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
Seller’s 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 19X6………………40.000
installment CR 19X5………………15.000

(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