Installment Sales

AGENA MARIE SAN PABLO, CPA

 2 Types of Sales
1. Regular Sales
It may be either a cash sales or credit sales.
Under this type of sale, revenue is recognized at
the time of sales rather than collection.
 2 Types of Sales
2. Installment Sales
It requires periodic installment collections of
cash. It recognizes revenue at the time of
collection rather than in the period of sale.
 Method
1. Cost recovery method
Under this method, at the date of sale
transaction, revenue and cost of sales are both
recognized, while the gross profit associated with the
sale is initially deferred; that is, all cash received from
the customer is applied to recover the cost of goods
sold.
Illustration
ABC Co. uses the “cost recovery method”. On January
1, 2021, ABC Co. sold inventory costing P280,000 to a
customer for P500,000 payable as follows: P100,000
down payment and balance due in 4 equal annual
payments every December 31.

Compute the realized gross profit (RGP) in years 2021

through 2024.
Illustration
Several of Pitt, Inc.’s customers are having cash flow problems. Information
pertaining to these customers for the years ended March 31, 2019 and 2020
follows:
2019 2020
Sales 10,000 15,000
Cost of sales 8,000 9,000
Cash collections:
On 2019 sales 7,000 3,000
On 2020 sales 12,000

If the cost recovery method is used, what amount would Pitt report as gross
profit from sales to these customers for the year ended March 31, 2020?
 Method
2. Gross profit realization method
Under this method, the first collections are
regarded as realization of gross profit. After the
recognition of the full profit, all subsequent
collections are treated as recovery of cost.
 Method
3. Instsallment method
Under this method, income is recognized when
collections are made. This method serves to spread
the gross profit on installment sales over the full life
of the contract.
 Accounting Procedures
Under the “installment sales method”, the gross
profit from an installment sale is initially deferred
and subsequently realized on a piecemeal basis
as the installment payments are received using
the formula below:

Realized gross profit = Collection on sale x GP rate

 Accounting Procedures
Gross profit rate based on sales = Gross profit / Sales

GPR based on cost to based on sale = GPR Cost

100% + GPR Cost
Illustration 3
Hill Company began operations on January 1, 2024 and
appropriately uses the installment method of accounting. Data
available for 2024 are as follows:
Installment Receivable, 12/31/2024 P500,000
Installment Sales 900,000
Cost of goods sold, as percentage of sales 60%

Using the installment method, Hill’s realized gross profit for 2019
would be _______
Illustration 4
Irvin Corporation, which began business on January 1, 2030,
appropriately uses the installment sales method of accounting. The
following information is available for 2030:
Installment Receivable, 12/31/2030 320,000
Deferred Gross Profit, 12/31/2030 (before 224,000
recognition of realized gross profit for 2030)
Gross Profit on Sales 40%

The realized gross profit on installment sales for the year ended
December 31, 2030 is:
Illustration 5
Billy Enterprises uses the installment method of accounting and it
has the following data at year-end:
Gross margin on cost 66 2/3%
Unrealized Gross Profit P192,000
Cash collection includes down payment P360,000

What was the total amount of sales in installment basis?

Illustration 6
Buen Motors sells locally manufactured jeepneys on the installment basis.
The information presented below relates to operations during the past 3
years.
2030 2029 2028
Cost of Installment Sales 8,765,625 7,700,00 4,950,000
Gross Profit Rate 32% 30% 28%
Dec. 31, Installment Receivable
2030 Sales 9,728,125
2029 Sales 3,025,000 8,387,500
2028 Sales - 1,512,500 4,812,500
1. What is the total realized gross profit on December 31, 2030?
2. The total deferred gross profit on December 31, 2030: _______
 Repossesion
The seller may reposses the good sold in case of default by the buyer. On
repossession date:
a. The repossessed good is debited to an inventory account at “fair value.”
For purposes of applying the installment sales method, “fair value” is
either:
i. the appraised value of the repossessed good; or
ii. the estimated resale price of the repossessed good
less reconditioning costs and normal profit margin.
b. The carrying amount of the related installment receivable and deferred
gross profit are derecognized.
c. The difference between (a) and (b) is recognized as gain/loss on
repossession.
 Repossesion
Pro-forma entry:
Inventory (at FV) x
Deferred gross profit (at CA) x
Loss on repossession (debit balancing figure) x
Installment receivable x
Gain on repossession (credit balancing figure) x
 Repossesion of Materials
Estimated Sales Value x
Normal Profit (x)
Disposal Cost (x)
FV - RM after recondititoning cost x
Reconditioning Cost (x)
FV - RM before reconditioning cost x
Unrecovered cost (x)
G/(L) on repossession x
Illustration 7
Wood Corp. has a normal gross profit on installment sales of
30%. A 2018 sale resulted in a default early in 2020. At the
date of default, the balance of the installment receivable
was P8,000, and the repossessed merchandise had a fair
value of P4,500.

