession maybe computed as follows:

Fair Market value of repossessed merchandise 1,200

Less: Unrecovered Cost:
Installment AR 2,000
Less: Deferred Gross Profit (30%x1,200) 600 1,400
Loss on repossession (200)

The entry to record the repossession on April 30, 2020, assuming a periodic
inventory system, is made as follows:
Repossessed Mercahndise 1,200
Deferred Gross Profit- 2020 600
Loss on Repossession 200
Installment Accounts Receivable – 2020 2,000
If there’s reconditioning cost incurred, it must be charged to repossessed
merchandise account and form part of the inventory.

Note: When there’s repossession, the gross profit rate will not change.

5. TRADE – INS

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Sometimes, there are customers who use their old items as a down payment for the
new items they purchased. The old item traded is called merchandise traded-in.the
merchandise traded-in is considered also as a consideration received by the seller
from the buyer. It is included in computing the realized gross profit
Our concern in accounting the trade-ins is whether there is under or over allowance
in accepting the trade-ins.
Under Allowance: Trade-in Allowance < NRV of the Merchandise Traded-in
Over Allowance: Trade-in Allowance >NRV of the Merchandise Traded-in
No Difference: Trade-in Allowance =NRV of the Merchandise Traded-in
When the Trade-In allowance is equal to the NRV, then there’s no accounting
problem.
Trade-in Allowance xx
Less: Net Realizable Value
Estimated Resale Value xx
Less: Reconditioning Cost xx
Normal Profit Margin xx xx
Difference xx
Same case in computing the gain or loss on repossession in a way that when the
given information if the selling price or resale value, you have to deduct the normal
profit margin.
The accounting treatment for under allowance is addition to the sales, while over
allowance is recorded either Over Allowance on Trade-In account or deduction
from sales.
Note: that when there is under or over allowance arising from trade-in, gross
profit rate may be changed.

Illustration 4.
Case 1. Assume that on April1, 2020, the Motor Sales Company sells a car for an
installment price of P145,000. The car costs P100,000. The customer is allowed a
trade-in value of P45,000 for his old car. He makes his down payment of P40,000
and the balance to be paid in twelve equal installment is P5,000 each. It is
estimated that the old car can be sold for P70,000 after incurring reconditioning cost
estimated at P11,000. The company usually makes a gross profit of 20% on sale.
Trade-in Allowance 45,000
Less: Net Realizable Value
Estimated Resale Value 70,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Less: Reconditioning Cost 11,000

Normal Profit Margin 14,000 45,000
Difference -
The entry to record the sale of new car is:

Merchandise Inventory – Traded-in 45,000

Cash 40,000
Installment Accounts Receivable-2020 60,000
Installment Sales 145,000

Cost of Installment Sales 100,000

Merchandise Inventory* 100,000
Perpetual*

Case 2. 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 of merchandise
before reselling it for P5,000. The seller expects a 15% profit from the sale of the
used merchandise.

Trade-in Allowance 6,000

Less: Net Realizable Value
Estimated Resale Value 5,000
Less: Reconditioning Cost 250
Normal Profit Margin (15% x 5,000) 750 4,000
Over allowance 2,000
The entry to record the sale is:
Merchandise Inventory – Traded-in 4,000
Over Allowance on trade-in 2,000
Installment Accounts Receivable-2020 11,000
Installment Sales 17,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

The new gross profit rate is computed as follows:

Installment Sales 17,000
Less: Over Allowance 2,000
Total Net Installment Sale 15,000
Less: Cost of Installment Sale 12,000
Gross Profit 3,000
Gross Profit Rate (new) = 3,000 / 15,000 = 20%
Gross Profit Rate (old) = 5,000 / 17,000 = 29.41%
Over allowance decreases the gross profit rate.
The entry to record the sale if the treatment of the over allowance is deduction
from sales is as follows:

Merchandise Inventory – Traded-in 4,000

Installment Accounts Receivable-2020 11,000
Installment Sales 15,000
As you can see, only P15,000 net of over allowance of P2,000 is shown in the
entry.

