Saint Paul School of Business and Law

Campetic, Palo, Leyte

Review Materials for Practical Accounting 2

INSTALLMENT SALES
Generally Accepted Accounting Principles states that the installment sales method of accounting for sales is not
acceptable unless circumstances exist such that collection of sales price is not reasonably assured. GAAP also
permits the use of the installment sales method when receivables are collected over an extended period of time, and
when there is no reasonable basis for estimating the degree of collectability. It requires that revenue be recognized at
the time of collection. The installment sales method allows revenue to be deferred and recognized each year in
proportion to the receivables collected during that year. Receivable accounts and deferred profit accounts must be
kept separately for each year because the profit rate will vary from year to year.
I.

INSTALLMENT SALES
A. Determining Gross Profit Rates:
DGP Beginning of current year
For prior year:

For Current Year:

Installment AR Beginning of
current year
Gross Profit
Installment Sales

B. Recognition of Gross Profit:

Installment AR Beg
Less: Installment AR End
Decrease in Installment AR
Less: Defaults / AR Balance
Collections Current year
Multiply: Gross profit rate

P xxx
xxx
P xxx
xxx
P xxx
xx%

Realized Gross Profit

xxx

C. Determine DGP End:

DGP end = Installment AR End (GP rate based on sales)
or
= DGP before adjustment RGP for current year
D. Gain or Loss on Repossession:
Estimated resale price after
reconditioning cost
Less: Reconditioning Cost
Normal Profit
Cost to sell

P
xxx
xxx
xxx

Fair Market Value / True Worth

Less: Unrecovered Cost:
Installment AR unpaid balance
Less: Deferred Gross Profit
Gain or Loss on Repossession

P
xxx
xxx
xxx

xxx
xxx

xxx
xxx

E. Determining Over or Under allowance:

Trade-in allowance:

P xxx

Less: Fair Market Value / True Worth:

Estimated Resale Price after
Reconditioning Cost
Less: Reconditioning Cost
Normal Profit
Cost to sell

xxx
xxx
xxx
xxx

Over/(Under) allowance:

P xxx

II. COST RECOVERY METHOD

Under exceptional circumstances, however, the cost recovery method may be used:
1. The cost recovery method may be used where collectability of proceeds is highly
uncertain, where an investment is very speculative in nature, and/or where the final
sale price is to be determined by future events.
2. Under the cost recovery method, all amounts collected are treated as a recoupment
of the cost of the item sold, until the entire cost associated with the transaction has
been recovered. Only on this point profit is recognized.

PROBLEMS:
1.

The following data pertains to installment sales of Gon Freecs store:

- Down payment: 20%
- Installment sales: P545,000 in 2010; P785,000 in 2011; and, P968,000 in 2012
- 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.
Compute the (1) Installment Accounts Receivable at the end of 2012, and (2) total
unrealized gross profit in the end of 2012.
a. (1) P621,640; (2) P217,547
b. (1) 464,640; (2) 217,547

c.
d.

(1) P464,640; (2) P161,166

(1) 621,640; (2) 161,166

2. Wan Pisu Enterprises uses the installment method of accounting and it has the following
data at the year-end:
Gross margin on cost
66.67%
Unrealized gross profit
P192,000
Cash collection including down payments 360,000
What was the total amount of sales on installment basis?
a. P480,000
b. 552,000

c.
d.

P648,000
840,000

3. Spoderman Corporation, which began business on January 1, 2011, appropriately uses the
installment sales method of accounting. The following data are available:
12/31/2011 12/31/2012
Balance of deferred gross profit on sales account:
2011
P300,000
P120,000
2012
440,000
Gross profit rate on sales
30%
40%
The installment accounts receivable balance at December 31, 2012 is:
a. P1,000,000
b. P1,100,000

c.
d.

P1,400,000
1,500,000

4. Gorabels Inc. started operation at the beginning of 2012, selling home appliances
exclusively on installment basis. Data for 2011 and 2012 follows:
2011
2012
Installment sales
P600,000
P750,000

Cost of installment sales

420,000

450,000

2011 installment accounts, end

285,000

22,500

2012 installment accounts, end

300,000

On May 31, 2012, a 2011 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.
The gain (loss) on repossession amounted to:
a. P3,000
b. (9,000)

c.
d.

P9,000
(3,750)

5. Khaleesi Co. employs the perpetual inventory basis in its accounting for new cars. On August
15, 2011, a new car was sold to Hodor with a list price of P220,000 costing 165,000. It grants
Mr. Hodor an allowance of P85,000 for her old car as trade-in, the current value of which was
estimated to be P81,700. The balance of 135,000 was payable as follows: cash at time of
Purchase P35,000, balance in 20 monthly payment of P5000, first payment being made on
September 1, 2011. On April 1, 2012, Mr. Hodor defaulted in the payment of March 1, 2012
installment. The new car sold was repossessed; its value to the seller is P40,000 after
reconditioning cost of P5000. (use two decimal places for gross profit percentage)
(1) The total realized gross profit n installment sales in 2011 (2) gain(loss) on repossession in 2012.
a. (1) P32,617; (2) P(8,298)
b. (1) 37,889; (2) 8,298

c.
d.

(1) P32,617; (2) P(13,298)

(1) 37,889; (2)
13,298