WELCOME

ABOARD
3 YEAR BSA!!
RD
ACCOUNTING FOR
SPECIAL
TRANSACTIONS
2ND DAY - ACCOUNTING WEBINAR
SERIES
ACCOUNTING FOR SPECIAL
TRANSACTIONS

■ ADVANCED ACCOUNTING 1 (ADVACC1)

■ Included in the CPA Board Exams under ADVANCE
FINANCIAL ACCOUNTING AND REPORTING (AFAR)
ACCOUNTING FOR SPECIAL
TRANSACTIONS
■ This course was based upon fundamental valuation of
accounting theory as applied to special income and expense
recognition methods, expanded business operations, specialized
problems in partnership accounting and other schemes.
■ Application of accounting mostly related to Special Revenue
Recognition
■ Overview of Concept, terminologies, and even formulas
 1.
INSTALLMENT
SALES
ACCOUNTING
Installment Sales Accounting
Installment Sales Accounting

■ Installment sale is a financing arrangement in which the seller

allows the buyer to make payments over an extended period of
time. 

■ POV of SELLER on Installment Sales

Installment Sales Accounting

What is the method used in Installment Sales?

INSTALLMENT SALES METHOD or GROSS PROFIT METHOD
- defers revenue recognition until cash from the sale is received.

Why Installment Method and not Accrual Method?

Risk of UNCOLLECTION OF PAYMENTS / Relationship of seller and buyer

Therefore, the installment sales method is a conservative method of revenue

recognition as revenue is not immediately recognized at the point of sale.
Seller’s Books at: Accrual Method Installment Method

Point of Sale A/R xx Installment A/R xx

Sales. xx Sales xx
Seller’s Books at: Accrual Method Installment Method

Point of Sale A/R xx Installment A/R xx

Sales. xx Sales xx

COGS. xx COGS. xx
Inventory xx Inventory. xx
Seller’s Books at: Accrual Method Installment Method

Point of Sale A/R xx Installment A/R xx

Sales. xx Sales xx

COGS. xx COGS. xx
Inventory xx Inventory. xx

Year End closing of I/S Sales. xx Sales. xx

Accounts COGS. xx COGS. xx
Gross Profit. xx Deferred Gross Profit. xx
(as Current Liability/Unearned Revenue)
Installment Sales Method or
GROSS PROFIT METHOD

SELLING PRICE 100 K 100% as base (ALWAYS!)

( COST OF GOODS 55 K
SOLD )
DEFERRED GROSS 45 K 45% -- GROSS PROFIT
PROFIT RATE
Seller’s Books at: Accrual Method Installment Method

Point of Sale A/R xx Installment A/R xx

Sales. xx Sales xx
COGS. xx COGS. xx
Inventory xx Inventory. xx
Year End closing of I/S Sales. xx Sales. xx
Accounts COGS. xx COGS. xx
Gross Profit. xx Deferred Gross Profit. xx

Collection Date (based Cash. xx Cash xx

on Actual Payments A/R. xx IAR. xx
Received)
--ONE TIME --SERIES OF PAYMENTS
PAYMENT
Installment Sales Accounting

What is the method used in Installment Sales?

INSTALLMENT SALES METHOD
- defers revenue recognition until cash from the sale is received.

How to recognize the revenue for Inst Sales?

REALIZED GROSS PROFIT
Computation for Realized Gross Profit
(RGP) upon Collection

Collection 10,000 JE:

X GP Rate % 0.45 Deferred GP 4,500
Realized GP 4,500
REALIZED GROSS 4,500
PROFIT
Seller’s Books at: Accrual Method Installment Method

Point of Sale A/R xx Installment A/R xx

Sales. xx Sales xx
COGS. xx COGS. xx
Inventory xx Inventory. xx
Year End closing of I/S Sales. xx Sales. xx
Accounts COGS. xx COGS. xx
Gross Profit. xx Deferred Gross Profit. xx
(as Current Liability)
Collection Date (based Cash. xx Cash xx
on Actual Payments A/R. xx IAR. xx
Received) --ONE TIME --SERIES OF PAYMENTS
PAYMENT
NO MORE ENTRY Deferred Gross Profit xx
Realized Gross Profit xx
Sample Problem
■ On Dec 1, Company A is a furniture company and makes a sale
for a piece of furniture with a retail price of P10,000 at the end
of December. The cost of the furniture to the company is
P4,000. Therefore, the gross margin for this good is 60%.
■ The company strikes a deal with the customer in which the
customer is required to make installment payments of P2,500
each month starting Jan 1 for the furniture until the full amount
is paid (P10,000).
Sample Problem
■ On Dec 1, Company A is a furniture company and makes a sale for a piece of furniture
with a retail price of P10,000 at the end of December. The cost of the furniture to the
company is P4,000. Therefore, the gross margin for this good is 60%.
■ The company strikes a deal with the customer in which the customer is required to make
installment payments of P2,500 each month starting Jan 1 for the furniture until the full
amount is paid (P10,000).
Selling Price?
COGS?
GP Rate?
How many payments?
Seller’s Books at: Installment Method

