CONSTRUCTION CONTRACTS

PFRS 15 – Revenue from Contracts with Customers

● It superseded PAS 11 – Construction Contracts, PAS 18 – Revenue, PFRIC 13 –
Customer Loyalty Programs, PFRIC 15 – Agreements for the Construction of Real Estate,
PFRIC 18 – Transfers of Assets from Customers, and SIC 31 – Revenue-Barter
Transactions involving Advertising Services.
● This applies to an annual reporting period beginning on or after January 1, 2018.
● This standard provides a single, principles-based five-step model to account for revenues
from all contracts with customers. Revenue Recognition Principle
● Recognize revenue in the accounting period when the performance obligation is
satisfied o Revenue recognition at a (Single) Point in Time
A. Revenue is recognized at a point in time when it does not qualify to be
recognized over time
B. Satisfaction of performance obligation: when the control of the goods or
services is transferred from the seller to the customer
● Transfer of control – obvious; coincides with delivery
● Control is also “more likely” transferred when the customer has:
a. An obligation to pay the seller
b. Legal title to the asset
c. Physical possession of the asset
d. Assumed the risks and rewards of ownership
e. Accepted the asset

o Revenue recognition Over a Period of Time (Over Time)

A. Revenue is recognized over time if goods and services are transferred over
time to the customer
B. Revenue can be recognized over time if one of the following conditions
hold:
● The customer consumes the benefit of the seller’s work as it is
performed, or
● The customer controls the asset as it is created, as when a
contractor builds an extension into a customer’s existing school
building, or
● The seller is creating an asset that has no alternative use to the
seller, and the seller has the legal right to receive payment for
progress to date, as when a company manufactures customized
product.
Construction Contracts
- contracts specifically negotiated for the construction of an asset or a combination of
assets that are closely interrelated or interdependent in terms of their design, technology
and function or their ultimate purpose or use; - These include:
a. Contracts for the rendering of services that are directly related to the construction
of an asset, e.g., those for the services of project managers and architects; and

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Shairene Anne Malaborbor
 b. Contracts for the destruction or restoration of assets, and the restoration of the
environment following the demolition of assets
- generally long-term
- Since, generally, it is long-term, a primary issue has to be dealt with in accounting for
construction contracts.
✔ Timing of recognition of:
▪ contract revenue and
▪ contract costs
FIVE-STEP MODEL (Overview of Revenue Recognition – PFRS 15) [COTA - Revenue]
1. Identify the Contract(s) with the customer.
2. Identify the performance Obligations in the contract.
3. Determine the Transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

STEP 1: Identify the contract(s) with the customer.

● Contract – an agreement that creates legally enforceable rights and obligations; can be
explicit or implicit; can be oral or written
● A contract with a customer is accounted for only if ALL the following are TRUE: [CARPT]
✔ It has Commercial substance, affecting the risk, timing or amount of the seller’s
future cash flows,
✔ It has been Approved by both the seller and the customer, indicating commitment
to fulfilling their obligations,
✔ It specifies the seller’s and customer’s Rights regarding the goods or services to
be transferred,
✔ It is Probable that the seller will collect the amount it is entitled to receive, and
✔ It specifies payment Terms.
● If BOTH of the following conditions exist, a contract DOES NOT exist:
✔ Neither the seller nor the customer has performed any obligations under the
contract, and
✔ Both the seller and the customer can terminate the contract without penalty.
● Any consideration received from contracts that did not qualify for revenue recognition
purposes is recognized as a liability, and recognized as revenue only when either of the
following has occurred:
✔ The entity has no remaining obligation to transfer goods or services to the
customer and all, or substantially all, of the consideration has been received and
is non-refundable; OR
✔ The contract has been terminated and the consideration received is
nonrefundable.
● Combination of contracts:

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Shairene Anne Malaborbor
 o Each contract is accounted for separately. However, two or more contracts entered
into at or near the same time with the same customer (or related parties of the
customer) are combined and accounted for as a single contract if:
✔ The contracts are negotiated as a package with a single commercial
objective;
✔ The amount of consideration to be paid in one contract depends on the
price or performance of the other contract; OR
✔ Some or all of the goods or services promised in the contracts are a single
performance obligation.
o Negotiating multiple contracts at the same time is not sufficient evidence to
demonstrate that the contracts represent a single arrangement

STEP 2: Identify the performance obligations in the contract.

