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INSTALLMENT SALES
Special type of credit arrangement which provides for a series of payment over a
period of months or years.
2 General Approaches:
1. GP is recognized at time of sale
2. GP is recognized in the period in which cash is collected
Cost Recovery Method all collections (principal and interest) are treated
first as recovery of cost.
Gross Profit Realization first collections are regarded as realization of
gross profit
Installment Method collections are regarded as a partial recovery of cost
and a partial realization of profit in their same proportion in the original price.
INSTALLMENT METHOD
Installment Sales
(Cost of Installment
Sales)
Deferred Gross Profit -decreased periodically for the amount recognized as realized
GP
Realized Gross Profit = Total Collections (excluding interest) x Gross Profit Rate (based
on sale)
Installment Receivable,end x GP %
Deferred Gross Profit, end = or
Deferred GP, beg. Realized GP
Assume that M Corp sells merchandise for cash, charge and on installment sales basis.
The following accounts are available at the end of 2015:
Installment sales P
937,500
Regular sales:
Cash sales 187,500
Charge sales 375,000
Cost of goods 975,000
sold
(A) (B)
Type of Sale Amount of Sales Ratio to Total Allocated Cost
Cash 187,500 1875/15000 121,875
Charge 375,000 3750/15000 243,750
Installment 937,500 9375/15000 609,375
TOTAL 1,500,000 975,000
TRADE INS
Accepted as a part payment or a down payment on a new contract
Recorded at the value allowed
ACCOUNTS WRITTTEN-OFF
Receivables proven to be worthless should be accounted for under direct write-
off method.
ALTERNATIVE PROCEDURES FOR COMPUTING REALIZED GROSS PROFIT FOR A SERIES OF YEARS
Sales xx
Cost of Sales:
Merchandise Inventory, beg. xx
Add: Purchases xx
Trade-in Merchandise xx
Repossessed Merchandise xx
Goods available for sale xx
Less: Shipments on Installment Sales (xx)
Merchandise Inventory, end (xx) xx
Gross Profit-Regular Sales xx
Realized Gross Profit-Installment Sales xx
Total Realized Gross Profit xx
Operating Expenses (xx)
Operating Income xx
Interest Income xx
Income before loss on repossession xx
Loss on repossession (xx)
Income after loss on repossession xx
PROBLEMS:
1. Since there is no basis for estimating the degree of collectability, Castor Co. uses the
installment method of revenue recognition for the following sales:
2016 2015
Sales 900,000 600,000
Collections from:
2015 sales 100,000 200,000
2016 sales 300,000 -
Accounts written off:
2015 sales 150,000 50,000
2016 sales 50,000 -
Gross Profit % 40 30
What amount should Castor Co. report as deferred gross profit in its December 31,
2016 balance sheet for the 2015 and 2016 sales?
3. The following selected amounts appeared in the trial balance of Bakes Sales as of
December 31, 2015:
Debit Credit
Installment receivable, 15,000
2014
Installment receivable, 200,000
2015
Inventory, 12/31/2014 70,000
Purchases 555,000
Repossession 3,000
Installment Sales 425,000
Regular Sales 385,000
Unrealized gross profit, 54,000
2014
Additional information:
Installment receivable, 2014 sales as of December 120,0
31, 2014 00
Inventory of new and repossessed merchandise as of
December 31, 2015 95,00
0
Gross Profit Percentage on regular sales during the 30%
year on
sales
Repossessions was made during the year. It was a
2014 sale and the corresponding uncollected amount
at the time of repossession 7,750
4. M Realty bought two adjoining lots (Lot A and B) with total area of 1,600 sq. m.. Lot A
was bought for P160,000 in 2009 and Lot B was bought for P240,000 in 2010. M
Realty re-subdivided the two lots and made a 400 sq. m. lot out of the original two
lots by taking 200 sq. m. from each to make Lot C. The cost of Lot C was by allocating
a portion of the cost of the original two lots. M realty build a house on Lot C at a cost
of P152,000. It was completed on June 30, 2014, and had an estimated useful life of
20 years.
The 3 lots and house were sold during 2014 on the following terms:
a. Realized gross profit from the sale of lots and house on December 31, 2014
b. Gain (Loss) on repossession of Lot C and house on June 30, 2014
5. In its first year of operations, MM Corp. reported cost of goods sold in the amount of
P900,000 and sales were as follows:
Mark-up on cost Sales
(%)
Cash basis 25 250,000
Charge basis 33 1/3 400,000
Installment 50 600,000
basis
If collections on installment sales during the year amounted to P240,000, how much
was the total gross profit realized at year end?