DEC 1 Installment A/R 10,000

Point of Sale Sales 10,000

COGS. 4,000
Inventory. 4,0000
DEC 31 Sales. 10,000
Year End closing of I/S Accounts COGS. 4,000
Deferred Gross Profit. 6,000

JAN 1 Cash 2,500

Collection Date (based on Actual IAR. 2,500
Payments Received)
Deferred GP 1,500
Realized GP. 1,500

Coll x GPR = 2,500 x 0.60 = 1,500

Seller’s Books at: Installment Method

DEC 1 Installment A/R 10,000

Point of Sale Sales 10,000

COGS. 4,000
Inventory. 4,0000
DEC 31 Sales. 10,000
Year End closing of I/S Accounts COGS. 4,000
Deferred Gross Profit. 6,000

JAN 1 Cash 2,500

Collection Date (based on Actual IAR. 2,500
Payments Received)
Deferred GP 1,500
Realized GP. 1,500

Coll x GPR = 2,500 x 0.60 = 1,500

Seller’s Books at: Installment Method

DEC 1 Installment A/R 10,000

Point of Sale Sales 10,000

COGS. 4,000
Inventory. 4,000
DEC 31 Sales. 10,000
Year End closing of I/S Accounts COGS. 4,000
Deferred Gross Profit. 6,000

JAN 1 Cash 2,500

Collection Date (based on Actual IAR. 2,500
Payments Received)
Deferred GP 1,500
Realized GP. 1,500

Coll x GPR = 2,500 x 0.60 = 1,500

Seller’s Books at: Installment Method

DEC 1 Installment A/R 10,000

Point of Sale Sales 10,000

COGS. 4,000
Inventory. 4,0000
DEC 31 Sales. 10,000
Year End closing of I/S Accounts COGS. 4,000
Deferred Gross Profit. 6,000

JAN 1 Cash 2,500

Collection Date (based on Actual IAR. 2,500
Payments Received)
Deferred GP 1,500
Realized GP. 1,500

Coll x GPR = 2,500 x 0.60 = 1,500

Seller’s Books at: Installment Method

DEC 1 Installment A/R 10,000

Point of Sale Sales 10,000

COGS. 4,000
Inventory. 4,0000
DEC 31 Sales. 10,000
Year End closing of I/S Accounts COGS. 4,000
Deferred Gross Profit. 6,000

JAN 1 Cash 2,500

Collection Date (based on Actual IAR. 2,500
Payments Received)
Deferred GP 1,500
Realized GP. 1,500

Coll x GPR = 2,500 x 0.60 = 1,500

Seller’s Books at: Installment Method

DEC 1 Installment A/R 10,000

Point of Sale Sales 10,000

COGS. 4,000
Inventory. 4,0000
DEC 31 Sales. 10,000
Year End closing of I/S Accounts COGS. 4,000
Deferred Gross Profit. 6,000

JAN 1 Cash 2,500

Collection Date (based on Actual IAR. 2,500
Payments Received)
Deferred GP 1,500
Realized GP. 1,500

Coll x GPR = 2,500 x 0.60 = 1,500

2. LONG TERM
CONTRUCTION
CONTRACTS
Long Term Construction Contracts

■ Under LTCC, contract revenues and expenses are recognized by

reference to the stage of completion of contract activity where the
outcome of the construction contract can be estimated reliably,
otherwise revenue is recognized only to the extent of recoverable
contract costs incurred.
■ Stage of completion, also known as percentage of completion, is a
measure of the extent of work that has been completed in respect of
a contract and is usually expressed in percentage terms. (Value
Based Method / Cost to Cost Method)
Long Term Construction Contracts
■ POV of the Construction Contractor (Gumagawa ng Building )
■ POV of the Buyer = under PPE (IAS 16)
■ Terms:
Progress billings (PB) : invoices requesting payment for work completed to date.
Construction in Progress (CIP) : a term for all the costs of construction associated with the building of fixed
long-term assets. 
Presented as one at year end: (as if DTA/DTL)

