INSTALLMEN

SALES
ADVANCED ACCOUNTING I

T
 INSTALLMENT
Installment sale is a contract

SALES
whereby a buyer makes a
series of payments over an
extended period of time in
exchange for property
acquired.
 
M ETHODS
profit is realized cost is recovered gross profit is
first in the first before realized in
collections realizing gross proportion to the
before profit. collections made
recovering cost. by the customer.
 

GROSS PROFIT COST INSTALLMENT

METHOD RECOVERY METHOD
 GROSS PROFIT
METHOD
On July 1, 2017, Ross Company acquired inventories
costing P1,000,000. Three weeks after, he sold 45% of its own
purchases to Nix Company at 50% above cost. All sales made
requires a down payment of 15% of the invoice price and the
remaining are in installment. Data from the customers collection
were as follows:
2018:P 150,000 2019: P 250,500 2020: remaining balance of the receivable

Assuming there were no beginning inventories and the company is using

gross profit method in realizing gross profit, how much is the gross profit
realized in 2017, 2018, 2019, and 2020?
SOLU GROSS PROFIT
METHOD
TION
Amount of inventories sold: P450,000 (P1,000,000 x 45%)
Sales price: P675,000 (P450,000 x 150%)
Gross profit: P225,000 (P675,000 – P450,000) or (P450,000 x 50%)
Gross profit realized in:
2017: P675,000 x 15% = P101,250
2018: P225,000 – P101,250 = P123,750
2019: P0
2020: P0
COST RECOVERY
METHOD
Several of Ana, Inc.’s customers are having cash flow
problems. Information pertaining to these customers for the years
ended March 31, 2017 and 2018 follows:
2017 2018
Sales P10 000 P15 000
Cost of Sales P8 000 P9 000
Cash Collections:
On 2009 Sales P7 000 P3 000
On 2010 Sales P12 000

If the Cost Recovery Method is used, what amount Ross Taba

report as gross profit from sales to these customers for the year
ended March 31, 2018?
SOLU COST RECOVERY
METHOD
TION
Collections on 2017 Sales
(7 000 + 3000)
P10 000

Less Cost of Sales 2017 8 000 P2 000

Collections on 2018 sales P12 000

Less Cost of Sales 2018 9 000 3 000

Total Gross Profit P5 000

The Cost Recovery Method recognizes profit only after collections exceed the Cost
of Sales, that is, when the full cost has been recovered. Subsequent amounts
collected are treated entirely as realized gross profit.
INSTALLMENT
METHOD
Aaron Company reports income on the installment basis and
uses perpetual inventory system. The following data are
available:
Sales made Gross profit Installment rec’l Collections Installment rec’l
during rate Jan. 1, 2016 during 2016 Dec. 31, 2016
2014 46% P30,000 P30,000 -
2015 42% 50,000 34,000 P16,000
2016 40% - 60,000 P140,000
SOLU INSTALLMENT
METHOD
TION Entries to record the transactions:
Installment Accounts Receivable
Installment Sales
200,000
200,000
To record 2016 sales.
Cost of Installment Sales 120,000
Inventory 120,000
To record the cost of 2016 sales.
Cash 124,000
Installment Accounts Receivable, 2016 60,000
Installment Accounts Receivable, 2015 34,000
Installment Accounts Receivable, 2014 30,000
To record collections during 2016.
SOLU INSTALLMENT
METHOD
TION
Installment Sales
Cost of Installment Sales
Deferred Gross Profit, 2016
200,000
120,000
80,000
To record deferred gross profit.
Deferred Gross Profit, 2016 24,000
Deferred Gross Profit, 2015 14,280
Deferred Gross Profit, 2014 13,800
Realized Gross Profit 52,080
To recognize realized profit.
Realized Gross Profit 52,080
Income Summary 52,080
To close the realized gross profit.
 INSTALLMENT
FORMULA SALES
Current year:
Gross Profit Rate = Gross Profit Sales

Prior year: Deferred Installment Accounts

Gross Profit Rate = Gross Profit, Receivable,
beginning beginning
 INSTALLMENT
FORMULA SALES
Installment Accounts x Gross Profit Rate = Deferred Gross Profit,
Receivable, beginning beginning

