Practical Accounting

2 Review

Compiled by:

Jason D. Bautista, CPA

INSTALLMENT SALES
Applying the Installment Method
When a seller uses the installment method, both revenue
and cost of sales are recognized at the point of sale, but the related
gross profit is deferred to those periods during which cash will be
collected. As receivables are collected, a portion of the deferred
gross profit equal to the gross profit rate times the cash collected is
recognized as income. When this method is used, the seller must
compute each year’s gross profit rate and also must maintain
records of installment accounts receivable and deferred revenue
that is separately identified by the year of sale. All general and
administrative expenses are normally expensed in the period
incurred.
The steps to use in accounting for sales under the
installment method are as follows:
1. During the current year, record the sales and cost of
sales in the regular manner. Record installment sales
transactions separately from other sales. Set up installment
accounts receivable identified by the year of sale (e.g.
Installment Accounts Receivable – 2014).

2. Record cash collections from installment accounts

receivable. Care must be taken so that the cash receipts are
properly identified as to the year in which the receivable
arose.

3. At the end of the current year, transfer installment sales

revenue and installment cost of sales to deferred gross
profit properly identified by the year of sale. Compute
the current year’s gross profit rate on installment sales as
follows:
Gross profit rate = 1 [-] Cost of instalment sales [/]
Installment sales revenue

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 Alternatively, the gross profit rate can be computed as
follows:
Gross profit rate = [Installment sales revenue – Cost of
instalment sales] [/] Installment sales revenue.

4. Apply the current year’s gross profit rate to the cash

collections from the current year’s installment sales to
compute the realized gross profit from the current
year’s installment sales.
Realized gross profit = Cash collections from the current
year’s installment sales [x] Current year’s gross profit rate.

5. Separately apply each of the previous year’s gross profit

rates to cash collections from those year’s installment
sales to compute the realized gross profit from each of
the previous year’s installment sales.
Realized gross profit = Cash collections from the previous
year’s installment sales [x] Previous years’ gross profit
rate.

6. Defer the current year’s unrealized gross profit to

future years. The deferred gross profit to carry forward to
future years is computed as follows:
Deferred gross profit (2014) = Ending balance installment
accounts receivable (2014) x Gross profit rate (2014)

Installment Sales with Interest

Examples presented above ignored interest, a major
component of most installment sales contracts. It is customary for
the seller to charge interest to the buyer on the unpaid installment
receivable balance. Generally, installment contracts call for equal
payments, each with an amount attributable to interest on the

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unpaid balance and the remainder to the installment receivable
balance. As the maturity nears, a smaller amount of each
installment payment is attributable to interest and a larger amount
is attributable to principal. Therefore, to determine the amount of
gross profit to recognize, the interest must first be deducted from
the installment payment, and then the difference (representing the
principal portion of the payment) is multiplied by the gross profit
rate as follows:
Realized gross profit = [Installment payment – Interest
portion] x Gross profit rate

The interest portion of the installment payment is recorded

as interest revenue at the time of the cash receipt. Appropriate
accounting entries are required to accrue interest revenue when the
collection dates.

Bad debts and Repossession

The standard accounting treatment for uncollectible
accounts is to accrue a bad debt loss in the year of sale by
estimating the amount expected to be uncollectible. This treatment
is consistent with the accrual and matching concepts. However,
just as revenue recognition under the accrual basis is sometimes
abandoned for certain installment basis sales, the accrual basis of
recognizing bad debts is also sometimes abandoned.

When the installment method is used, it is usually

appropriate to recognize bad debts by the direct write-off method
(i.e. bad debts are not recognized until the receivable has been
determined to be uncollectible). This practice is acceptable because
most installment contracts contain a provision that allows the seller
to repossess the merchandise when the buyer defaults on the
installment payments. The loss on the account may be eliminated
or reduced because the seller has the option of reselling the