● Each promise to transfer the following is a performance obligation that is accounted for
separately:
o A distinct good or service (or a distinct bundle of goods or services)
✔ usually isang bagsakan na performance
OR o A series of distinct goods or services that are substantially the same and
have the same pattern of transfer to the customer
✔ usually continuous over time

A. Distinct Good or Service

● A promised good or service is distinct if:
o The customer can benefit from the good or service either on its own or together with
other resources that are readily available to the customer
✔ How can we say that the customer can benefit?
● If the good or service could be used, consumed, sold for an amount that is greater than
scrap value or otherwise held in a way that generates economic benefits
✔ The promise to transfer the good or service is separately identifiable from
other promises in the contract.
● How can we say that the good or service is separately identifiable?
o If the good or service:
▪ Is not an input to a combined output specified by the
customer
▪ Does not significantly modify another good or service
promised in the contract
▪ Is not highly interrelated with other goods or services
promised in the contract ● When is a promised good or service not distinct?
✔ When it is combined with other promised goods or services until a bundle of
goods or services that is distinct is identified.

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Shairene Anne Malaborbor
 B. Series of Distinct Goods or Services
● Series of distinct goods or services that are substantially the same and have the same
pattern of transfer to the customer – accounted for as a single performance obligation
if:
✔ Each good or service in the series represents a performance obligation that would
be satisfied over time if each was accounted for separately; and
✔ The entity would use the same measure of progress toward the satisfaction of the
performance obligation for each of those goods or services.

● Performance obligations do not include administrative tasks to set up a contract ●

Examples of common parts of contracts that are performance obligations:
o Extended warranties
o Options that provide a material right (material right – something the customer
wouldn’t get otherwise, so the seller is obligated to provide it)
● Examples of common parts of contracts that are not performance obligations:
o Prepayments (part of transaction price)
o Quality-assurance warranties (part of the performance obligation to deliver goods
and services that are free of defects)
o Right of return (part of the performance obligation to deliver acceptable goods and
services)
● Satisfaction of performance obligations – at contract inception, the entity shall determine
whether the identified performance obligations will be satisfied either:
o over time or o at a point in time (refer to the Revenue Recognition Principle notes

above)

STEP 3: Determine the transaction price.

● Transaction price – the amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties
● In a construction contract, transaction price normally consists of the following:
o Contract price; and
o Any subsequent variations in the contract price ▪ to the extent that it is:
● probable that they will result in revenue and
● they are capable of being measured reliably
● Transaction price may not be equal to the contract price if the consideration in the contract
is affected by any of the following:
1. Variable consideration;
2. Constraining estimates of variable consideration;
3. The existence of a significant financing component in the contract;
4. Non-cash consideration; or
5. Consideration payable to a customer.
● A construction contract may be either:
1. Fixed price contract – the contractor agrees to a fixed contract price or a fixed
rate per unit of output, which in some cases is subject to cost escalation clauses

Made by:
Shairene Anne Malaborbor
 2. Cost plus contract – the contractor is reimbursed for allowable or defined costs,
plus a fee
▪ Two types of cost-plus contracts:
i. Cost-plus-variable-fee contract – the contractor is reimbursed for the
costs plus a percentage of these costs
(contract price = costs + variable fee) ii. Cost-plus-fixed-fee
contract – the contractor is reimbursed for the costs plus a fixed
amount (contract price = costs + fixed fee)

STEP 4: Allocate the transaction price to the performance obligations in the contract.
● Allocation is based on the relative stand-alone prices of the distinct goods or services.
● Stand-alone selling price – price at which a promised good or service can be sold
separately to a customer
● What if there is no stand-alone selling price?
○ Three methods for estimating stand-alone selling prices that are not observable:
a. Adjusted market assessment approach – the seller considers what it could sell the
product or services for in the market in which it normally conducts business,
perhaps referencing prices charged by competitors (bentahan ng ibang vendors)
b. Expected cost plus margin approach – the seller estimates its costs of satisfying a
performance obligation and then adds an appropriate profit margin
c. Residual approach – the seller estimates an unknown (or highly uncertain)
standalone selling price by subtracting the sum of the known or estimated stand-
alone selling prices from the total transaction price
▪ Note: This is only allowed if the stand-alone selling price is highly uncertain,
either because
● The seller hasn’t previously sold the good or service and hasn’t yet determined a price for
it; or
● The seller provides the same good or service to different customers at substantially
different prices.
● What If there is only one performance obligation in a contract?
○ The transaction price is allocated only to that single performance obligation