CIP > PB CIP < PB

100 – 40 =60 ASSET 100 – 110 = 10 LIAB
Long Term Construction Contracts
■ Methods in Accounting LTCC:

1. If the estimate is reliable =

Use PERCETAGE OF COMPLETION (POC)
using “cost to cost method”

POC (%)= cost incurred as to date

total cost as to date
Long Term Construction Contracts
■ Methods in Accounting LTCC:

2. If the estimate is NOT reliable =

Use Zero Profit Method
also called as “cost recovery method”

Cost incurred = Revenue for the year

No Gross Profit unless last year of completion
Transactions POC Method
Billing to Client Accounts Receivable xx
Progress Billings. xx
Transactions POC Method
Billing to Client Accounts Receivable xx
Progress Billings. xx

Payment from Client Cash xx

Accounts Receivable. xx
Transactions POC Method
Billing to Client Accounts Receivable xx
Progress Billings. xx

Payment from Client Cash xx

Accounts Receivable. xx
Actual Cost Incurred Labor Expense xx
Materials Expense xx
Cash xx
Transactions POC Method
Billing to Client Accounts Receivable xx
Progress Billings. xx

Payment from Client Cash xx

Accounts Receivable. xx
Actual Cost Incurred Labor Expense xx
Materials Expense xx
Cash xx
Year End JE 1 (Closing of CIP xx
I/S accounts to CIP) Labor Expense xx
Materials Expense xx
Transactions POC Method
Billing to Client Accounts Receivable xx
Progress Billings. xx

Payment from Client Cash xx

Accounts Receivable. xx
Actual Cost Incurred Labor Expense xx
Materials Expense xx
Cash xx
Year End JE 1 (Closing of CIP xx
I/S accounts to CIP) Labor Expense xx
Materials Expense xx
Year End JE 2 - If Using CIP xx
Percentage of Completion Construction Cost xx
Method Const Revenue xx
Transactions POC Method Zero Profit
Billing to Client Accounts Receivable xx same
Progress Billings. xx

Payment from Client Cash xx same

Accounts Receivable. xx
Actual Cost Incurred Labor Expense xx
Materials Expense xx same
Cash xx
Year End JE 1 (Closing of CIP xx same
I/S accounts to CIP) Labor Expense xx
Materials Expense xx
Year End JE 2 - If Using CIP xx
Percentage of Completion Construction Cost xx
Method Const Revenue xx
Year End JE 2 - If Using Construction Cost xx
Zero Profit Method Const Revenue xx
■ On Jan 1, 2020, JPIA Corp was contracted to build an office building for a total contract
price of P1,825,000. JPIA has not yet billed the client for the project.
2020 2021 2022
Contract Cost Incurred. 350,000 930,000 300,000
Est Cost to Complete. 1,050,000 320,000 -0-

Compute for the (using POC Method)

1. REVENUE =
2. CIP =
3. GROSS PROFIT =
■ On Jan 1, 2020, JPIA Corp was contracted to build an office building for a total contract
price of P1,825,000. JPIA has not yet billed the client for the project.
2020 2021 2022
Contract Cost Incurred. 350,000 930,000 300,000
Est Cost to Complete. 1,050,000 320,000 -0-
Total Cost as to date. 1,400,000. 1,600,000. 1,580,00
Compute for the ff:
POC (%)= cost incurred as to date
total cost as to date

2020 2021 2022

Cost inc. to date 350,000 350K+930K=1,280,000 1,580,000
/ Total Cost to date 1,400,000 1,600,000 (350+930+320) 1,580,00
POC % 25% 80% 100%
■ On Jan 1, 2020, JPIA Corp was contracted to build an office building for a total contract
price of P1,825,000. JPIA has not yet billed the client for the project.
2020 2021 2022
Contract Cost Incurred. 350,000 930,000 300,000
Est Cost to Complete. 1,050,000 320,000 -0-
Total Cost as to date. 1,400,000. 1,600,000. 1,580,00
Compute for the ff:
POC (%)= cost incurred as to date
total cost as to date