Collection x Gross Profit Rate = Realized Gross Profit

Installment Accounts x Gross Profit Rate = Deferred Gross Profit,

Receivable, end end
INSTALLMENT
METHOD
Installment Accounts Receivable, beginning = 1,500,000
Deferred Gross Profit, beginning = 300,000
Installment Accounts Receivable, ending = 675,000

Compute for:
• Collections
• Gross Profit Rate
• Cost of Sales incurred
• Deferred Gross Profit, ending
• Realized Gross Profit
SOLU INSTALLMENT
METHOD
TION
1
Installment Accounts Receivable, beginning

Less: Installment Accounts Receivable, ending

1,500,000

675,000
Collections 875,000

2
Deferred Gross Profit, beginning 300,000
÷ Installment Accounts Receivable, beginning 1,500,00
Gross Profit Rate 20%

3
Collections 875,000
x cost rate ( 1- GPR) 80%
Cost of sales incurred 660,000
SOLU INSTALLMENT
METHOD
TION
4
Installment Accounts Receivable, ending 675,000
x Gross Profit Rate 20%
Deferred Gross Profit 135,000

5
Collections 875,000
x Gross Profit Rate 20%
Realized Gross Profit 175,000
 INSTALLMENT
METHOD
These data pertain to installment sales of Mickey’s Store:
Down payment: 20%
Installment Sales: P545,000 in Year 1; P785,000 in Year 2; and
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, and 25% in the third year.
Find the following:
The realized gross profit in year 1 is:
The unrealized gross profit for installment sales made during year 2,
as of the end of year 2 is:
The installment accounts receivable at the end of year 3 is:
The unrealized gross profit at the end of year 3 is:
SOLU INSTALLMENT
METHOD
TION
Down payment (20% x 545, 000)
Installments (545, 000 x 80% x 40%)
Total Collections in Year 1
P109, 000
174, 400
P283, 400
Multiply by Gross Profit Rate 35/135
Realized Gross Profit in Year 1 P73, 474

Normally, realized gross profit is determined by multiplying the gross

profit rate on sale by the total collection during the period. The gross
profit rate provided by the problem in Year 1 is 35% on cost, however,
the gross profit rate to be used in the installment method of accounting
should be on sales, thus the above computations.
SOLU INSTALLMENT
METHOD
TION
Installment Sales – Year 2

Less down payment (20%)

P785, 000

157, 000
The unrealized gross profit in
question refers to installment sales
Balance P628, 000 made in Year 2. Therefore, to
Less collections year of sale (40% x 628, 000) 251, 200 compute for the unrealized portion of
Receivable balance – Year 2 sales at the end of P376, 800 sales, gross profit rate on sales
Year 2
Multiply by Gross Profit Rate 35/135
should be applied to the uncollected
Unrealized Gross Profit at the end of Year 2 P97, 689
portion at the end of Year 2, known
as installment accounts receivable
balance at Year 2.
SOLU INSTALLMENT
METHOD
TION Installment Sales
Down payment (20%)
Balance
Year 2
P785, 000
(157, 000)
628, 000
Year 3
P968, 000
(193, 600)
774, 400
Collections
Year of Sale (40%) (251,200) (309, 760)
Year after Sale (35%) (219, 800) -
Installment Accounts Receivable, end of P157, 000 P464, 640
Year 3

Installment accounts receivable, end of Year 3 P621, 640

Multiply by Gross Profit Rate on Sales 35/135

Unrealized Gross Profit, end of Year 3 P161, 166
REPOSSESION
R ULES ON
REPOSSESSION
• The repossessed merchandise recorded at its market
value (NRV) at the time of repossession

Estimated Resale Price Pxxx

Less: Reconditioning cost Pxxx
Cost to sell xxx___________
Market value or Net Realizable value Pxxx
R ULES ON
REPOSSESSION

• The deferred gross profit relating to the account

defaulted is written off. It is computed as follows:

DGP to be written off = Account defaulted x Gross profit rate

R ULES ON
REPOSSESSION
• The account defaulted (unpaid balance upon
default) is canceled.