STEP 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
● Revenue is measured at the amount of the transaction price allocated to the satisfied
performance obligation
● Revenue is recognized either:
o Over time
o At a point in time

A. Percentage of Completion (Performance obligations satisfied over time)

● Revenue is recognized over time AS the entity progresses towards the complete
satisfaction of the obligation ● Methods of measuring progress:
○ NOTE:

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Shairene Anne Malaborbor
 ■ Only one should be used consistently by the entity for each PO
satisfied over time, and
■ Progress shall be remeasured at the end of each reporting period
1. Output methods – made in terms of terms of results achieved ● ex.
of output methods:
○ surveys of work performance completed to date
○ appraisals of results achieved
○ milestones reached
○ time elapsed and units produced or units delivered
● Revenue is recognized based on the direct measurements of the
value to the customer of the goods or services transferred to date
relative to the remaining goods or services promised under the
contract
2. Input methods – made in relation to the efforts or inputs devoted to a
contract
● ex. of inputs:
○ costs incurred
○ resources consumed
○ labor hours expended
○ machine hours used
○ time elapsed
● Revenue is recognized based on the efforts or inputs to satisfy the
PO relative to the total expected inputs
● Revenue can be recognized in a straight line basis if inputs are used
evenly throughout the performance period
● Cost-to-cost method – widely used input method; percentage of
completion is determined as:
POC = Total costs incurred to date
Estimated total contract costs
or
POC = Total costs incurred to date Total
costs incurred to date +
Estimated costs to complete
● Efforts-expended (labor hours-based) method – POC is
determined as:
POC = Total labor hours to date
Est. total contract labor hrs.
or
POC = Total labor hours to date
Total labor hours to date + Est. labor hrs. to
complete

B. Cost Recovery Method or Zero Profit Approach (Performance obligations satisfied at

a point in time)
● Revenue is recognized WHEN the performance obligation is satisfied ● When
should this be used?

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Shairene Anne Malaborbor
 ○ If the outcome of a performance obligation cannot be reasonably measured,
but it is likely to recover costs.
● Revenue is recognized only to the extent of costs incurred that are expected
to be recovered
o Zero profit -> revenue recognized = costs incurred

Financial Statement Presentation

a. Percentage of completion (Over Time)
● Current asset – Contract Asset o Consists of total costs incurred on the
contract plus cumulative recognized profit (or less cumulative recognized loss) less
progress billings
● Current liability – Contract Liability o Consists of progress billings less total costs
incurred on the contract plus cumulative recognized profit (or less cumulative
recognized loss)
b. Cost recovery method (Point in time)
● Current asset – Contract Asset
o Consists of total costs incurred on the contract less progress billings
● Current liability – Contract Liability o Consists of progress billings less total costs
incurred on the contract

Illustrative Problem #1:

Gold Constructions signed a contract in January 1, 2026 to build a custom garage for a customer
and received an advanced payment of P25,000. The said project will be built on the customer’s
property. Gold must first build a concrete floor, construct wooden pillars and walls, and finally
install a roof to complete the project. The stand-alone prices normally charged by Gold for these
are P5,000, P7,000 and P9,000 respectively for each of these three smaller tasks if done
separately. How many performance obligations exist in this contract?
Answer: 1 performance obligation – although the smaller tasks are capable of being distinct, they
are not separately identifiable because each component is highly interrelated with each other,
and providing them to the customer requires the seller to integrate the components into a garage

Illustrative Problem #2:

A construction company enters into a contract with a customer to build a warehouse for
P1,000,000 on March 30, 2025 with a performance bonus of P75,000 if the building is completed
by July 31, 2025. The bonus is reduced by P10,000 each week that completion is delayed. The
company commonly includes these completion bonuses in its contracts, and based on prior
experience, estimates the following completion outcomes:
Completed by Probability
July 31, 2025 65%
August 7, 2025 25%
August 14, 2025 5%
August 21, 2025 5%