2020 2021 2022

Cost inc. to date 350,000 350K+930K=1,280,000 1,580,000
/ Total Cost to date 1,400,000 1,600,000 (350+930+320) 1,580,00
POC % 25% 80% 100%
■ On Jan 1, 2020, JPIA Corp was contracted to build an office building for a total contract
price of P1,825,000. JPIA has not yet billed the client for the project.
2020 2021 2022
Contract Cost Incurred. 350,000 930,000 300,000
Est Cost to Complete. 1,050,000 320,000 -0-
Total Cost as to date. 1,400,000. 1,600,000. 1,580,00
Compute for the ff:
POC (%)= cost incurred as to date
total cost as to date

2020 2021 2022

Cost inc. to date 350,000 350K+930K=1,280,000 1,580,000
/ Total Cost to date 1,400,000 1,600,000 (350+930+320) 1,580,00
POC % 25% 80% 100%
■ On Jan 1, 2020, JPIA Corp was contracted to build an office building for a total contract
price of P1,825,000. JPIA has not yet billed the client for the project.
2020 2021 2022
Contract Cost Incurred. 350,000 930,000 300,000
Est Cost to Complete. 1,050,000 320,000 -0-
Total Cost as to date. 1,400,000. 1,600,000. 1,580,000
Compute for the ff:
POC (%)= cost incurred as to date
total cost as to date

2020 2021 2022

Cost inc. to date 350,000 350K+930K=1,280,000 1,580,000
/ Total Cost to date 1,400,000 1,600,000 (350+930+320) 1,580,000
POC % 25% 80% 100%
■ On Jan 1, 2020, JPIA Corp was contracted to build an office building for a total contract price of
P1,825,000. JPIA has not yet billed the client for the project.
2020 2021 2022
Contract Cost Incurred. 350,000 930,000 300,000
Est Cost to Complete. 1,050,000 320,000 -0-
% of Completion (YTD) 25% 80%. 100%
Compute for the ff: Revenue = Contract Price x POC%

POC Method 2020 2021 YTD as of 2021 2022 YTD as of 2022

Revenue (CP x POC) 456,250 1,003,750 1,460,000 365,000 1,825,000

Cost of Const (Actual) (350,000) (930,000) (1,280,000) (300,000) (1,580,000)
Gross Profit 106,250 73,750 180,000 65,000 245,000

How much is your CIP?

POC Method 456,250. 1,460,000 1,825,000 (zero if asset is turned over)
Zero Profit Method. 350,000. 1,280,000. 1,580,000 (zero if asset is turned over)
Transactions 2020 2021 2022

Billing to Client Accounts Receivable Accounts Receivable Accounts Receivable

Progress Billings. Progress Billings. Progress Billings.

Payment from Client Cash Cash Cash

Accounts Receivable. Accounts Receivable. Accounts Receivable.

Actual Cost Incurred DL/DM Expense 350,000 DL/DM Expense 930,000 DL/DM Expense 300,000
Cash 350,000 Cash 930,000 Cash 300,000

Year End JE 1 (Closing CIP 350,000 CIP 930,000 CIP 300,000

of I/S accounts to CIP) DL/DM Expense 350,000 DL/DM Expense 930,000 DL/DM Expense 300,000

Year End JE 2 - If CIP 106,250 CIP 73,750 CIP 65,000

Using Percentage of Construction Cost 350,000 Construction Cost 930,000 Construction Cost 300,000
Completion Method Const Revenue 456,250 Const Revenue 1,003,750 Const Revenue 365,000

Year End JE 2 - If Construction Cost 350,000 Construction Cost 930,000 CIP. 295,000
Using Zero Profit Const Revenue 350,000 Const Revenue 930,000 Construction Cost 300,000
Method Const Revenue 1,825,000
3. FRANCHISE
ACCOUNTING
GUESS THE FRANCHISE
Franchise Accounting

■ It is where a leading , known business entered into agreement  in which for fee ONE
PARTY ( FRANCHISOR)  gives the other party ( FRANCHISEE)  the rights to perform
certain functions  or sell certain products or services of the franchisor.
Franchise Accounting

■ It is where a leading , known business (like Jollibee, Mcdo) entered

into agreement  in which for fee ONE PARTY (FRANCHISOR) 
gives the other party (FRANCHISEE)  the rights to perform certain
functions or sell certain products or services of the franchisor.

