INSTALLMENT SALES METHOD

CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE

The “installment sales method” is a special case of revenue recognition that deviates
from the revenue recognition principles of PFRS 15. This method may be used for
taxation purposes or when the entity is a “micro entity” and has opted to used the
“income tax basis” of accounting
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE

The “installment sales method” has originated from the traditional U.S. GAAP and was
applied typically by entities providing financing through long-term installment sales of
real property (e.g., land) and other assets with relatively high value (e.g., heavy
equipment) when there is uncertainty in the collectability of the consideration.
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE

Under the “installment sales method” the gross profit from an installment sale is
initially deferred and subsequently realized on a piecemeal basis as the installment
payments are received using the formula below:

Realized gross profit = Collection on sale X Gross profit rate

 Gross profit rate based on sales = Gross profit ÷ Sales

Illustration 1: Journal entries | Illustration 2: Two periods

 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE
Illustration 1: Journal entries
ABC Co. uses the “installment sales method.” On Jan. 1, 20x1, ABC Co. sold a bulldozer
costing ₱600,000 for ₱1,000,000 payable as follows: 20% down payment and balance
due in 4 equal annual installments every Dec. 31.
Journal entries:
Jan. 1, 20x1 Cash 200,000
Installment accounts receivable 800,000
Sales 1,000,000
Jan. 1, 20x1 Cost of sales 600,000
Inventory 600,000
Dec. 31, Cash (800K ÷ 4) 200,000 200,000
20x1 Installment accounts receivable
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE
Illustration 2: Two periods
ABC Co. uses the “installment sales method.” Information on ABC’s transactions during
20x1 and 20x2 is shown below:
20x1 20x2

Installment sales 1,000,000 1,200,000

Cost of Sales 600,000 660,000
Gross profit 400,000 540,000
Cash collections from:
20x1 sales 400,000 200,000
20x2 sales 480,000
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE
The seller may repossess the good sold in case of default by the buyer. On
repossession date:
a. The repossessed good is debited to an inventory account at “fair value.” For
purposes of applying the installment sales method, “fair value” is either:
i. The appraised value of the repossessed good; or
ii. The estimated resale price of the repossessed good less reconditioning
costs and normal profit margin.
b. The carrying amounts of the related installment receivable and deferred
gross profit and derecognized.
c. The difference between (a) and (b) is recognized as gain or loss on
repossession
 Pro-forma entry
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE

Pro-forma entry

Date Inventory (at “fair value”) XX

Deferred gross profit (at carrying amount) XX
Loss on repossession (debit balancing figure) XX
Installment receivable (at carrying amount) XX
Gain on repossession (credit balancing XX
figure)

Illustration 1: Repossession – Appraised value

Illustration 2: Repossession – Estimated resale price
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE
Illustration 1: Repossession – Appraised value
ABC Co. repossessed a good that was previously sold to a defaulting buyer. Relevant
information follow:
• Appraised value the repossessed good - ₱6,000.
• Balance of installment receivable - ₱10,000.
• Gross profit rate on the sale – 30%
Requirement: Compute for the gain or loss on repossession.
Solution:
Date Inventory 6,000
Deferred gross profit (10K x 30%) 3,000
Loss on repossession (squeeze) 1.000
Installment account receivable 10,000
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE
Illustration 2: Repossession – Estimated resale price
Information on ABC Co.’s installment sales is as follows:
20x1 20x2

Sales 200,000 320,000

Cost of Sales 160,000 224,000
Gross profit rate 20% 30%
Installment receivable – 20x1 90,000 30,000
Installment receivable – 20x2 144,000
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE

If trade-in value exceeds fair value, the excess is an over allowance, which is
deducted from sales when computing for the gross profit rate. The fair value of the
traded-in merchandise is treated as part of the collections in the year of sales when
computing for the realized gross profit.

Illustration 1: Trade-in
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE
Illustration 1: Trade-in
ABC Co. uses the “installment sales method.” ABC sells new merchandise costing
₱12,000 to a customer for ₱20,000. ABC accepts old merchandise as trade-in. The old
merchandise’s fair value is ₱5,000.

Case 1: Trade-in value equal to Fair value

ABC Co. grants the customer a trade-in value of ₱5,000 for the old merchandise.
Subsequent collections during the year amount to ₱7,000
Requirement: Compute for the realized gross profit in the year of sale.

 Solution
 INSTALLMENT SALES METHOD
CHAPTER 10
BRIEF ACCOUNTING
APPLICABILITY REPOSSESSION TRADE-INS
HISTORY PROCEDURE

Solution:
Date Inventory – trade-in 5,000
Installment receivable (squeeze) 15,000
Installment sale 20,000

Fair value of old merchandise trade-in 5,000

Collections 7,000
Total 12,000
Multiply by Gross profit rate (20K-12K) ÷ 20K] 40%
Realized gross profit in year of sale 4,800