Made by:
Shairene Anne Malaborbor
How much is the transaction price for this contract?
P (1,000,000 + 75,000) x 65% = 698,750
P (1,075,000 – 10,000) x 25% = 266,250
P (1,065,000 – 10,000) x 5% = 52,750
P (1,055,000 – 10,000) x 5% = 52,250
Total transaction price P 1,070,000
● Make sure that the probability is equal to 100%.
● What if the probabilities or scenarios change over time?
○ Account for it prospectively (change in estimate)

Illustrative Problem #3:

Xtraordinaire Co. has entered into a fixed price contract for constructing a high rise building over
a period of three years. The contract price of P35,000,000 will be billed to the customer
periodically based on the company’s progress on the construction. It incurred the following costs
relating to the contract during the first year:
Cost of materials P 3,250,000
Site labor cost P 2,500,000
Agreed admin costs per contract to be reimbursed by the customer P 1,300,000
Marketing costs for selling apartments, when they are ready P 1,200,000
Depreciation of the plant used for the construction P 500,000 Total
estimated cost of the project P 20,000,000
a. The percentage of completion of this contract at the end of the year is:
POC = Total costs incurred to date
Estimated total contract costs
Total costs incurred during the year:
P 3,250,000 + 2,500,000 + 1,300,000 + 500,000 = P 7,550,000
Estimated total contract costs: P 20,000,000
POC = P 7.55M / P 20M
POC = 37.75%
*Marketing costs are expensed outright.
*Contract costs may include some general admin costs and development costs
for which reimbursement is specified.
b. The revenue recognized during the first year is:
Revenue = Contract price x POC = P 35M x 37.75%
Revenue = P 13,212,500

Illustrative Problem #4:

Made by:
Shairene Anne Malaborbor
ABD Company signed a P1,000,000 contract to build an environmentally friendly access trail to
Manila. The project was expected to take approximately 3 years. The following information was
collected for each year of the project – Year 1, Year 2, and Year 3.
Cost Expected Support Addt’l Trail feet Addt’l trail
expended addt’l cost timbers laid support constructed feet to be
during the to during the timbers to during the constructed
year complete year be laid year
Year 1 P 100,000 P 450,000 150 850 3,000 15,200
Year 2 P 150,000 P 280,000 300 520 7,500 8,200
Year 3 P 250,000 P -0- 500 -0- 8,000 -0-

a. Compute the amount of revenue to be recognized in Year 3, assume that ABD employs
the efforts-expended method of estimating percentage of completion and the company measures
its progress by the number of support timbers laid in the trail.
Year 2 Year 3
Timbers laid each year 300 500
Add: Timbers laid in prior years 150 450
Timbers laid to date 450 950
Add: Addt’l support timbers to be laid 520 -0-
Total estimated timbers 970 950
POC 450/970 100%
Multiply by: Contract Price P1M P1M
Revenue recognized to date P463,918 P1,000,000
Revenue recognized in prior year 463,918
Revenue recognized in current year P 536,082
b. Compute the amount of revenue to be recognized in Year 3, assume that ABD employs
an output measure and the company measures its progress by the number of trail feet that have
been completed.
Year 2 Year 3
Trail feet each 7,500 8,000
Add: Trail feet in prior years 3,000 10,500
Trail feet to date 10,500 18,500
Add: Addt’l trail feet to be constructed 8,200 -0-
Total estimated trail feet 18,700 18,500
POC 10.5/18.7 100%
Multiply by: Contract Price P1M P1M
Revenue recognized to date P561,497 P1,000,000
Revenue recognized in prior year 561,497
Revenue recognized in current year P 438,503

Illustrative Problem #5:

EBuildMo Co. began operations on January 1, 2026. During the year, EBuild Co. entered into a
contract with UBuildMe Company to construct a manufacturing facility. At that time, EbuildMo
estimated that it would take five years to complete the facility at a total cost of P 5,700,000. The
contract price for construction of the facility is P 8,000,000.

