INSTALLMENT

SALES
Installment Sales

Down Payment
Balance in a series of payment

Special Revenue Recognition

Postponed revenue recognition until

probability of collection can be reasonably estimated
Sellers risk: Repossession
losses
To avoid repossession losses:
1. DP should be large enough to cover the
decline in the value of an article.
2. The period of installment payment
should not be too long ( 1 month).
3. Payments periodic should exceed the
decline in the value of article.
 Methods of GP Recognition
on Installment Sales
1. GP recognized at the time of sale.
2. GP recognized at the collection of cash;
the alternatives:
- collections regarded as first to recovery of
cost.
- collections regarded as first to realization of
profit.
- collections regarded to both recovery cost
and realization of profit.
The Installment Method

Deffered Gross Profit:

The difference of sales price and COGS
Recognized as revenue periodically (in
proportion of cash collection).
 Sale of Real Estate on
Installment Sales
October 1, 19X2, WR co. sells to SF.West for
$50,000 property that it owns and carries on its
books at $30,000. The company receives
$10,000 on the date of the sale and a mortgage
note for $40,000 payable in 20 semiannual
installments of $2,000 plus interest on the unpaid
principal at 12%. Comisions and other expenses
on the sale amounting to $1,500 are paid.
Reguller installments of principal and intrest on
the mortgage notes are received by the seller in
19X3
 Recognition of Profit Periodically in
Recognition of Profit in Period of Sale proportion to collections
October 1, 19X2
Sold real estate (Parcel A), book value, $30,000, for $50,000
Receivable from Receivable from

SF West 50.000 SF West 50.000

Real estate Real estate
(Parcel A) 30.000 (Parcel A) 30.000
Gain on sale Deffered GP
(Parcel A) 20.000 (Parcel A) 20.000
Received DP, $10,000, and mortgage note for balance, $40,000
Cash 10.000 Cash 10.000
Mortgage Note 40.000 Mortgage Note 40.000
Receivable from Receivable from
SF West 50.000 SF West 50.000
Paid expenses on sale, $1,500
Selling expenses 1.500 Selling expenses 1.500
Cash 1.500 Cash 1.500
Recognition of Profit in Period of Recognition of Profit Periodically in
Sale proportion to collections
December, 31 19X2
(1) Adjusting accrued interest on mortgage note, $40,000 at 12% for 3 months, $1,200
(2) GP realized (GP rate 40%; $20,000 GP$50,000 sales price); cash collected
$10,000;GP realized of $10,000 is $4,000
Accrued Interest Accrued Interest

On M.Note 1.200 On M.Note 1.200

Interest Income 1.200 Interest Income 1.200
Deffered GP
(Parcel A) 4.000
Realized GP
(Parcel A) 4.000
To close nominal accounts
Gain on sale Realized GP

(Parcel A) 20.000 (Parcel A) 4.000

Interest Income 1.200 Interest Income 1.200

Selling expenses 1.500 Selling expenses 1.500
Income summary 19.700 Income summary 3.700
 Recognition of Profit Periodically in
Recognition of Profit in Period of Sale proportion to collections
Jan 1, 19X3
To reserve accrued interest established at the end of previous period.
Interest Income 1.200 Interest Income 1.200
Accrued Interest Accrued Interest
On M.Note 1.200 On M.Note 1.200
Apr 1, 19X3
Received semiannual installment on mortgage notes, $2,000 and interest on $40,000 at
12% for 6 months, $2,400

Cash 4.400 Cash 4.400

M. Note 2.000 M. Note 2.000

Interest Income 2.400 Interest Income 2.400
Oct 1, 19X3
Received semiannual installment on mortgage notes, $2,000 and interest on $38,000 at
12% for 6 months, $2,280

Cash 4.280 Cash 4.280

M. Note 2.000 M. Note 2.000

 Recognition of Profit Periodically in
Recognition of Profit in Period of Sale proportion to collections
December, 31 19X3
(1) Adjusting accrued interest on mortgage note, $36,000 at 12% for 3 months, $1,080

(2) GP realized (GP rate 40%); cash collected $4,000;GP realized of $4,000 is $1,600
Accrued Interest Accrued Interest

On M.Note 1.080 On M.Note 1.080

Interest Income 1.080 Interest Income 1.080
Deffered GP
(Parcel A) 1.600
Realized GP
(Parcel A) 1.600
To close nominal accounts
Realized GP
(Parcel A) 1.600

Interest Income 4.560 Interest Income 4.560

Income summary 4.560 Income summary 6.160
The difference of
recognizing net gain
Using first methods:
$18,500 ($20,000-$1,500)

Using second methods:

19X2: $2,500 ($4,000-$1,500)
19X3 and each of next 10 year:
$1,600 (40% 0f $4,000)
Assume in the previous example that buyer fails to meet
installment due on April 1, 19X4. The seller surrenders
the mortgage note with an unpaid balance of $36,000.
And repossesses the property. On the date, the fair
value of the property is $28,500

Reacquired real estate (Parcel A) valued at $28,500; surrendered M.note with unpaid
balance of $36,000