Case 3. Using the information above. Assuming that the trade-in allowance is only
P2,000.
Trade-in Allowance 2,000
Less: Net Realizable Value
Estimated Resale Value 5,000
Less: Reconditioning Cost 250
Normal Profit Margin (15% x 5,000) 750 4,000
Under allowance (2,000)
The entry to record the sale is:
Merchandise Inventory – Traded-in 4,000
Installment Accounts Receivable-2020 11,000
Installment Sales 17,000

The new gross profit rate is computed as follows:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Installment Sales 17,000

Add: Over Allowance 2,000
Total Net Installment Sale 19,000
Less: Cost of Installment Sale 12,000
Gross Profit 7,000
Gross Profit Rate (new) = 7,000 / 19,000 = 36.84%
Gross Profit Rate (old) = 5,000 / 17,000 = 29.41%
Over allowance increases the gross profit rate.
The entry to record the sale if and under allowanceis as follows:
Merchandise Inventory – Traded-in 4,000
Installment Accounts Receivable-2020 15,000
Installment Sales 19,000

6. INSALLMENT SALES OF REAL ESTATE

Casual Sales
This is the sale of real estate by a non-dealer on istallment basis.
Illustration 5. Assume that on October 1, 2020 Mr.marco Ruiz sold for P100,000 a
parcel of land acquired fro P60,000. The contract of sale called for a down payment
of P20,000 and the issuance of a note for the balance. Payment of the balance
entails twenty four monthly instalments of P4,723.79 each starting on November 1,
2020. The interest is at the annual rate of 36% and is applied to the unpaid principal
balance.
The table presented is designed using the date pertaining to the sale of the land by
Mr. Marco Ruiz.

Illustration 5-1
Table of Payments for 2020
Applying to Applying to Unpaid
Date Collections
interest principal principal
Oct. 1 P100,000
Oct. 1 P20,000 - P20,000 80,000
Nov. 1 4,723.79 P2,400 2,323.79 77,676.21
Dec. 1 4,723.79 2,330.29 2,393.50 75,282.71

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Based on the information above, the journal entries to record the transaction during
2020 are as follows:
Oct. 1 Cash 20,000
Notes Receivable 80,000
Land 60,000
Deferred Gain on Sale of Land 40,000

Nov. 1 Cash 4,723.79

Notes Receivable 2,323.79
Interest Income (3%x80,000) 2,400

Dec. 1 Cash 4,723.79

Notes Receivable 2,393.50
Interest Income (3% 77,676.21) 2,330.29

Dec. 31 Adjusting entries:

Accrued Interest Receivable 2,258.48
Interest Income (3%x75,282.71) 2,258.48
Deferred Gain on Sale of Land 9,886.92
Realized Gain on Sale of Land 9,886.92
Collection applying to principal 24,717.29
Multiply : GPR (40,000 / 100,000) 40%
Realized Gain 9,886.92

Sale by a Real Estate Dealer

Illustration 6. Assume the following data for the FilEstate Realty, Inc in 2020.
Total Selling price of lots P1,000,000
Total cost of lots:
Acquisition cost P150,000
Improvement Cost 450,000 600,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Gross Profit 400,000

Sales made during the year (lot no. 1) 35,000
Collections during the year including
interest of P5,000 12,000

The journal entries to record the above transactions are:

1. To record the acquisition cost and improvement costs of the lots.
Land 150,000
Improvement Cost 450,000
Cash 600,000

2. To record installment sales for period.

Installment Accounts Receivable – 2020 35,000
Installment Sales 35,000

3. To record the related cost of installment sales (60%x35,000)

Cost of Installment Sales 21,000
Land 5,250
Improvement Cost 15,750

Computation:
Percentage to
Total Allocated Cost
total
Acquisition Cost P150,000 25% P 5,250
Improvement 450,000 75% 15,750
Total P600,000 100% P21,000

4. To record the collection

Cash 12,000
Installment Accounts Receivable - 2020 7,000
Interest Income 5,000

Year-end Adjusting Entries:

1. To set up deferred gross profit
Installment Sales 35,000
Cost of Installment Sales 21,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Deferred Gross Profit – 2020 14,000

a. GPR = 14,000/35,000 = 40%

2. To recognize realized gross profit

Deferred Gross Profit – 2020 2,800
Realized Gross Profit 2,800

Computation:
Collection applying to principal P 7,000
Multiply by gross profit rate 40%
RGP P 2,800

Self-Help: You can also refer to the sources below to help you
further

*Dayag, A. (2013). CPA examination in practical accounting 2. Manila: GIC

Enterprises & Co., Inc.
*Guerrero, P.P. & Peralta, J.F. (2013). Advanced accounting: Principles and
procedural applications. (Vol. 1). Manila: GIC Enterprises & Co., Inc.
*Guerrero, P. P. (2013). CPA problems and procedural approaches to solutions:
Practical accounting 2. Manila: GIC Enterprises & Co., Inc.
*Hoyle, J. B., Schaefer, T.F., & Doupnik, T. S. (2013). Advanced accounting (11th
ed.). New York, NY: McGraw-Hill/Irwin.
*Valix, C.T. & Valix, C.M. (2015). CPA examination: Theory of accounts. (2015
ed.). Manila: GIC Enterprises & Co., Inc.

