INSTALLMENT SALES

A. How to get Gross profit rate?

For prior year(s) sales:

For current year:

B. How to determine realized gross profit?

Formula: Collection X Gross Profit Rate

C. Ho to get ending balance of Deferred Gross Profit Account?

Formula: Ending Installment A/R X Gross Profit Rate

Installment A/R Deferred Gross Profit

Beg. Balance PXX PXX Beg. Balance

Realized Gross Profit PXX DGP on Installment Sales

Installment Sales PXX PXX Collection PXX (Current year)
DGP on Repossession
PXX Repossession PXX

End Balance
PXX End Balance PXX

D. Determining gain or loss on repossession:

E. Determining Over or Under allowance of Trade-in Merchandise

EXERCISES:

PROBLEM 1 – Methods of Recognizing Gross Profit in Installment Sales

On 31 December 2008, the Austin Company sold merchandise to Kirsten Corporation for
P400,000. Terms of sale called for a down payment of P120,000 and balance is payable in two
(2) annual installments of P140,000 beginning 31 December 2009. The cost of the merchandise
on Austin’s books on the date of sale was P240,000. The company’s fiscal year end is 31
December.
Determine the following:
1. The gross profit recognized using time of sale or point of delivery recognition of revenue.

2. The deferred gross profit on 31 December using time of sale or point of delivery recognition
of revenue.

3. The unrecovered cost on 31 December using time of sale or point of delivery recognition of
revenue.

4. The gross profit recognized using time of collection – cost recovery method of recognizing
revenue.

5. The prepaid gross profit on 31 December using time of collection – cost recovery method of
recognizing revenue.

6. The gross profit recognized using time of collection – profit recovery method of recognizing
revenue.

7. The deferred gross profit on 31 December using time of collection – profit recovery method of
recognizing revenue.

8. The deferred gross cost on 31 December using time of collection – profit recovery method of
recognizing revenue.

9. The gross profit method recognized using time of collection – installment sales method of
recognizing revenue.

10.The deferred gross profit on 31 December using time of collection – installment sales method
of recognizing revenue.

11.The deferred cost on 31 December using the time of collection installment sales method of
recognizing revenue.

Problem 2 – DEF Company began operations on 01 January 2011 and appropriately uses the
installment method of accounting the following data are available for 2011 and 2012:
 2011 2012
Installment Sales 1,200,000 1,500,000
Cash Collections from:
2011 Sales 400,000 500,000
2012 Sales -- 600,000
Gross Profit on sales 30% 40%

The realized gross profit for 2012 is? ______________________

Problem 3 - ABC Company, which began business on 01 January 2011, appropriate uses the
installment sales method of accounting. The following data are available:

Installment Accounts Receivable. 12/31/2011 P200,000

Deferred Gross Profit, 12/31/2011 (B4 Adjustment) P140,000
Gross Profit on Sales 40%

Determine the following:

1. Cash Collections
2. Realized Gross Profit

Problem 4 – ABC Co. accounts for installment sales on the installment basis. On January 1,
2012, ledger accounts included in the following balances:
2010 2011
Installment Receivable 38,500 155,000
Deferred Gross Profit 11,550 62,000

On 31 December 2012, account balances before adjustments for realized gross profit on
installments sales were:

Installment sales in 2012 were made at 42% above cost of merchandise.

The total realized gross profit on installment sales in 2012:

a. 132,510 b. 98,910 c. 97,510 d.102,834

Problem 5: Karen Corporation started operations on January 1, 2011 selling home appliances
and furniture sets both for cash and installment basis. Data on the installment sales operations of
the company gathered for the years ending December 31, 2011 and 2012 as follows:

2011 2012

Installment Sales 400,000.00 500,000.00

Cost of Installment Sales 240,000.00 350,000.00

Cash collected in Installment Sales:

2011 Installment Contracts 210,000.00 150,000.00

2012 Installment Contracts - 300,000.00

Additional information:
On January 5, 2013, an installment sale in 2011 was defaulted and the merchandise with an
appraised value of P5,000 was repossessed. Related installment receivable balance on January
5, 2013 was P8,000.
a. Compute the balance of Deferred Gross Profit on December 31,
2012._____________________
b. Compute the gain or loss on repossession in 2013. ______________________

Problem 6: A& K Company uses installment sales method for their installment sales. On January
1, 2008, a treadmill that cost P24,000 was sold for P40,000 to Mr. Bert. Bert made a down of
P10,000 and paid 6,000 per month for the next three months. When no further collection could be
made, the treadmill sold was repossessed. The estimated selling price was determined to be at
P8,000 after the company spent P1,000 for reconditioning cost. A 25% gross profit was usual
from the sale of used treadmill.

a. Determine the gain or loss on repossession assuming the use of installment sales method.
______________
b. Determine the gain or loss on repossession assuming that full profit is recognized when
the sale is made. (Time of Sale/ Point of Delivery) ______________________

Problem 7: The Austin Company accounts for its sales on the installment sales basis. At the
beginning of 2008, ledger accounts include the following account balances:

Installment Accounts :
Receivable, 2006 90,000.00
Receivable, 2007 288,000.00
Deferred Gross Profit, 2006 37,800.00
Deferred Gross Profit, 2007 108,000.00

At the end of 2008 account, balances before adjustment for realized gross profit on installment
sales are:

Installment Accounts Receivable, 2006 -

Installment Accounts Receivable, 2007 72,000.00
Installment Accounts Receivable, 2008 390,000.00
Deferred Gross Profit, 2006 37,800.00
Deferred Gross Profit, 2007 103,050.00
Deferred Gross Profit, 2008 180,000.00

Installment sales in 2008 are made at 25% above the cost of merchandise sold; cash sales
amounting to P700,000 were made at a markup of 30% of sales and credit sales of P200,000 at
a markup of 32%. During 2008, upon default in payment by the customer, the company
repossessed the merchandise with an estimated market value of P60,000. The sales was made
in 2007 for P32,400 and P19,200 had been collected prior to repossession.

Determine the:
1 . Total realized gross profit before gain or loss on repossession in 2008:
a. 489,850 b. 215,850 c. 113,850 d. 102,000

2 . Realized gross profit on installment sales in 2008 for 2008 sales :

a. 489,850 b. 215,850 c. 113,850 d. 102,000

3 . Realized gross profit on installment sales in 2008 for 2007 sales :

a. 489,850 b. 215,850 c. 76,050 d. 37,800

4 . Realized gross profit on installment sales in 2008 for 2006 sales :

a. 489,850 b. 102,000 c. 76,050 d. 37,800

5 . The total realized gross profit on installment sales in 2008:

a. 489,850 b. 215,850 c. 113,850 d. 102,000

Problem 8: Using the same information in Problem 6, assuming that A&K Company wants to
improve the salability of the repossessed merchandise, the company incurred P500 for
reconditioning. After which the company was able to sell the merchandise to another customer of
P8,125 at a down payment of 40%.
Compute the realized gross profit on the subsequent installment sale:
a. 850 b. 812 c. 650 d. 520

Problem 9: Since there is no reasonable basis for estimating collectability, the AIR Appliance
Company uses the installment method of recognizing revenue for the following sales:

2012 2013
Sales 225,000.00 337,500.00
Collections from:
2012 Sales 75,000.00 37,500.00
2013 Sales - 112,500.00
Defaults:
2012 Sales 7,500.00 15,000.00
2013 Sales - 30,000.00
Accounts written off:
2012 Sales 18,750.00 56,250.00
2013 Sales - 18,750.00
Gross Profit % 30% 40 %

What amount should AIR Appliance Co. report as deferred gross profit, ending balance in its 31
December 2012 balance sheet? __________________

Problem 10: Dahon, Inc. sells a new car costing P1,080,000 for P1,530,000 on installment basis
on 01 October 2012. Terms of the payment included the acceptance of a used car with a trade-in
allowance of P540,000. Cash of P90,000 was paid in addition to the trade-in car with the balance
to be paid in (10) monthly installments due at the end of each month commencing the month of
sale. The estimated selling price of the car after reconditioning cost of P22,500 is P450,000. A
15%gross profit was usual from the sale of used car. The company uses the installment method
of accounting to recognize gross profit.

What is the realized gross profit on installment sales in 2012?

a. 72,000 b. 127,059 c. 144,000 d. 180,000

Problem 11: On September 30, 2008, Musical Instruments, Inc. sold for P32000 a piano costing
P20,000. The down payment was P3,200 and the balance was to be paid on 12 installments at
the end of each succeeding month using present value. Interest at 1% a month was charged on
the unpaid balance of the contract, with payments applying first to accrued interest and the
balance to principal. After 3 installments, the customer defaulted. The piano was repossessed in
01 March 2009. It was estimated that the piano had a fair value of P11,500 after reconditioning
costs of P300. The present value factors are: PV of P1 at 1% for 12 periods = 0.8874; and the PV
of P1 of an annuity of P1 at 1% for 12 periods = 11.2551.

Determine:
1. Total collection as to interest for the year 2008:
a. 288 b. 320 c. 507.65 d. 795.65
2. Total collections as to principal for the year 2008:
a. 10,080.87 b. 10,666.67 c. 10,876.52 d. 12,800.00
3. The realized gross profit on installment sales for the year 2008:
a. 3,780.33 b. 4,000 c. 4,078.70 d. 4,800
4. The gain or loss on repossession on 01 March 2009:
a. 2,499.46 b. (2,499.46) c. (2,199.46) d. 800

Solution Problem 11:

Collection
Date s Interest Principal Unpaid Balance
9/30/200
8 32,000.00
9/30/200
8 3,200.00 - 3,200.00 28,800.00
10/31/20
08 2,558.84 288.00 2,270.84 26,529.16
11/30/20
08 2,558.84 265.29 2,293.55 24,235.61
12/31/20
08 2,558.84 242.36 2,316.48 21,919.13 Totals 10,876.52 795.65
10,080.87
*PV installment collections = P28,800, unpaid balance/11.2551, PV annuity of 1 =
P2,558.84