Real astate Real astate

(Parcel A) 28.500 (Parcel A) 28.500

Loss on Repossession Deferred GP

(Parcel A) 7500 (Parcel A) 14400

Gain on Rep 6.900

M. Note 36.000 M. Note 36.000

 The loss and gain calculations:
Recognition of Recognition of
Profit in Period Profit Periodically
of Sale in proportion to
collections
Total amount
collected $14,000 $14,000
Loss in value of
repossessed prop:
Orignal basis $30,000
FV 28,500 1,500 1,500
Net gain $12,500 $12,500
Gain recognized
prior to repossession
20,000 5,600
Gain (loss) on
repossession ($7,500) $6,900
 Sale of merchandise on
Installment Basis
The balance sheet of K co.on Jan 1, 19X7:

Cash 25.000 Acc Payable 40.000

Merchandise inventory 100.000 Deferred GP on installment sales
Acc Rec (Reguler) 15.000 19X6 22.800
Installment Contract Rec,
19X6 60.000 Deferred GP on installment sales
Installment Contract Rec,
19X5 20.000 19X5 7.000
Total Assets 220.000 Capital Stock 100.000

Retained earnings 50.200

Tot liab & SE 220.000

 Computation of Deff. GP
percentage
19X6 : Deff GP 19X6
installment sales contract 19X6
= 38%

19X5 : Deff GP 19X5

installment sales contract 19X5
= 35%
 Transaction

Jan 1- Dec 1
(1) Reg sales consisted of cash sales $250,000, and sales on account,
$200,000; installment sales were $150,000

(2) purchases of merchandise on account were $425,000

(3)Receipt in addition to those from cash sales were from the following sources:
account receivables$190.000
installment CR 19X7...80.000
installment CR 19X640.000
installment CR 19X515.000

(4) Payment were applied to account payable ($435,000 discount$5,000) and

operating expenses $120,000

(5) Adjusting and closing, Dec 31

To record cogs relating to installment sales, $90,000
 Transaction
(6) To close installment sales and cost of installment sales accounts and to
record GP on installment sales for year, $60,000 40% of installment sales
(7) To record the GP realized as a result of collection on installment contracts of
19X7, 19X6, 19X5, as follows:
19x7 accounts, 40% of $80,000$32,000
19x6 accounts, 38% of $40,000$15,200
19x5 accounts, 35% of $15,000$5,250
(8) To close beginning inventory, purchases, purchases discount, and
shipments on installment sales account into Income Summary, thus
summarizing the goods available for regular sales ($430,000)
(9) To record ending inventory, summarizing COGS ro reg sales ($310,000)
(10) To close reg sales into IS, summarizing GP on reg sales ($140.000).
(11) To close realized GP on IS of current and prior years into IS, sumrz tot GP
($192,450)
(12)To close operating expenses into IS, sumrz Income bfor income Tax
($72,450)
(13) To record estimated income tax payable at 40% of the $72,450 income
before tax, or $28,980.
(14) To close income tax into IS, sumrz net income ($43,470)
(15) To transfer NI to RE ($43,470)
Cash 250.000
Account Receivables 200.000
Sales (Reguler) 450.000
Installment Contract Rec.19X7 150.000
Installment Sales 150.000
Purchases 425.000
Accounts Payable 425.000
Cash 325.000
Account Receivables 190.000
Installment Contract Rec.19X7 80.000
Installment Contract Rec.19X6 40.000
Installment Contract Rec.19X5 15.000
Accounts Payable 435.000
Operating Expenses 120.000
Purchase discount 5.000
Cash 550.000
Cost of Ins Sales 90.000
Shipments on Inst Sales 90.000
Installment Sales 150.000
Cost of Inst Sales 90.000
Def GP on Inst Sales 19X7 60.000
Def GP on Inst Sales, 19X7 32.000
Def GP on Inst Sales, 19X6 15.200
Def GP on Inst Sales, 19X5 5.250
Realized GP on Inst Sales, 19X5-19X7 52.450
Income
summar
y 430.000
Shipments on Inst Sales 90.000
Purchase discount 5.000
Merchandise Inv, beg 100.000
Purchase 425.000
Merchandise Inv, ending 120.000
IS 120.000
Sales (Reg) 450.000
IS 450.000
Realized GP on Inst Sales, 19X5-19X7 52.450
IS 52.450
Income tax 28.980
Income Tax payable 28.980
IS 28.980
Income Tax 28.980
IS 43.470
RE 43.470
Calculation

Cost of goods sold (reg sales):

Beginning inventory: $100,000

Net purchases: 420,000
Shipment on Inst.Sales: (90.000)
Available for sale: 430,000
Ending inventory: 120,000

Cost of goods sold $310,000

 Alternative Procedure for
Calculating Realized GP
19X7 19X6 19X5
Balance of DGP before adj $60,000 $22,800 $7,000
DGP at the end of 19X7:
On ICR 19X7, 40%x70,000 28,000
On ICR 19X6, 38%x20,000 7,600
On ICR 19X5, 35%x5,000 1,750
Reduction in DGP balances at
the end of 19X7-GP realized
as a result of collections $32,000 $15,200 $5,250
during 19X7
Financial Statement
Kelton Co.
Balance Sheet
December 31,19X7

Assets Liabilities & SE