■ POV of the FRANCHISOR

■ POV of the Franchisee = under Intangible Asset (IAS 38)
How to account Franchise Revenue?
■ INITIAL FRANCHISE FEE = Collections received upon entering contract. (DP + PV of
Notes Receivable)
■ CONTINUING FRANCHISE FEE = Collections to be received usually based on Sales (ex
5% of the Gross sales)
■ Methods to Account Franchise Revenue
COLLECTABILITY OF NOTES RECEIVABLE FROM FRANCHISEE
1. Reasonably Assured – Accrual Method (100% outright recorded revenue)
2. Not Reasonable Assured – GP Method ( using GP Rate = GP over Gross Revenue)
3. Uncertain – Zero Profit Method

WHY AGAIN? Risk in Collectability of the Notes Receivable

Normal Cost Franchise - Accrual Franchise - Franchise - Zero
Accounting Method (RA) GP Method (NRA) Profit Method (UC)
Gross Sales

(Cost of Sales)

Gross Profit

(Operating Exp)

+Interest Income

+Other Income

Net Income
Normal Cost Franchise - Accrual Franchise - Franchise - Zero
Accounting Method (RA) GP Method (NRA) Profit Method (UC)
Gross Sales Initial Franchise Fee Total Collections
-excl. interest
(Cost of Sales) (Cost of Franchise) X GP Rate (%)

Gross Profit Gross Profit Gross Profit

(Operating Exp) (Operating Expense) (Operating Expense)

+Interest Income +Interest Income +Interest Income

+Other Income +Cont. Franchise Fee +Cont.Franchise Fee

Net Income Net Income Net Income

Normal Cost Franchise - Accrual Franchise - Franchise - Zero
Accounting Method (RA) GP Method (NRA) Profit Method (UC)
Gross Sales Initial Franchise Fee Total Collections
-excl. interest rec
(Cost of Sales) (Cost of Franchise) X GP Rate (%)

Gross Profit Gross Profit Gross Profit

(Operating Exp) (Operating Expense) (Operating Expense)

+Interest Income +Interest Income +Interest Income

+Other Income +Cont. Franchise Fee +Cont.Franchise Fee

Net Income Net Income Net Income

Normal Cost Franchise - Accrual Franchise - Franchise - Zero
Accounting Method (RA) GP Method (NRA) Profit Method (UC)
Gross Sales Initial Franchise Fee Total Collections Total Collections
-excl. interest rec -excl. interest rec
(Cost of Sales) (Cost of Franchise) X GP Rate (%) (Cost of Franchise)

Gross Profit Gross Profit Gross Profit Gross Profit

(Operating Exp) (Operating Expense) (Operating Expense) (Operating Expense)

+Interest Income +Interest Income +Interest Income +Interest Income

+Other Income +Cont. Franchise Fee +Cont.Franchise Fee +Cont.Franchise Fee

Net Income Net Income Net Income Net Income

Normal Cost Franchise - Accrual Franchise - Franchise - Zero
Accounting Method (RA) GP Method (NRA) Profit Method (UC)
Gross Sales Initial Franchise Fee Total Collections Total Collections
-excl. interest rec -excl. interest rec
(Cost of Sales) (Cost of Franchise) X GP Rate (%) (Cost of Franchise)

Gross Profit Gross Profit Gross Profit Gross Profit

(Operating Exp) (Operating Expense) (Operating Expense) (Operating Expense)

+Interest Income +Interest Income +Interest Income +Interest Income

+Other Income +Cont. Franchise Fee +Cont.Franchise Fee +Cont.Franchise Fee

Net Income Net Income Net Income Net Income

HOME OFFICE
AND BRANCH
Home Office and Branch
■ Home Office and Branch maintains
SEPARATE BOOKS (both of them makes
an entry per transaction related to each
other)
■ Use of temporary accounts such as:
Home Office’s Books Branch’s Books
Investment to Branch (Dr.) Home Office Acct (Cr.)
Shipment to Branch (Cr.) Shipment fr HO (Dr.)

■ At year end, both books pertain to the

same entity, hence, must be presented as
COMBINED ENTITY. All temporary
accounts must also be eliminated.
ACCOUNTING FOR SPECIAL TRANSACTIONS -
Recap
1. Installment Sales = RGP when cash is collected
from customer.
2. LTCC = Revenue based on POC (POC Method),
Cost of Construction, GP, PB and CIP.
3. Franchise = Method depends on collectability.
RA / NRA / Uncertain
Additional Topic : Home Office and Branch =
separate books combined when presented at year end.
 THE END!
THANKS FOR
LISTENING!!
2ND DAY - ACCOUNTING WEBINAR
SERIES