INSTALLMENTS SALES

REVENUE RECOGNITION - INSTALLMENT SALES

The earning of revenue by a business is recognized for accounting purposes when

the transaction is recorded. Revenue is often recognized at time of sale.

Revenue is also recognized (1) during production, (2) at completion, and (3) at time of
collection.
(1) During production. The most common situation is the use of the percentage-of-
completion method for long-term construction contracts. The point of sale is
much less significant than production activity. If the contractor can expect to
perform the contractual obligation, the revenue is assured by the contract. To
defer recognition until completion of the entire contract misrepresents the efforts
(costs) and accomplishments (revenues) of the interim periods. If progress toward
completion can be estimated with reasonable accuracy, the percentage-of-
completion method should be used.
(2) At completion. Examples of revenue recognition at completion of
production involve precious metals and agricultural products with quoted prices.
These sales prices are reasonably assured, there are low additional costs of
distribution, and unit costs cannot be determined because of joint costs.
(3) At collection. When collection is highly uncertain and there is no reasonably
objective basis for estimating the degree of collectability, revenue should not be
recognized until cash is received. In addition, if collection costs and bad debts are
expected to be high and their amount cannot be reasonably estimated, revenue
recognition should be deferred. Examples are cost recovery method and
installment method.
Recognition of Gross Profit at the Time of Collection
a. Cost Recovery Method also known as “hybrid approach” or “zero profit
approach”
b. Profit Realization Method
c. Installment Method - a contract whereby the buyer, in exchange for the
property acquired makes a series of payments over extended period of
time

Problem 1
San Marcelino Corporation started operations on January 1, 2013 selling home
appliances and furniture sets both for cash and on installment basis. Data on the
installment sales operations of the company gathered for the years ending
December 31, 2013 and 2014 were as follows:

2013 2014
Installment Sales 200,000 250,000
Cost of Installment Sales 120,000 175,000
Cash Collected on Installment Sales
2013 Installment Sales 105,000 75,000
2014 Installment Sales 150,000

Required: Compute the following:

Installment Cost Recovery Profit Accrual

Method Method Realization Method
Method
DGP 12/31/13
DGP 12/31/14,
2013 Sales
DGP 12/31/14,
2014 Sales
RGP 2013
RGP 2014,
2013 Sales
RGP 2014,
2014 Sales

Note: Use Installment Method if the problem is silent. Use accrual Method if the
collectability is reasonably assured.

ACCOUNTING FOR REPOSSESSIONS

The repossessed merchandise is valued at its appraised or true worth at the time
 of repossession and a loss is recognized representing the difference between the
value assigned to the repossessed merchandise plus the adjustment to the
unrealized gross profit and the accounts receivable written off.

Journal Entry:
Repossessed Merchandise xxxx
Unrealized Gross Profit xxxx
(Installment A/R written off x GPR)
Installment Accounts Receivable xxxx

The difference between the total debits and the credit is recognized as loss on
repossession (if debit) and if credit, the amount must be deducted from the value
of the repossessed merchandise. No gain is reported at the time of repossession.

COMPUTATION OF TRUE WORTH OF REPOSSESSED MERCHANDISE

Estimated Selling Price after reconditioning xxxx
Less: Reconditioning costs xxxx
Selling expenses xxxx
Margin of profit xxxx xxxx
True worth of merchandise xxxx

SITION OF LOSS ON REPOSSESSION

The loss on repossession is shown as deduction from the realized gross profit on
installment sales in the income statement.

Problem 2

Lipa Corporation has a normal gross profit on installment sales of 30%. A 2002
sale resulted in a default early in 2004. At the date of default, the balance of the
installment receivable was $40,000, and the repossessed merchandise had a fair
value of P22,500. Assuming the repossessed merchandise is to be recorded at fair
value, the gain or loss on repossession should be _______________
 Problem 3

Seeman Furniture uses the installment sales method. No further collections could
be made on an account with a balance of P12,000. It was estimated that the
repossessed furniture could be sold as is for P3,600, or for P4,200 if P200 were
spent reconditioning it. The gross profit rate on the original sale was 40%. The loss
on repossession was _______________________

resale value is P10,000 after reconditioning, The gain or loss on repossession was
____________.

Problem 4

The Cavite Furniture Company appropriately used the installment sales method in
accounting for the following installment sale. During 2012, Cavite sold furniture to
Bulacan Co. for P3,000 at a gross profit of P1,200. On June 1, 2012, this
installment account receivable had a balance of 2,200 and it was determined that
no other collections would be made. Cavite, therefore, repossessed the
merchandise. When reacquired, the merchandise was appraised as being worth
only for P1,000. In order to improve its salability, Cavite incurred costs of P100 for
reconditioning. Normal profit on resale is P200. What should be the loss
on repossession attributable to this merchandise?