Assuming the repossessed merchandise is to be recorded at

fair value, the gain or loss on repossession should be _____
Illustration 8
Gentry Co. uses the installment sales method. When an
account had a balance of P3,500, no further collections
could be made and the dining room set was repossessed. At
that time, it was estimated that the dining room set could
be sold for P1,300 if the company spent P125 reconditioning
it. The gross profit rate on this sale was 70%.

What is the gain or loss on repossession?

Illustration 9
The Japan Homes Corporation started operations on January 1, 2022 selling home appliance 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, 2022 and 2023 were as follows:
2022 2023
Installment sales P1,200,000 P1,500,000
Cost of installment sales 720,000 1,050,000
Cash collected on installment sales
2022 installment sales 630,000 450,000
2023 installment sales 900,000
On January 6, 2023 an installment sale in 2022 was defaulted and the merchandise was
repossessed. The fair market value of the merchandise after reconditioning costs amounted to P
15,000. There is a 10% normal profit based on estimated resale value, the corporation incurred P
3,000 disposal costs and P 5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was 'P 17,000. The operating expenses incurred in 2022 and 2023 amounted to
P50,000 and P100,000, respectively.
1. What is the gross profit rate 2022 and 2023, respectively?
Illustration 9
The Japan Homes Corporation started operations on January 1, 2022 selling home appliance 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, 2022 and 2023 were as follows:
2022 2023
Installment sales P1,200,000 P1,500,000
Cost of installment sales 720,000 1,050,000
Cash collected on installment sales
2022 installment sales 630,000 450,000
2023 installment sales 900,000
On January 6, 2023 an installment sale in 2022 was defaulted and the merchandise was
repossessed. The fair market value of the merchandise after reconditioning costs amounted to P
15,000. There is a 10% normal profit based on estimated resale value, the corporation incurred P
3,000 disposal costs and P 5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was 'P 17,000. The operating expenses incurred in 2022 and 2023 amounted to
P50,000 and P100,000, respectively.
2. What is the Deferred Gross Profit as of 2023 from 2022 sales?
Illustration 9
The Japan Homes Corporation started operations on January 1, 2022 selling home appliance 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, 2022 and 2023 were as follows:
2022 2023
Installment sales P1,200,000 P1,500,000
Cost of installment sales 720,000 1,050,000
Cash collected on installment sales
2022 installment sales 630,000 450,000
2023 installment sales 900,000
On January 6, 2023 an installment sale in 2022 was defaulted and the merchandise was
repossessed. The fair market value of the merchandise after reconditioning costs amounted to P
15,000. There is a 10% normal profit based on estimated resale value, the corporation incurred P
3,000 disposal costs and P 5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was 'P 17,000. The operating expenses incurred in 2022 and 2023 amounted to
P50,000 and P100,000, respectively.
3. How much is the amount of estimated resale value?
The Japan Homes Corporation started operations on January 1, 2022 selling home appliance 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, 2022 and 2023 were as follows:
2022 2023
Installment sales P1,200,000 P1,500,000
Cost of installment sales 720,000 1,050,000
Cash collected on installment sales
2022 installment sales 630,000 450,000
2023 installment sales 900,000
On January 6, 2023 an installment sale in 2022 was defaulted and the merchandise was
repossessed. The fair market value of the merchandise after reconditioning costs amounted to P
15,000. There is a 10% normal profit based on estimated resale value, the corporation incurred P
3,000 disposal costs and P 5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was 'P 17,000. The operating expenses incurred in 2022 and 2023 amounted to
P50,000 and P100,000, respectively.
4. What is the amount of the debited as the value of Repossessed Merchandise at time of
repossession?
The Japan Homes Corporation started operations on January 1, 2022 selling home appliance 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, 2022 and 2023 were as follows:
2022 2023
Installment sales P1,200,000 P1,500,000
Cost of installment sales 720,000 1,050,000
Cash collected on installment sales
2022 installment sales 630,000 450,000
2023 installment sales 900,000
On January 6, 2023 an installment sale in 2022 was defaulted and the merchandise was
repossessed. The fair market value of the merchandise after reconditioning costs amounted to P
15,000. There is a 10% normal profit based on estimated resale value, the corporation incurred P
3,000 disposal costs and P 5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was 'P 17,000. The operating expenses incurred in 2022 and 2023 amounted to
P50,000 and P100,000, respectively.