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repossessed merchandise. To write-off an uncollectible installment
receivable, the following three steps are followed:
1. The installment accounts receivable and the deferred
gross profit are eliminated.
2. The repossessed merchandise is recorded as used
inventory at its net realizable value. Net realizable value
is resale value less any selling or reconditioning costs. The
repossessed asset is recorded at this fair value because any
asset acquired is recorded at the best approximation of its
fair value.
3. A gain or loss on repossession is recognized.
The repossession gain or loss is the difference between
the unrecovered cost (installment receivable – deferred
gross profit) and the net realizable value of the
repossessed merchandise.
Trade-in
Normally, trade-in value allowed to a customer is the
amount charged to the asset traded-in provided the amount is
realistic and is indicative of the fair market value or net realizable
value of the item. Net realizable value is the value of the old
merchandise traded-in after the provisions of expected
reconditioning expenses cost of disposal and a normal profit upon
its resale.
When the value assigned to the old merchandise traded-in
is equal to its net realizable value, there is no special problem
involved. Merchandise Inventory – Traded-In is debited for the
trade-in value of the old merchandise. Cash is debited for any cash
payment accompanying the trade-in, Installment Contracts
Receivable is debited for the balance of the sales price, and
Installment Sales is credited for the full amount of the sales price.
The seller sometimes grants a customer a trade-in value
greater than the fair market value or net realizable value of the item
received from him as a special inducement to the customer. An

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accounting problem arises if the seller grants an over allowance on
the used merchandise taken in. Over allowance is the excess of the
trade-in value granted over the net realizable value of the used
merchandise. The amount of the over allowance may be recorded
either as a charge to Over Allowance on Trade-In account or as a
reduction from Installment Sales account to arrive at a valid
amount for the net sales price.

Note: In cases where-in an under allowance results from

trade-in transactions, that is, the trade-in value allowed to customer
is less than the net realizable value of the merchandise traded-in,
then the under allowance is treated as an addition to the selling
price of the new merchandise for which the old merchandise is
traded-in.

ILLUSTRATIVE PROBLEMS

1. The post-closing trial balance of Durabuilt Appliance Corp. on

September 30, 2014 shows the following balance of certain
accounts:
Installment contract receivables – 2014 P
100,000
Deferred gross profit – 2014 50,000

The gross profit percentage on regular sales during the fiscal

year was 30%. The accountant made the following entry for

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repossession on a sale of 2014 towards the end of the fiscal
year:
Repossession 2,500
Loss on repossession 3,750
Installment contract receivable – 2014
6,250

The inventory of new and repossessed merchandise on

September 30, 2015 amounted to P 75,000. The trial balance as
of the end of the fiscal year on September 30, 2015 is shown
below:

Debit Credit
Accounts receivable P 100,000
Accounts payable P
100,000
Allowance for depreciation
33,750
Capital stock 125,000
Cash 46,250
Deferred gross profit – 2014
50,000
Equipment 112,500
Installment receivable – 2014 12,500
Installment receivable – 2015 150,000
Installment sales
375,000
Inventory, September 30, 2014 62,500
Loss on Repossessions 3,750
Prepaid expenses 3,750
Purchases 435,000
Repossessions 2,500
Retained earnings 30,000

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 Sales
312,500 Selling and Administrative Expenses 97,500
________
P 1,026,250 P
1,026,250

A. The gross profit on collections for installment sales in fiscal

year 2014 is
A. P 2,375 B. P 27,500 C. P 43,750 D. P 40,625

B. The gross profit realized for installment sales in fiscal year

2015 is
A. P 67,500 B. P 101,250 C. P 191,250 D. P 225,000

C. The correcting entry for repossession made on sale of 2014

is
A. Deferred gross profit, 2014 3,125
Loss on repossession 3,125

B. Deferred gross profit, 2014 3,750

Loss on repossession 3,750

C. Loss on repossession 3,125

Installment contracts receivable – 2014
3,125

D. No entry

2. The Ana Motors Company makes all sales on installment

contracts and accordingly reports income on the installment
basis. Installment contracts receivable are accounted for by
years. Defaulted contracts are recorded by debiting Loss on
Repossession account and crediting the appropriate Installment

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 Contract Receivable account for the unpaid balance at the time
of default. All repossessions and trade-ins are recorded at
realizable values. The following data relate to the transactions
during 2014 and 2015.