-ALLOWANCE ON TRADE-IN
Represents the difference between the actual trade-in allowance granted on the
merchandise traded-in and the true worth of such merchandise.

COMPUTATION OF OVER-ALLOWANCE ON TRADE-IN

 Trade-in allowance granted xxxx
Less: True worth of merchandise traded-in
Selling price after reconditioning xxxx
Less: Reconditioning costs xxxx
Selling & admin. expenses xxxx
Normal profit margin xxxx xxxx xxxx
Over-allowance on trade-in xxxx

SITION OF OVER-ALLOWANCE ON TRADE-IN

The over-allowance on trade-in is carried as a separate account in the books

because the trade-in should be recorded at no more than the company would pay
on its purchase.

al Entry:
Trade-in merchandise (at true worth) xxxx
Over-allowance on merchandise traded-in xxxx
Accounts Receivable xxxx
Installment Sales xxxx

In computing the gross profit rate on installment sales, the over-allowance on

merchandise traded-in is deducted from the installment sales.
When closing the books, the balance of the over-allowance on merchandise
traded-in is closed against installment sales.

Problem 5

Aman Group, Inc. sold a fitness equipment on installment basis on October 1,

2011. The unit cost to the company was 60,000 but the installment selling price
was set to 85,000. Terms of payment included the acceptance of a used
equipment given a trade-in value of 30,000. Cash of 5,000 was paid in addition to
the added trade-in equipment with the balance to be pain in ten (10) monthly
installments due at the end of each month of sale. It would require 1,250 to
recondition the used equipment so that it would be resold for 25,000. A 15%
 gross profit rate was usual from the sale of used equipment. What amount of
realized gross profit should Aman report during 2011?

EST ON INSTALLMENT CONTRACTS

Installment contracts frequently provide for a charge for interest on the balance
due. The interest charge is originally payable with the installment payment that
reduces the principal.

The arrangement for the periodic payment of interest generally takes one of the
following forms:
a) Interest is computed on the balance of the principal owed between installment
periods. This is sometimes referred to as long-end interest.
b) Interest is computed on the amount of the individual installment due, from the
date of the contract until the date of installment payment. This is sometimes
referred to as short-end interest.
c) Periodic payments are equal in amount and represent interest on the balance of
the principal owed between installment periods, the remainder a reduction in the
principal balance.
d) Interest throughout the payment period is computed on the original principal.

When interest is involved in installment sales, it should be separately accounted

for as interest revenue distinct from the gross profit recognized on the installment
sales collections during the period.

Problem 6
 Lucena Industrial sells machinery on the installment plan. On September 1, 2009,
Lucena entered into an installment sale contract with Western Productions for a
six-year period. Equal annual payments under the installment sale are P187,500
and are due on August 31 of each year beginning in 2010.

Additional information:

(a) The cost of the machinery sold to Western was P637,500.

(b) The implicit interest rate on the installment sale is 10%.

Compute the income or loss before taxes that Lucena should record for the year
ended December 31, 2009, as a result of the above transaction, assuming that
circumstances are such that the collection of the installments due under the
contract

(1) is reasonably assured.

(2) cannot be reasonably assured.

Multiple Choice:

1. Manahan Co., which began operations on January 1, 2010, appropriately uses

the installment method of accounting to record revenues. The following
information is available for the years ended December 31, 2010 and 2011:

2010 2011
Sales P 1,000,000 P 2,000,000
Gross profit realized on
Sales made in:
2010 150,000 90,000
2011 - 200,000
Gross profit percentages 30% 40%

What amount of installment accounts receivable should Manahan report in its

December 31, 2011, balance sheet?
a. P1,100,000
 b. P1,300,000
c. P1,700,000
d. P1,900,000

2. Bugoy Co., which began operations on January 2, 2010, appropriately uses the
installment sales method of accounting. The following information is available for
2010:

Installment accounts receivable, December 31, 2010 P

800,000
Deferred gross profit, December 31, 2010 (before recognition of realized
gross profit for 2010)
560,000
Gross profit on sales 40%

For the year ended December 31, 2010, cash collections and realized gross profit
on sales should be
Cash collections Realized gross profit
a. P 480,000 P 320,000
b. P 480,000 P 240,000
c. P 600,000 P 320,000
d. P 600,000 P 240,000