Made by:
Shairene Anne Malaborbor
During 2026, EBuildMo incurred P 1,900,000 in construction costs related to the project.
Because of rising material and labor costs, the estimated cost to complete the contract at the
end of 2026 is P4,000,000. UBuildMe was billed for and paid 30% of the contract price in
accordance with the contract agreement. It is further agreed that any costs incurred is expected
to be receivable. Compute the amount of contract asset/construction in progress (net) – or
progress billings (net). a. POC (Over time):
Contract price P 8,000,000
Less: Total estimated costs:
Costs incurred to date P 1,900,000
Add: Estimated costs to complete 4,000,000 5,900,000
Estimated gross profit 2,100,000
Multiply by: POC (1900/5900) 32.20%
Recognized profit to date 676,200
Less: Recognized gross profit in prior year -0-
Recognized profit in current year 676,200
Construction in progress = Costs incurred + Profit = 1,900,000 + 676,200 = 2,576,200
Progress billings = 30% x 8,000,000 = 2,400,000
Contract asset = 2,576,200 – 2,400,000 = P 176,200

b. Cost Recovery Method (Point in time):

Construction in progress = 1,900,000 (revenue = cost incurred)
Progress billings = 2,400,000
Contract liability = P 500,000

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INSTALLMENT SALES

Installment Sales Method

● It is one of the special revenue recognition topics that deviates from the revenue
recognition principles of PFRS 15.
● It maybe used for:
o Taxation purposes (National Internal Revenue Code Sec. 49)
o Micro entities – those whose total assets and liabilities are below P3,000,000 (SEC
Memorandum Circular No. 5 Series of 2018); opted to use “income tax basis” of
accounting
● This method was applied typically by entities providing financing through long-term
installment sales of real property and other assets with relatively high value when there is
uncertainty in the collectability of the consideration.

Under the installment sales method:

⮚ Gross profit:

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Shairene Anne Malaborbor
 o Initially: deferred o Subsequently: realized as the installment payments are
received o Realized Gross Profit = Collection on sale x Gross Profit Rate Gross
Profit Rate (GPR) may be computed as:
▪ GPR = Gross Profit / Sales; (or)
▪ GPR = Deferred Gross Profit / Installment Sales Receivable

Deferred Gross Profit (DGP) ▪

current liability; unearned income
▪ may be computed as:
Sales xx
Cost of goods sold (xx)
Deferred gross profit – beg. xx
Realized gross profit (xx)
Deferred gross profit – end. xx

Installment Sales vs. Regular Sales

Installment Sales Regular Sales

● There is a series of collections ● One-time collection
● Installment method Journal ● Accrual method
entries: Journal entries:

1. Date of sale 1. Date of sale

Installment sales receivable xx Accounts receivable xx
Sales xx Sales xx
Cost of goods sold xx Cost of Goods Sold xx
Inventory xx Inventory xx

2. Year-end (adjusting entry) 2. Date of collection

Sales xx Cash xx
Cost of goods sold xx Accounts receivable xx
Deferred gross profit xx

*Deferred gross profit xx

Realized gross profit xx
*when there is cash collection
(OR)
Income summary xx
Deferred gross profit xx

3. Date of collection
Cash xx
Installment sales receivable xx

Made by:
Shairene Anne Malaborbor
Illustrative Problem #1:

ABC Company sells merchandise on an installment basis. The installment sales method is to be
used because of uncertainties of cash collection. The following data relate to two years of
operations.
2024 2025
Installment sales P480,000 P560,000
Cost of installment sales 300,000 364,000
Gross profit 180,000 196,000
Gross profit percentage Cash 37.5% 35%
collections:
2024 Sales P190,000 P210,000
2025 Sales -- 235,000

Required: Journalize the transactions related to installment sales for 2024 and 2025.

Journal Entries – 2024

● Date of sale
Installment sales receivable - 2024 480,000
Sales 480,000
Cost of goods sold 300,000
Inventory 300,000
● Date of cash collection
Cash 190,000
Installment sales receivable - 2024 190,000
● Year-end adjusting entries
Sales 480,000
Cost of goods sold 300,000
Deferred gross profit – 2024 (480k * 37.5%) 180,000
Deferred gross profit – 2024 (190k * 37.5%) 71,250
Realized gross profit 71,250 (OR)
Income summary ((480k – 300k) * 37.5%) 108,750
Deferred gross profit - 2024 108,750

Journal Entries – 2025

● Date of sale
ISR – 2025 560,000
Sales 560,000
COGS 364,000
Inventory 364,000
● Date of cash collection
Cash 445,000
ISR – 2024 210,000
ISR – 2025 235,000

