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INSTALLMENT SALES
A. Determining Gross Profit Rates
For prior year(s) sales:

For current year:

B. Recognition of Gross Profit Under Installment Sales Method

C. Determining Deferred Gross Profit, End of the year:

Or, alternatively:

D. Determining gain or loss on repossession:

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

Prof. Albert I. Rivera, CPA, MBA

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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 Austins books on the date of
sale was P240,000. The companys 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.
Prof. Albert I. Rivera, CPA, MBA

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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:

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:

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:

Prof. Albert I. Rivera, CPA, MBA

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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

Cash collected in Installment
Sales

240,000.00

350,000.00

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)
______________________

Prof. Albert I. Rivera, CPA, MBA

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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
Installment Accounts
Receivable, 2007
Deferred Gross Profit, 2006
Deferred Gross Profit, 2007

90,000.00
288,000.00
37,800.00
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
Installment Accounts
Receivable, 2008
Deferred Gross Profit, 2006
Deferred Gross Profit, 2007
Deferred Gross Profit, 2008

72,000.00
390,000.00
37,800.00
103,050.00
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:

Prof. Albert I. Rivera, CPA, MBA

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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:

Sales
Collections from:
2012 Sales
2013 Sales
Defaults
2012 Sales
2013 Sales
Accounts writtenof
2012 Sales
2013 Sales
Gross Profit %

2012
225,000.00

2013
337,500.00

75,000.00
-

37,500.00
112,500.00

7,500.00
-

15,000.00
30,000.00

18,750.00
30%

56,250.00
18,750.00
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. 320c. 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:
Prof. Albert I. Rivera, CPA, MBA

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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
s

Date
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

Prof. Albert I. Rivera, CPA, MBA

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