3. On January 1, 2010, Enteng Co. sold a used machine to Cooper, Inc. for
P525,000. On this date, the machine had a depreciated cost of P367,500. Cooper
paid P75,000 cash on January 1, 2010 and signed a P450,000 note bearing
interest at 10%. The note was payable in three annual installments of P150,000
beginning January 1, 2011. Enteng appropriately accounted for the sale under the
installment method. Cooper made a timely payment of the first installment on
January 1, 2011 of P195,000, which included interest of P45,000 to date of
payment. At December 31, 2011, Enteng has deferred gross profit of
a. P105,000
b. P 99,000
c. P 90,000
d. P 76,500
4. Sendong Co., which began operations on January 1, 2011, appropriately uses the
installment method of accounting. The following information pertains to
Sendong's operations for the year 2011:

Installment sales P 1,000,000

Regular sales 600,000
Cost of installment sales 500,000
Cost of regular sales 300,000
General and administrative expenses 100,000
Collections on installment sales 200,000

The balance in the deferred gross profit account in Sendong's December 31, 2011
balance sheet should be
a. P 200,000
b. P 320,000
c. P 400,000
d. P500,000

5. Several of Fox, Inc.'s customers are having cash flow problems. Information
pertaining to these customers for the years ended March 31, 2010 and 2011
follows:
3/31/10 3/31/11
Sales P 10,000 P 15,000
Cost of sales 8,000 9,000
Cash collections
On 2010 sales 7,000 3,000
On 2011 sales - 12,000

If the cost-recovery method is used, what amount would Fox report as gross
profit from sales to these customers for the year ended March 31, 2011?
a. P 2,000
b. P 3,000
c. P 5,000
d. P15,000
6. 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 P1,000 as repossessed, or for P1,300 if the company spent P125
reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on
repossession was a

a. P2,450 loss.
b. P2,500 loss.
c. P 300 gain.
d. P 125 gain.

7. Wood Corporation has a normal gross profit on installment sales of 30%. A 2009
sale resulted in a default in 2011. At the date of default, the balance of
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
a. P0
b. a P1,100 loss.
c. a P1,100 gain.
d. a P2,500 loss.

8. Cagayan Furniture uses the installment sales method. No further collections

could be made on an account with a balance of P10,000. It was estimated that the
repossessed furniture could be sold as is for P3,000, or for P3,500 if P200 were
spent reconditioning it. The gross profit rate on the original sale was 40%. The loss
on repossession was
a. P2,700
b. P2,500
c. P6,700
d. P7,000

9. Matson Company sold some machinery to the Finney Company on January 1,

2010. The cash selling price would have been P473,850. Finney entered into an
installment sales contract which required annual payments of P125,000, including
interest at 10%, over five years. The first payment was due on December 31,
 2010. What amount of interest income should be included in Matson’s 2011
income statement (the second year of the contract)?
a. P12,500.
b. P39,624.
c. P25,000
d. P34,885.

10. On January 1, 2010, Colt Co. sold land that cost P60,000 for P80,000, receiving a
note bearing interest at 10%. The note will be paid in three annual installments of
P32,170 starting on December 31, 2010. Because collection of the note is very
uncertain, Colt will use the cost recovery method. How much revenue from this
sale should Colt recognize in 2010?
a. P0
b. P 6,000
c. P 8,000
d. P20,000

11. Hart, Inc. appropriately uses the installment method of accounting to recognize
income in its financial statements. Some pertinent data relating to this method of
accounting include:
2009 2010 2011
Installment sales P300,000 P375,000 P360,000
Cost of installment sales 225,000 285,000 252,000
Gross Profit P 75,000 P 90,000 P108,000

Rate of gross profit 25% 24% 30%

Balance of deferred gross profit at year-end:

2009 P52,500 P15,000 P –0-
2010 54,000 12,000
2011 96,000
Total P52,500 P69,000 P108,000

What amount of installment accounts receivable should be presented in Hart’s

December 31, 2011 balance sheet?
a. P360,000
b. P370,000
 c. P372,000
d. P400,000

12. Marcum Co., which began operations on January 1, 2010, appropriately uses the
installment method of accounting. The following information pertains to
Marcum’s operations for the year 2010:

Installment sales P1,500,000

Regular sales 600,000
Cost of installment sales 750,000
Cost of regular sales 300,000
General and administrative expenses 100,000
Collections on installment sales 300,000

The deferred gross profit account in Marcum’s December 31, 2010 balance sheet
should be
a. P150,000
b. P480,000
c. P600,000
d. P750,000