Made by:
Shairene Anne Malaborbor
 ● Year-end adjusting entries
Sales 560,000
COGS 364,000
DGP – 2025 196,000
DGP – 2025 (235k * 35%) 82,250
DGP – 2024 (210k * 37.5%) 78,750
RGP 161,000

Repossession
⮚ In case of default by the buyer, the good sold may be repossessed by the seller.
⮚ The FAIR VALUE of the repossessed good shall be used to record the repossession of
inventory. It is either:
o the appraised value of the repossessed good, or
o the estimated resale price of the repossessed good less reconditioning costs and
normal profit margin.
⮚ Journal entry on the date of repossession:
Inventory (fair value) xx
Deferred gross profit (carrying amount) xx
Loss on repossession (debit balancing figure) xx
Installment receivable (carrying amount) xx
Gain on repossession (credit balancing figure) xx

Illustrative Problem #2:

DEF Corporation repossessed a refrigerator during 2025. Such refrigerator was sold in 2021 for
P5,400. P3,200 has been collected before the buyer defaulted. The repossessed merchandise’s
resale price is P2,000 after reconditioning cost of P300 and a normal gross profit of 35%. The
company 2021 sales and cost of sales are summarized below:
Sales P432,000
Cost of Sales P285,120

Required: Journalize the repossession transaction.

Journal entry – 2025

Inventory (2,000 – 300 – (2,000 * 35%)) 1,000
Deferred gross profit ((5,400 – 3,200) * 34%) 748
Loss on repossession (balancing figure) 452
Installment receivable 2,200
*GPR = (432,000 – 285,120)/432,000 = 34%

Trade-ins
⮚ Trading in an old merchandise as part payment for the sale of new merchandise may be
accepted by the seller.

Made by:
Shairene Anne Malaborbor
 ⮚ The FAIR VALUE of the traded-in merchandise shall be used to record the transaction. It
is either:
o the appraised value of the traded-in merchandise, or
o the estimated resale price of the traded-in merchandise less reconditioning costs
and normal profit margin.
⮚ Trade-in value – value given by the seller for the old merchandise traded-in by the buyer;
amount treated as part payment of the new merchandise being sold o If Trade-in Value =
Fair Value: no accounting problem
o If TIV > FV: “Over-allowance” account (amounting to the difference) needs to be
debited which shall be deducted from the sale price when computing for the gross
profit rate
o If TIV < FV: “Under-allowance” account (amounting to the difference) needs to be
credited which shall be added to the sale price when computing for the gross profit
rate

Illustrative Problem #3: (TIV = FV)

GHI Co. sold a fitness equipment on installment basis on October 1, 2021. 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 20,000. Cash of 5,000
was paid in addition to the added trade-in equipment with the balance to be paid in ten monthly
installments due at the end of each month of sale. The used equipment would require
reconditioning costs amounting to 1,250 so that it would be resold for 25,000. A 15% gross profit
rate was usual from the sale of used equipment.

Required: Compute for the realized gross profit in the year of sale.

● Fair value of the traded-in merchandise:

Resale price 25,000
Less: Reconditioning costs (1,250)
Less: Normal profit margin (25k * 15%) (3,750)
Fair value 20,000 (equal to trade-in value: 20,000)

● Sale price 85,000

Less: Trade-in value (20,000)
Less: Cash collection (5,000)
Balance due in 10 monthly installments 60,000

● Collections:
Used equipment (fair value) 20,000
Cash received on the date of sale 5,000
October – monthly installment (60,000/10) 6,000
November – monthly installment 6,000
December – monthly installment 6,000
Total 43,000

Made by:
Shairene Anne Malaborbor
 ● Gross profit rate = (85,000 – 60,000)/85,000 = 29%

● Realized gross profit – 2021 = 29% * 43,000 = 12,470

Illustrative Problem #4: (TIV > FV)

GHI Co. sold a fitness equipment on installment basis on October 1, 2021. 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 paid in ten monthly
installments due at the end of each month of sale. The used equipment would require
reconditioning costs amounting to 1,250 so that it would be resold for 25,000. A 15% gross profit
rate was usual from the sale of used equipment.

Required: Compute for the realized gross profit in the year of sale.