2014
2015
Installment sales P 150,000 P
198,500
IAR, 12/31
2014 sales 80,000
25,000
2015 sales 95,000
Purchases 100,000
120,000
New inventory, 12/31 at cost 10,000
26,000
Loss on repossessions 6,000

The company auditor disclosed that the inventory taken on

December 31, 2015 did not include certain merchandise
received as trade-in on December 2, 2015 for which an
allowance was given. The appraised value of the merchandise
is P 1,500 which was also the allowance on the trade-in. No
entry was made to record this merchandise on the books at the
time it was received. In 2015, a 2014 contract was defaulted
and the merchandise was repossessed. At the time of default,
the repossessed merchandise had an appraised value of P
2,500. The repossessed merchandise was neither recorded nor

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 included in the physical inventory on December 31, 2015.
Compute the total realized gross profit on sales in 2015 and
gain (loss) on repossession.
A. P 70,000 and P 100 respectively
B. P 70,000 and P (1,100) respectively
C. P 50,400 and P (1,100) respectively
D. P 19,600 and P 3,500 respectively

3. The following selected accounts appeared in the trial balance

of Uni Top Sales as of December 31, 2015:
Debit
Credit
Installment receivable – 2014 P 150,000
Installment receivable – 2015 2,000,000
Inventory, December 31, 2014 700,000
Purchases 5,550,000
Repossession 30,000
Installment sales P
4,250,000
Regular sales
3,850,000
Unrealized gross profit – 2014
540,000
Operating expenses 1,250,000
Additional information:

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  Installment receivable – 2014, as of December 31,
2014, P 1,200,000.
 Inventory of new and repossessed merchandise as
of December 31, 2015, P 950,000.
 Gross profit percentage of regular sales during the
year, 30% on sales.
 Repossession was made during the year. It was
2014 sales and the corresponding uncollected
accounts at the time of repossession were P 77,500.

A. The gain or loss on repossession in 2015 is:

A. P 12,625 B. P (12,625) C. P 18,050 D. P (18,050)

B. The net income for the year 2015 amounts to:

A. P 2,185,000 B. P 747,375 C. P (107,625) D. P
1,185,000

4. Sharon Company uses the installment sales method in

accounting for its installment sales. On January 1, 2015,
Sharon Company had an installment account receivable from
Rowena with a balance of P 18,000. During 2015, P 4,000 was
collected from Rowena. When no further collection could be
made, the merchandise sold to Rowena was repossessed. The
merchandise had a fair market value of P 6,500 after the
company spent for P 600 for reconditioning of the
merchandise. The merchandise was originally sold with a gross
profit rate of 40%. Determine the gain or loss on repossession
and Cost of Repossessed Merchandise to be presented in the
Income Statement, respectively:
a. P 2,500 loss; P 6,500 C. P 2,500 gain; P
5,900
b. P 2,100 loss; P 6,500 D.P 2,100 gain; P
5,900

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5. Automatic Company sells home appliances and furniture sets
on charge and installment basis. Data on the installment sales
operations of the company for the two years ending 2014 and
2015 were as follows:
2014
2015
Installment sales P 4,000,000 P
5,000,000
Cost ratio 60%
70%
Total collections:
2014 account P 2,100,000 P
1,500,000
2015 account P
3,000,000

Additional information:
The newly hired bookkeeper of Automatic Company records
collections on installment sales as: debit cash and credit
Installment Receivable for collection on principal and interest.
The interests included in the collections above are:

2014 collections P 120,000

2015 collections:
2014 accounts P
60,000
2015 accounts P
180,000

The required balance of the deferred gross profit account at

December 31, 2015 is:
2014 Sales 2015 Sales

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 A. P 232,000 P 600,000
B. P 184,000 P 600,000
C. P 160,000 P 654,000
D. P 232,000 P 654,000
6. On January 2, 2014, FPJ Company sold a car to Mr. Ruiz for P
1,050,000. On this date, the car cost P 735,000. Mr. Ruiz paid
P 150,000 as downpayment and signed a P 900,000 interest
bearing note at 10 percent. The note was payable in three
annual installments of P 300,000 beginning January 1, 2015.
Mr. Ruiz made a timely payment for the first installment on
January 1, 2015 of P 390,000 which included interest of P
90,000 to date of payment. FPJ Company uses the installment
method of accounting. In its December 31, 2015 Statement of
Financial Position, what amount should FPJ Company
report as deferred gross profit?
A. P 180,000 B. P 153,000 C. P 270,000 D.
225,000

7. ACA Video Company sells Betamax equipment. It maintains

its accounting records on a calendar year basis. On October 1,
2014, ACA Video Company sold a television set to Mr. Lopez.
The cost of the set was P 18,000, and the set was sold for P
24,000. A downpayment of P 6,000 was received along the
contract calling for the subsequent payment of P 1,000 on the
first day of each month starting on the following month. No
interest was added to the contract. Mr. Lopez paid monthly
installments promptly on November 1 and December 1 in
2014. He also made seven installment payments in 2015 after
which he defaulted on the contract. The set was then
repossessed on November 1, 2015. Assuming the repossessed
set has a fair value of P 4,000, what is the gain (loss) on
repossession to be recognized?