• Compute for the unrecovered cost:

Defaulted balance x Cost Percentage
R ULES ON
REPOSSESSION
• Compute for the gain or loss on repossession:
Market Value Pxxx
Less: Unrecovered cost xxx
Gain (Loss) Pxxx
JOURNAL ENTRY
Loss on Repossession:
Repossessed Merchandise xxx
Deferred Gross Profit xxx
Loss on Repossession xxx
Installment Accounts Receivable xxx

Gain on Repossession:
Repossessed Merchandise xxx
Deferred Gross Profit xxx
Installment Accounts Receivable xxx
Gain on Repossession xxx
REPOSSESSION
A sale on installment basis was made on 2016 for P16, 000 at a
gross profit of P5, 600. At the end of 2017, when installment
account receivable had a balance of P7, 000, it was ascertained
that the customer should not be able to make further payments.
The merchandise was then repossessed. It was estimated that
the repossession can be resold for P6, 000 after reconditioning
the same at P1, 500 and a commission of 10%.
Required:
• Unrecovered Cost
• Deferred Gross Profit
• Market value or Net Realizable Value
• Gain or Loss on Repossession
• Necessary Journal Entries
SOLU REPOSSESSION
TION
The gross profit rate is 35% (i.e., P5, 600/P16, 000). The customer’s account balance
is analyzed as follows:
Unrecovered Cost 65% x P7, 000 P4, 550
Deferred Gross Profit 35% x P7, 000 2, 450
P7,000

The net realizable value of the repossessed merchandise is determined as follows:

Estimated Resale Price P6, 000
Less: Reconditioning Cost P1, 500
Gross Profit (20% of P70K) 600 2, 100

Net Realizable Value P3, 900

SOLU REPOSSESSION
TION
Since the unrecovered cost of P4, 550 is more than the market value of P3, 900,
there is a loss on repossession of P650. The repossession is now recorded as follows:

Repossessed Merchandise 3, 900

Deferred Gross Profit, 2015 2, 450
Loss on Repossession 650
Installment Contract Receivable, 2015 7, 000
TRADE
IN
R ULES ON
TRADE IN
• The merchandise received as trade-in is recorded at market
value/ net realizable value:

Estimated Resale Price Pxxx

Less: Reconditioning cost Pxxx
Cost to sell xxx
Gross Profit xxx____________
Market Value or Net Realizable value Pxxx
R ULES ON
TRADE IN
• The market value (NRV) is compared
with the trade-in allowance:
Overallowance (deducted from sales price)
Market value < Trade-in allowance

Underallowance (added to sales price)

Market value > Trade-in allowance
JOURNAL ENTRY

Cash xxx
Trade-in Merchandise xxx
Installment Accounts Receivable xxx
Installment Sales xxx

Cost of Installment Sales xxx

Inventory xxx
TRADE
IN
On March 1, 2017, the Glenn Co. sold a machine for
P155, 000. The machine costs P100, 000. The customer is allowed a
trade-in allowance of P50, 000 for an old machine. A down payment
of P45,000 was made and the balance is to be paid in 12 monthly
installments of P5, 000 each payable at the end of each month
beginning March 31. The old machine is estimated to have a resale
value P70, 000 after incurring reconditioning cost of P7, 500. The
seller expects a 20% profit from the sale of the used machine;
commission is 5%.
TRADE
IN
Required:
• The net realizable value of the machine accepted as trade-in
• The over (under) allowance in trade-in
• The gross profit from the transaction
• The gross profit ratio
• Prepare the necessary journal entries
SOLU TRADE
IN
TION
The net realizable value of the merchandise received as trade-in is computed
as follows:
Estimated Resale Price P70, 000
Less: Reconditioning Cost P7, 500
Commission (5% of 3, 500
P70K) 14, 000 25, 000
Gross Profit (20% of
P70K)
Net Realizable Value P45, 000
SOLU TRADE
IN
TION
The gross profit is computed as follows:
Sales P155, 000
Less: Over-allowance on trade-in:
Trade-in allowance P50, 000
Less Net Realizable Value 45, 000 5, 000
Adjusted Sales P150, 000 100.00%
Cost of Sales 100, 000 66.67%
Gross Profit P50, 000 33.33%
SOLU TRADE
IN
TION
The entry to record the installment sales with trade-in is as follows:

Cash 45, 000

Trade-in Merchandise 45, 000
Installment Contract Receivable 60, 000
Installment Sales 150, 000

Cost of Installment Sales 100, 000

Machinery 100, 000