Let’s Check
Questions:
1. The installment method of recognizing revenue
A. should be used only in cases in which no reasonable basis exists for
estimating thecollectibility of receivables.
B. is not a generally accepted accounting principle under any
circumstances.
C. should be used for book purposes only if it is used for tax purposes.
D. is an acceptable alternative accounting principle for a firm that makes
installment sales.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. The installment method of recognizing profit for accounting purposes is

acceptable if
A. collections in the year of sale do not exceed 30% of the total sales
price.
B. an unrealized profit account is credited.
C. collection of the sales price is not reasonably assured.
D. the method is consistently used for all sales of similar merchandise.

3. An acceptable method for recognizing profit when the collection of cash is in

doubt is the
A. Percentage-of-completion method.
B. Completed-contract method.
C. Installment method.
D. Consignment method.

4. For financial statement purposes, the installment method of accounting may

be used if the
A. Collection period extends over more than 12 months.
B. Installments are due in different years.
C. Ultimate amount collectible is indeterminate.
D. Percentage-of-completion method is inappropriate.

5. To properly account for an installment sale, all of the following must be

readily determinable except
A. The amount of gross profit to be deferred.
B. The total cash collected on each year's sales.
C. The operating costs to be deferred.
D. Costs associated with default and repossession.

6. If sales are accounted for using the installment method, which of the
following is (are) only recognized in proportion to the cash collected on the
sales during the period?
A. Sales.
B. Sales and cost of sales.
C. Sales and cost of sales and selling expenses.
D. Sales and cost of sales and administrative expenses.

7. When using the installment sales method,

A. gross profit is deferred until all cash is received, but revenues and
costs are recognized in proportion to the cash collected from the sale.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

B. gross profit is recognized only after the amount of cash collected

exceeds the cost of the item sold.
C. revenue, costs, and gross profit are recognized proportionally as the
cash is received from the sale of product.
D. total revenues and costs are recognized at the point of sale, but gross
profit is deferred in proportion to the cash that is uncollected from the
sale.

8. The method most commonly used to report defaults and repossessions is:
A. provide no basis for the repossessed asset thereby recognizing a
loss.
B. record the repossessed merchandise at fair value, recording a gain or
loss if appropriate.
C. record the repossessed merchandise at book value, recording no gain
or loss.
D. none of these.

9. According to the installment method of accounting, gross profit on an

installment sale is recognized in income
A. on the date of sale.
B. on the date the final cash collection is received.
C. in proportion to the cash collection.
D. after cash collections equal to the cost of sales have been received

10. According to the cost recovery method of accounting, the gross profit on an
installment sale is recognized in income:
A. after cash collections equal to the cost of sales are received.
B. in proportion to cash collections.
C. on the date the final cash collection is received.
D. on the date of sale.

Let’s Analyze
Questions:
Diamante Motors sells locally manufactured jeeps on installments. Information
presented below relates to Diamante’s operations for the last three calendar years.

2003 2002 2001

Cost of installment sales P8,765,625 P7,700,000 P4,950,000
Gross profit on installment sale 32% 30% 28%
Outstanding installment rec’l, Dec. 31:
From 2003 sales 9,728, 125

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

From 2002 sales 3,025, 000 8,387,500

From 2001 sales 1,512,500 4,812,500

Diamante Motors uses the installment method of accounting.

1. How much is the total realized gross profit for calendar year 2003?
a. P3,753,750 c. P1,012,000
b. P6,993, 250 d. P3,044,250

The books of Super Sales , Inc. show the following balances on December
31, 2003:
Accounts receivable: P313,750
Deferred gross profit (before adjustment) 38,000

Analysis of the accounts receivable reveal the following:

Regular accounts P207,500

2002 installment accounts 16,250
2003 installment accounts 90,000

Sales on an installment basis in 2002 were made at 30% above cost, in 2003,
at 33 1/3% above cost. Expenses paid relating to installment sales were
P1,500.