13. On January 1, 2010, Tam Co. sold a used machine to Lock, Inc. for P420,000. On
this date, the machine had a depreciated cost of P294,000. Lock paid P60,000
cash on January 1, 2010 and signed a P360,000 note bearing interest at 10%. The
note was payable in three annual installments of P120,000 beginning January 1,
2011. Tam appropriately accounted for the sale under the installment method.
Lock made a timely payment of the first installment on January 1, 2011 of
P156,000, which included interest of P36,000 to date of payment. At December
31, 2011, Tam has deferred gross profit of
a. P84,000
b. P79,200
c. P72,000
d. P61,200

14. Elon Co. began operations on January 1, 2010 and appropriately uses the
installment method of accounting. The following information pertains to Elon’s
operations for 2010:
 Installment sales P 600,000
Cost of installment sales 360,000
General and administrative expenses 60,000
Collections on installment sales 225,000

The balance in the deferred gross profit account at December 31, 2010
should be
a. P 90,000
b. P135,000
c. P150,000
d. P240,000

Questions 15 & 16 are based on the following information:

15. Quad, Inc. started operation at the beginning of 2010, selling home appliances
exclusively on the installment sales basis. Data for 2010 and 2011 follows:
2010 2011
Installment sales P600,000 P750,000
Cost of installment sales 420,000 450,000
2010 inst. Accounts, end 285,000 22,500
2011 inst. Accounts, end - 300,000

On May 31, 2011, a 2010 installment account of P37,500 was defaulted and
the appliance was repossessed. After reconditioning at a cost of P750, the
repossessed appliance would be priced to sell for P30,000. At the end of 2011, the
total unrealized gross profit was:
a. P120,000
b. P126,750
c. P138,000
d. P146,250

16. The default and repossession on May 31, 2011 resulted in a

a. P3,000 gain.
b. P3,750 gain.
c. P8,250 loss.
 d. P9,000 loss.

Questions 17 & 18 are based on the following information:

17. From various documents and records which were recovered immediately after a
fire gutted its premises, LAMBDA Marketing Co. gathered the following
information:

2009 2010 2011

Installment sales P500,000 P800,000 P (?)
Cost of installment sales (?) 600,000 (?)
Gross Profit on ins. sales P (?) P (?) P282,000
Collections on:
1999 inst. accounts 50,000 250,000 100,000
2010 inst accounts - 200,000 500,000
2011 inst. accounts - - 400,000
Realized gross profit fr. ins. sales 11,000 (?) 241,000

Based on the information given above, the total realized gross profit in 2010 was:
a. P 50,000
b. P105,000
c. P112,500
d. P200,000

18. The cost of installment sales for the year 2011 was:
a. P900,000
b. P918,000
c. P932,000
d. P940,000

Questions 19 through 21 are based on the following information.

Abenson Trading Corp. sells household furniture both on cash and on installment
basis. For each installment sales, a contract is entered into whereby the following
terms are stated:
a. A down payment of 25% of the installment selling price is required and the
balance is payable in 15 equal monthly installments.
b. Interest of 1% per month is charged on the unpaid cash sales price equivalent at
each installment.
c. The price on installment sales is equal to 110% of the cash sales price.

For accounting purposes, installment sales are recorded at contract price. Any
unpaid balances on defaulted contracts are charged to uncollectible account
expense. Sales of defaulted merchandise are credited to uncollectible account
expense. Interest are recorded in the period earned. For its first year of operation
ending December 31, 2010, the books of the company showed the following:

Cash sales P378,000

Installment sales 794,970
Merchandise inventory, Jan. 1 174,180
Purchases 627,891
Merchandise inventory, Dec. 31 108,630
Cash collections on installment contracts:
Down Payment 198,750
Installment payments, including interest
of P27,758.52 (average of six monthly
installments on all contracts, except
on defaulted contracts) 238,023

A contract amounting to P3,300 was defaulted after the payment of 3

installments.