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 A. P (2,750) B. P 2,750 C. P 750 D.
P 1,500

8. Got Hong, Inc. sells automatic voltage regulators costing P 700

at a price of P 1,200. Cardinal Audio buys a dozen voltage
regulators on installment and trade-in six (6) of its old units at a
trade-in value of P 300 each. Got Hong, Inc. spends P 25 to
recondition the old units and sells them for P 315. Got Hong,
Inc. expects a 10 percent gross profit from the sale of used
voltage regulators. How much is the over-allowance granted
by Got Hong, Inc. on the trade-in?
A. P 249 B. P 150 C. P 339 D.
P 189

9. The books of Amor Power, Inc. show the following balances

on December 31, 2015:

Accounts Receivable P 627,500

Deferred Gross Profit (before adjustment) 76,000

Analysis and aging of the accounts receivable reveal the

following:

Regular Accounts P
415,000
2014 installment accounts 32,500
2015 installment accounts
180,000

Sales on an installment basis on 2014 were made at 30 %

above cost, in 2015, at 33 1/3 % above cost. What is the total
realized gross profit for the year ended December 31, 2015?

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 A. P 23,500 B. P 52,500 C. P 45,000 D. P
69,750

10. The following data pertain to installment sales of Brain’s Store:

Down payment, 20%

Installment sales:
2013
P 545,000
2014
785,000
2015
968,000
Mark up on cost, 35%
Collections after down payment are:
40% during the year of sale
35% during the year after
25% on the third year
What is the balance of Deferred Gross Profit – 2014 at
December 31, 2014?
A. P 97,689 B. P 131,880 C. P 141,112 D. P
114,063
11. TMC Company, which began operations on January 2, 2015
appropriately, uses the installment method of accounting. The
following data pertain to 2015 operations:

Installment sales P
900,000
Operating expenses
72,000
Regular sales 375,000

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 Collections (including interest of 24,000)
312,000
Cost of regular sales
215,000
Installment accounts written-off due to defaults 44,000
Cost of installment sales
630,000
Repossessed accounts 100,000
Fair value of repossessed merchandise
54,000
Reconditioning cost
4,000

What is the net income for the year ended December 31,
2015?
A. P 151,600 B. P 127,600 C. P 158,400 D. P 165,600

12. JJC Company began operations on June 1, 2015. The following

information extracted from its records at year-end:

Cost of installment sales P 1,093,750

Cost of regular sales 1,050,000
Mark-up on installment sales 140% of cost
Mark-up on regular sales 33 1/3 on sales
Balances at December 31, 2015;
Installment accounts receivable
1,575,000
Accounts receivable
735,000
Operating expenses 70% of realized gross
profit

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 What is the net income for the year ended December 31,
2015?
A. P 341,250 B. P 267,750 C. P 90,157 D. P 174,000

13. On July 10, 2015, Nissan Motors, Inc. sold a new car to Mr. Yu
for P 850,000. The car costs Nissan P 650,625. Mr. Yu paid
25% downpayment and traded his old car. Nissan granted an
allowance of P 80,000 on the old car traded, the balance
payable in equal monthly installment payments. The monthly
installment amounts to P 30,000 inclusive of 12% interest on
the unpaid balance of the principal amount of obligation. The
old car traded in has a selling price of P 120,000 after
expending reconditioning cost of P 22,500.

After paying three installments, Mr. Yu suffered major

financial setback incapacitating him to continue paying. The
car was appraised to have a fair value of P 300,000.

A. What is the gain (loss) on repossession?

A. (62,617.50) B. 62,617.50 C.(162,617.50) D.
162,617.50

B. Under the installment method, how much is the realized

gross profit to be recognized at the end of the year?
A. P 96,003 B. P 75,625 C. P 100,000 D. P
90,073

14. Cebu Company is a dealer of air conditioners. For the period

May 1, 2015 to May 31, 2015, Cebu Company gives a trade
discount of 10% to all its buyers. On May 1, 2015, five units of
air conditioners with a total list price of P 100,000 and total

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 cost of P 59,800 were sold to Mr. Delos Santos. Cebu
Company granted an allowance of P 10,000 for Mr. Delos
Santos’ used air conditioners as trade in although the current
fair value is P 12,000. The balance was payable as follows:
20% of the balance paid at the time of purchase; the rest is
payable in 10 months starting June 1, 2015. A 15% gross profit
rate is usual from the sale of second hand air conditioners.