2. How much is the net income on installment sales?

a. P10,000 c. P11,000
b. P10,250 d. P11,500

The following information pertain to installment sales of Uniwide Variety Store:

 Down payment : 20%

 Installment sales: P545, 000 in Year 1, P785,000 in year 2, and
P968,000 in Year 3
 Markup on cost: 35%
 Collections after down payment: 40% during year of sale, 35% during
the year after sale, and 25% on the third year.

3. The realized gross profit for Year 1 is

a. P109,357 c. P 99, 190
b. P 73, 474 d. P114, 825

4. The unrealized gross profit for the installment sales made during Year 2 as at the
end of Year
2 is:
a. P 97,689 c. P141,112
b. P131,880 d. P114,063

5. The Installment Accounts Receivable at the end Year 3 is

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. P652,722 c. P602,991
b. P621,640 d. P685,358

6. The Unrealized gross profit at the end of Year 3 is

a. P211,047 c. P198,574
b. P161,166 d. P217,574

Presented below are the information taken from the books of Cooler Co.

2002 2003

Sales: P125,000 P187,500

Regular 62,500 100,000
Installment
Cost of good sold:
Regular 75,000 112,500
Installment 31,250 45,000
Selling expenses 25,000 31,250
Collections on accounts from:
Regular sales 100,000 137,500
Installment sales – 2002 37,500 25,000
Installment sales – 2003 62,500

7. Total realized gross profit in installment sales for 2003 is:

a. P46,875 c. P114,375
b. P93,750 d. P87,500

8. Net income for 2003 is:

a. P78,125 c. P98,750
b. P93,750 d. P90,625

The data below are taken from the records of True Value Appliance Co.
which sells appliances exclusively on installment basis:

20012002 2003
Installment sales P365,500 P417,800
P610,750
Gross profit rate 36% 39% 40%

The balance in the Installment Accounts Receivable controlling accounts at

the beginning and end of 2003 were:

January 1December 31
2001 P17,400 -
2002 205,400 P25,800
2003 - 306,250

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

There was one repossession recorded during 2003. It related to 2002 sales.
Thereafter, the repossessed appliance was sold for P200, which equaled the
uncollected balance in the customer’s installment account receivable.

9. For the year ended December 31, 2003, the cost of goods sold for True Value
Appliance Co.
amounted:
a. P205,400 c. P305,520
b. P244,300 d. P366,450

10. The balance of unrealized gross profit on 2003 sales was

a. P15,480 c. P122,092
b. P17,400 d. P122,608

11. The gross profit realized in 2003 on collections of 2001 and 2002 installment
accounts
receivable totaled:
a. P 69,966 c. P122,092
b. P76,230 d. P198,322

12. In addition to above realized gross profit, there was also a gain from the sale of
the
repossessed appliance of
a. P72 c. P80
b. P78 d. P200

Union Sales Corp. accounts for sales on the installment basis. The
balances of the control accounts for installment Contracts Receivable at the
beginning and end of 2003 were:
Jan.1 Dec. 31
Installment contracts receivable – 2001 P 24,020 -
Installment contracts receivable - 2002 344,460 P 67,440
Installment contracts receivable - 2003 - 410,090

During 2003, the company repossessed a refrigerator which had been

sold in 2002 for P5,400 and P3,200 had been collected prior to default. The
company sales and cost of sales figures are summarized below:

200120022003
Net sales P380,000 P432,000 P602,000
Cost of sales 247,000 285,120 379,260

13. The gross profit on 2002 installments sales realized from collections in 2003
amounted to
a. P92,400.10 c. P94,186.80
b. P93,438.80 d. P96,187.00

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

14. Assuming Union Sales Corp. values the repossessed goods at market value
based on its
resale price of P1,700 and the current gross profit rate, the loss on repossession
would be
a. P360 c. P500
b. P381 d. P1,129
15. The realized gross profit on installment sales for the collections of the year 2003
was
a. P169,307.80 c. P173,600.50
b. P171,852.50 d. P172,852.50

In a Nutshell
Question:
1. Compare and identify advantages and disadvantages of regular sales and
installment sales.
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2. If you are going to put up a merchandising business for appliances, what do
you prefer? Installment sales or regular sales? Explain.
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Q&A List

Do you have any clarifications?

27
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Issues/Questions Answers

Keyword Index
1. Cost of Installment Sales. 5. Repossession
2. Deferred Goss Profit. 6. Gross Profit Rate
3. Installment Sales 7. Trade-In
4. Realized Gross Profit.

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