19. The gross profit rate based on total sales at cash sales price equivalent is:
a. 33.75%
b. 36.34%
c. 37.00%
d. 40.88%

20. The total interest earned for the first four months on the defaulted contract is:
a. P60.94
b. P69.30
c. P72.07
d. P80.85
21. The realized gross profit for the year 2010 is
a. P151,335.35
b. P161,789.16
c. P249,674.52
d. P291,355.95

22. The Brownout, Inc. began operating at the beginning of the calendar year 2011
and, using the installment method of accounting, presented the following data for
the first year:

Installment sales P400,000

Gross margin based on cost 66- 2/3 %
Inventory, Dec. 31, 2011 P 80,000
General and administrative expenses 40,000
Accounts receivable, Dec. 31, 2011 320,000

The balance of the deferred gross profit account should be:

a. P192,000
b. P128,000
c. P 96,000
d. P 80,000

23. Quincy 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 collections including down payments 360,000

What was the total amount of sales on installment basis?

a. P480,000
b. P552,000
c. P648,000
d. P840,000

24. A refrigerator was sold to Fernandina Castro for P16,000, which included a 40%
mark-up on selling price. She made a down payment of 20%, paid four of the
 remaining sixteen equal payments, and then defaulted on further payments. The
refrigerator was repossessed, at which time the fair value was determined to be
P6,800. The repossession resulted in the following loss/gain:
a. P 56.80
b. P1,040.00
c. P2,960.00
d. P4,056.80

25. A company uses the installment method of accounting to recognize income, and
pertinent data are as follows:

2009 2010 2011

Installment sales P300,000 P375,000 P360,000
Cost of installment sales 225,000 285,000 252,000

Balance of gross profit at year-end:

2009 52,500 15,000 -

2010 - 54,000 9,000
2011 inst. Accounts - - 72,000

The balance of the receivable on December 31, 2011 is :

a. P270,000
b. P277,500
c. P279,000
d. P300,000

Questions 26 through 29 are based on the following information.

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,
and 25% in the third year.
26. The realized gross profit in Year 1 is:
a. P109,357
b. P 73,474
c. P 99,190
d. P114,825

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

28. The installment Accounts Receivable account balance, as at the end of the Year
3, is:
a. P652,722
b. P621,640
c. P602,991
d. P685,359

29. The total unrealized gross profit, as at the end of Year 3, is

a. P221,047
b. P161,166
c. P198,574
d. P217,574

30. On October 1, 2010, Pilinvest Co. sold to Mr. X a piece of property which cost
P250,000. The company received a down payment of P100,000 on the date of sale
plus a mortgage note for P400,000 that is payable in 20 semi-annual installments
of P20,000 with interest on the unpaid principal at 16% per annum. If gross profit
is recognized periodically in proportion to collections, the realized gross profit in
2010 would be:
a. P0
b. P 20,000
c. P 50,000
d. P250,000
31. Forbes Co. sells goods on installment basis. For the year just ended, the
following were reported:

Installment sales P3,000,000

Cost of installment sales 2,025,000
Collections on installment sales 1,800,000
Defaulted accounts 200,000
Fair market value of repossessions 120,000

The repossessions resulted in:

a. No gain, no loss.
b. A gain of P15,000.
c. A loss of P15,000.
d. A loss of P80,000.

32. Jay & Bee Co., which sells on installment basis, recognizes, at year-end, gross
profit based on collections made. Operations data follow:
January 1 December 31
Installment receivable:
2010 P 120,000 P -0-
2011 1,722,300 337,200
2012 -0- 2,050,450

2010 2011 2012

Sales P1,900,000 P2,160,000 P3,010,000
Cost of sales 1,235,000 1,425,600 1,896,300

In 2012, the company repossessed merchandise with a resale value of P8,500

from a customer who defaulted on his payments. The account was incurred for
P27,000 in 2011, and P16,000 had been paid prior to the default. As collections
are made, the company debits cash and credits the related installments
receivable; for defaults, the company debits inventory of repossessed
merchandise and also credits the related installment receivable account. The
amount of the adjustment on inventory of repossessed merchandise would be:
a. P-0-
b. P2,500
 c. P3,740
d. P5,645

33. Home Appliances, Inc. began operation in May, 2010 by selling exclusively on
the installment basis. Using the installment method of income recognition, the
company summarized the following data at the end of the first eight-month
period: installment sales, P450,000; various expenses, P23,000; accounts
receivable, P330,000; and, inventory, P80,000. If the gross margin based on cost
is 66-2/3%, the net income was:
a. P25,000
b. P48,000
c. P57,000
d. P80,000

34. On January 2, 2010, Yardley Co. sold a plant to Ivory, Inc. for P1.5 million. On
that date, the plant's carrying cost was P1 million. Ivory gave Yardley P300,000
cash and a P1.2 million note, payable in four annual installments of P300,000 plus
12% interest. Ivory made the first principal and interest payment of P444,000 on
December 31, 2010. Yardley uses the installment method of revenue recognition.
In its 2010 income statement, what amount of realized gross profit should Yardley
report?
a. P344,000
b. P200,000
c. P148,000
d. P100,000