● Fair value of the traded-in merchandise:

Resale price 25,000
Less: Reconditioning costs (1,250)
Less: Normal profit margin (25k * 15%) (3,750)
Fair value 20,000
Trade-in value 30,000
Over-allowance 10,000

● Sale price 85,000

Less: Trade-in value (30,000)
Less: Cash collection (5,000)
Balance due in 10 monthly installments 50,000

● Collections:
Used equipment (fair value) 20,000
Cash received on the date of sale 5,000
October – monthly installment (50,000/10) 5,000
November – monthly installment 5,000
December – monthly installment 5,000
Total 40,000

● Gross profit rate:

Sales (85000 – 10000 over-allowance) 75,000
Cost of goods sold 60,000
Gross profit 15,000
Gross profit rate (15,000/75,000) 20%

● Realized gross profit – 2021 = 20% * 40,000 = 8,000

Made by:
Shairene Anne Malaborbor
Illustrative Problem #5: (TIV < FV)

GHI Co. sold a fitness equipment on installment basis on October 1, 2021. 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 10,000. Cash of 5,000
was paid in addition to the added trade-in equipment with the balance to be paid in ten monthly
installments due at the end of each month of sale. The used equipment would require
reconditioning costs amounting to 1,250 so that it would be resold for 25,000. A 15% gross profit
rate was usual from the sale of used equipment.

Required: Compute for the realized gross profit in the year of sale.

● Fair value of the traded-in merchandise:

Resale price 25,000
Less: Reconditioning costs (1,250)
Less: Normal profit margin (25k * 15%) (3,750)
Fair value 20,000
Trade-in value 10,000
Under-allowance 10,000

● Sale price 85,000

Less: Trade-in value (10,000)
Less: Cash collection (5,000)
Balance due in 10 monthly installments 70,000

● Collections:
Used equipment (fair value) 20,000
Cash received on the date of sale 5,000
October – monthly installment (70,000/10) 7,000
November – monthly installment 7,000
December – monthly installment 7,000
Total 46,000

● Gross profit rate:

Sales (85000 + 10000 under-allowance) 95,000
Cost of goods sold 60,000
Gross profit 35,000
Gross profit rate (35,000/95,000) 37%

● Realized gross profit – 2021 = 37% * 46,000 = 17,020

Allocation of cost of goods sold

⮚ This happens when a seller makes both regular and installment sales.

Illustrative Problem #6:

Made by:
Shairene Anne Malaborbor
Xiyizo Co. recognizes revenue from its regular sales at the point of sale and uses the “installment
sales method” for its installment sales. Information at year-end is as follows:

Regular sales 2,000,000

Installment sales 4,200,000
Cost of goods sold 2,420,000

The installment price is higher than the regular price by 20%.

Required: Compute for the allocation of the cost of goods sold.

Cash sale prices Fraction Allocation of COGS

Regular sales 2,000,000 2000000/5500000 880,000
Installment sales 3,500,000 3500000/5500000 1,540,000
(4.2M/120%)
Total 5,500,000 2,420,000

Cost recovery method (US GAAP)

⮚ No profit or interest income shall be recognized until the total collections from the sale
exceed the cost of inventory (good) sold

Illustrative Problem #7:

Aegyo Company uses the cost recovery method. On January 1, 2021, Aegyo sold inventory
costing P350,000 for P600,000 payable as follows: P100,000 down payment and balance due in
five equal annual payments every December 31.

Required: Determine the amount of realized gross profit to be recognized in 2021 through 2025.

2021 2022 2023 2024 2025

Cumulative collections 200,000 300,000 400,000 500,000 600,000
Cost of goods sold 350,000 350,000 350,000 350,000 350,000
Excess collection - - 50,000 150,000 250,000
RGP in previous year - (50,000) (150,000)
RGP in current year - - 50,000 100,000 100,000

References:

Dayag, A. (2019). Advanced Financial Accounting and Reporting (Theories & Problems).
Manila. GIC Enterprises & Co., Inc.
Millan, Z. V. (2020). Accounting for Special Transactions (Advanced Accounting 1). Baguio City.
Bandolin Enterprise.
Various review materials in Advanced Financial Accounting and Reporting.

Made by:
Shairene Anne Malaborbor
 Made by:
Shairene Anne Malaborbor