5. How much is the gain / (loss) on repossession?

The Japan Homes Corporation started operations on January 1, 2022 selling home appliance 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, 2022 and 2023 were as follows:
2022 2023
Installment sales P1,200,000 P1,500,000
Cost of installment sales 720,000 1,050,000
Cash collected on installment sales
2022 installment sales 630,000 450,000
2023 installment sales 900,000
On January 6, 2023 an installment sale in 2022 was defaulted and the merchandise was
repossessed. The fair market value of the merchandise after reconditioning costs amounted to P
15,000. There is a 10% normal profit based on estimated resale value, the corporation incurred P
3,000 disposal costs and P 5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was 'P 17,000. The operating expenses incurred in 2022 and 2023 amounted to
P50,000 and P100,000, respectively.

6. How much is the RGP after gain or (loss) on repossession on December 31, 2022?
The Japan Homes Corporation started operations on January 1, 2022 selling home appliance 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, 2022 and 2023 were as follows:
2022 2023
Installment sales P1,200,000 P1,500,000
Cost of installment sales 720,000 1,050,000
Cash collected on installment sales
2022 installment sales 630,000 450,000
2023 installment sales 900,000
On January 6, 2023 an installment sale in 2022 was defaulted and the merchandise was
repossessed. The fair market value of the merchandise after reconditioning costs amounted to P
15,000. There is a 10% normal profit based on estimated resale value, the corporation incurred P
3,000 disposal costs and P 5,000 reconditioning cost. Related installment receivable balance on
January 6, 2023 was 'P 17,000. The operating expenses incurred in 2022 and 2023 amounted to
P50,000 and P100,000, respectively.

7. How much is the RGP after gain or (loss) on repossession on December 31, 2023?
Illustration 10
On Sept. 30, 2030, De Jesus Corp. bought a bike for P3,600,000,
costing P2,400,000. A down payment of P1,600,000 was made with
the balance due in equal monthly installment, each payment to
apply first as interest at 12% on the unpaid principal and the
balance as a reduction in principal, such equal payments are
calculated to be P 211,164.15.

1. What is the realized gross profit on installment sales in 2030?

2. What is the interest income in 2030?
3. What is the unpaid balance of the installment receivable on
January 31, 2031?
 Trade-in
A seller may accept from a buyer a trade-in of old
merchandise as part payment for the sale of new
merchandise.
 Trade-in
Trade-ins under the “installment sales method” are accounted as
follows:

a. The trade-in merchandise is debited to inventory at “fair

value.” For purposes of applying the installment sales method,
“fair value” is either:
i. the appraised value of the trade-in merchandise; or
ii. the estimated resale price of the traded-in merchandise
less reconditioning costs and normal profit profit margin.
 Trade-in
Trade-ins under the “installment sales method” are accounted as
follows:

b. The seller gives the buyer a trade-in value for the old
merchandise. The trade-in value is the amount that is treated as
part payment of the new merchandise being sold.