After six months of paying, Mr. Delos Santos defaulted in the

payment of December 1, 2015. The five units were repossessed
and it would require P 2,000 reconditioning cost for each unit
before it could be resold for P 6,000 each.

A. How much is the gain (loss) on repossession to be

recognized on December 1, 2015?
A. P 3,360 B. P (3,360) C. P 1,760 D. P
(1,760)

B. What is the total realized gross profit under the

installment method to be adjusted on December 31, 2015?
A. P 23,240 B. P 19,040 C. P 18,496 D. P 22,576

15. JOBZ Computers, Inc. sells computers on the installment basis.

For the year ended December 31, 2015, the following were
reported:

Cost of installment sales P 525,000

Loss on repossessions 13,500
Fair value of repossessed merchandise 112,500
Account defaulted 180,000
Deferred gross profit, December 31
108,000

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 How much was collected during the year?
A. P 210,000 B. P 264,000 C. P 390,000 D. P
415,715

16. Hyundai sells cars both on installment and cash basis. On

March 20, 2015, Hyundai sold a car to Mr. Yap for P 525,000
costing P 414,000. A used car is accepted as down payment, P
128,000 being allowed on the trade-in. The used car can be
resold for P 160,200 after reconditioning cost of P 7,660. The
company expects to make a 20% gross profit on the sale of
used car. The balance of the sale is to be paid on a 10-month
installment basis starting May 1, 2015.

Mr. Yap defaults payment starting November 1, 2015 and the

car was immediately repossessed. The repossessed car was
appraised at a value of P 93,750 at the time of repossession.
Hyundai had to incur additional cost of repairs amounting to P
9,250 before the car was subsequently resold on December 1,
2015 for P 128,750 cash to Mr. Ong.

A. What is the realized gross profit on December 31, 2015?

A. P 97,490 B. P 98,990 C. P 71,740 D. P 47,640

B. What is the net income for the year ended December 31,
2015?
A. P 64,200 B. P 38,450 C. P 49,100 D. P 40,100

17. The following data were taken from the books of Jewelry
Company:
2014 2015

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 Installment sales 640,000
720,000
Cost of installment sales 384,000
480,000
Collections:
2014 Installment receivable 200,000
240,000
2015 Installment receivable
288,000
Defaults and repossessions:
Unpaid balance of prior year’s installment
receivable defaulted 9,600
12,000
Value assigned to repossessed merchandise 5,600
6,400

Compute for the (1) realized gross profit on 2015 installment

sales during 2015 and (2) deferred gross profit on 2014
installment sales as of December 31, 2015.
A. (1) P115,200; (2) P51,200
B. (1) P 96,000; (2) P75,200
C. (1) P144,000; (2) P75,200
D. (1) P176,000; (2) P56,200

18. Jack and Jill sells on the installment basis. Its records show
the following:
January 1 December 31
Installment receivable:
2013 sales P 120,000 P -0-
2014 sales 1,722,300 337,200
2015 sales 2,050,450

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 2013 2014
2015
Sales P 1,900,000 P 2,160,000 P 3,010,000
Cost of sales 1,235,000 1,425,600 1,896,300

In 2015, the company repossessed merchandise with a resale

value of P 8,500 from a customer who defaulted in his
payments. The account incurred for P 27,000 in 2014 and P
16,000 had been paid prior to the default. As collections are
made, the company debits cash and credit the related
installment receivable; for defaults, the company debits
inventory of repossessed merchandise and credits the related
installment receivable account.

The amount of the adjustment on Inventory of Repossessed

Merchandise is
A. P -0- B. P 2,500 C. P 3,740 D. P 5,645

19. Paiyakan Corporation, which began operations on January 1,

2014, appropriately uses the installment method of accounting
for revenues. The following information is available for the
years ended December 31, 2014 and 2015.

2014 2015
Cost of installment sale P 600,000 P 1,200,000
Gross profit realized on sales made in:
2014 90,000 54,000
2015 120,000
Gross profit rate, cost based 30%
40%

Calculate the ending balance of installment accounts

receivable on December 31, 2015.

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A. P 1,416,000 B. P 1,065,000 C. P 1,020,000 D. P 735,000

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