If the fair value is not equal to the trade-in value, the seller
recognizes either an over allowance or under allowance for the
difference.
 Over allowance
If the trade-in value is greater than fair value, the
difference is debited to an “over allowance” account.

The over allowance is deducted from the sale price when

computing for the gross profit rate.
 Under allowance
If the trade-in value is less than fair value, the difference is
credited to an “under allowance” account.

The under allowance is added to the sale price when

computing for the gross profit rate.
 Pro-forma Entry
Inventory - traded-in (at FV) x
Over allowance (if trade-in value > FV) x
Installment Receivable (balancing figure) x
Installment Sale x
Under allowance (if trade-in value < FV) x
 Steps in Solving Trade-in
1. Compute for under or (over) allowance
*FV - Trade-in x
Allowance - Trade-in (x)
Under/(over) allowance x(x)
Original Selling Price x
New Selling Price x

*(Est. SP - (RC + Normal Profit + Disposal cost)

 Steps in Solving Trade-in
2. Compute for NEW GPRs

New Selling Price x

Cost of installment sales (x)
DGP - New x
Divided by net selling price x
GPR new x
 Steps in Solving Trade-in
3. Compute for the balance and periodic payment

Original selling price x

Cash downpayment x
Allowance for trade-in x(x)
Installment Receivable, balance x
Divided by no. of payments x
Periodic payments x
Multiplied by no. of payments x
Periodic payment made x
 Steps in Solving Trade-in
4. Compute for the realized gross profit on installment sales

Cash down payment x

FV - trade-in x
Periodic payments made x
Principal collection x
Multiplied by the new GPR %
RGP x
Illustration 11
Assume that on April 1, 2025, the Motor Sale Company sells a car
for an installment price of P145,000. The car costs P100,000. The
car is allowed a trade-in value of P45,000 for his old car. He makes a
down payment of P40,000 and the balance to paid in 12 equal
installments is P5,000 each starting this April. It is estimated that
the old car can be sold for P70,000 after incurring reconditioning
expenses estimated at P11,000. The company usually makes a gross
profit of 20 percent on resale.

1. What is the fair value of the traded-in merchandise?

Illustration 11
Assume that on April 1, 2025, the Motor Sale Company sells a car
for an installment price of P145,000. The car costs P100,000. The
car is allowed a trade-in value of P45,000 for his old car. He makes a
down payment of P40,000 and the balance to paid in 12 equal
installments is P5,000 each starting this April. It is estimated that
the old car can be sold for P70,000 after incurring reconditioning
expenses estimated at P11,000. The company usually makes a gross
profit of 20 percent on resale.

2. How much is the under/(over) allowance?

Illustration 11
Assume that on April 1, 2025, the Motor Sale Company sells a car
for an installment price of P145,000. The car costs P100,000. The
car is allowed a trade-in value of P45,000 for his old car. He makes a
down payment of P40,000 and the balance to paid in 12 equal
installments is P5,000 each starting this April 30. It is estimated that
the old car can be sold for P70,000 after incurring reconditioning
expenses estimated at P11,000. The company usually makes a gross
profit of 20 percent on resale.

3. How much is the total realized gross profit in 2025?

Illustration 12
Assume that a stereo component with a cost of P12,000 is
sold for P17,000. A used stereo 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
P5,000. The seller expects a 15% profit from the sale of
merchandise.

1. What is the fair value of the traded-in merchandise?

Illustration 12
Assume that a stereo component with a cost of P12,000 is
sold for P17,000. A used stereo 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
P5,000. The seller expects a 15% profit from the sale of
merchandise.

2. How much is the under/(over) allowance?

Illustration 13
SUN CELL Company sold Cellphones on installment basis on July 1, 2023.
The Unit cost to the company was P 388,800, but the installment selling
price was set at P 550,800. Terms of payment included the acceptance
of used Cellphones with trade in allowance of P 194,400. Cash of P
32,400 was paid in addition to the traded in Cellphones with the balance
to be paid in ten monthly installments due at the end of each month
commencing the month after the month of sale. It would require P
8,100 to recondition the used Cellphones so that it could be resold for P
162,000. A 15% gross profit was usual from the sale of used cellphones.

1. How much is the fair value of the traded-in merchandise?

Illustration 13
SUN CELL Company sold Cellphones on installment basis on July 1, 2023.
The Unit cost to the company was P 388,800, but the installment selling
price was set at P 550,800. Terms of payment included the acceptance
of used Cellphones with trade in allowance of P 194,400. Cash of P
32,400 was paid in addition to the traded in Cellphones with the balance
to be paid in ten monthly installments due at the end of each month
commencing the month after the month of sale. It would require P
8,100 to recondition the used Cellphones so that it could be resold for P
162,000. A 15% gross profit was usual from the sale of used cellphones.

2. How much is the under/(over) allowance in trade in?

Illustration 13
SUN CELL Company sold Cellphones on installment basis on July 1, 2023.
The Unit cost to the company was P 388,800, but the installment selling
price was set at P 550,800. Terms of payment included the acceptance
of used Cellphones with trade in allowance of P 194,400. Cash of P
32,400 was paid in addition to the traded in Cellphones with the balance
to be paid in ten monthly installments due at the end of each month
commencing the month after the month of sale. It would require P
8,100 to recondition the used Cellphones so that it could be resold for P
162,000. A 15% gross profit was usual from the sale of used cellphones.

3. What is the gross profit rate?

Illustration 13
SUN CELL Company sold Cellphones on installment basis on July 1, 2023.
The Unit cost to the company was P 388,800, but the installment selling
price was set at P 550,800. Terms of payment included the acceptance
of used Cellphones with trade in allowance of P 194,400. Cash of P
32,400 was paid in addition to the traded in Cellphones with the balance
to be paid in ten monthly installments due at the end of each month
commencing the month after the month of sale. It would require P
8,100 to recondition the used Cellphones so that it could be resold for P
162,000. A 15% gross profit was usual from the sale of used cellphones.

4. How much is the monthly payment?

Illustration 13
SUN CELL Company sold Cellphones on installment basis on July 1, 2023.
The Unit cost to the company was P 388,800, but the installment selling
price was set at P 550,800. Terms of payment included the acceptance
of used Cellphones with trade in allowance of P 194,400. Cash of P
32,400 was paid in addition to the traded in Cellphones with the balance
to be paid in ten monthly installments due at the end of each month
commencing the month after the month of sale. It would require P
8,100 to recondition the used Cellphones so that it could be resold for P
162,000. A 15% gross profit was usual from the sale of used cellphones.

5. How much is the total realized gross profit in 2023?

Illustration 14
The Zonyo Company on October 1, 2019, sold article "A" for P4,000, costing
P2,700. Article "B", a used article was accepted as down payment and the
balance on a monthly installment payment of P200 starting November 1,
2019. P1,200 was allowed on the article traded-in. The company estimates
reconditioning cost of P80 on this article and a sales price of P1,100 after
such reconditioning. The company normally expects 20% gross profit on sale
of used articles. The company employs the perpetual method of inventory.

On April 1, 2020, the customer defaulted in the payment of installment.

Article "A" which was sold was repossessed; its value to the seller is P1,350
allowing for reconditioning cost and a normal gross profit on resale.

1. The amount of realized gross profit in 2019 is _______

Illustration 14
The Zonyo Company on October 1, 2019, sold article "A" for P4,000, costing
P2,700. Article "B", a used article was accepted as down payment and the
balance on a monthly installment payment of P200 starting November 1,
2019. P1,200 was allowed on the article traded-in. The company estimates
reconditioning cost of P80 on this article and a sales price of P1,100 after
such reconditioning. The company normally expects 20% gross profit on sale
of used. articles. The company employs the perpetual method of inventory.

On April 1, 2020, the customer defaulted in the payment of installment.

Article "A" which was sold was repossessed; its value to the seller is P1,350
allowing for reconditioning cost and a normal gross profit on resale.

2. The amount of loss on repossession is ________