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Installment Sales

Defaults and Repossessions

Accounting for repossessions:
1. The repossessed merchandise is recorded at its
market value (NRV) which is equal to estimated
resale price less reconditioning cost and cost to sell. It
may also be recorded at estimated cash purchase
price.
2. The DGP relating to the account defaulted is written
off. (DGP to be written off = Accoun defaulted x
Gross profit rate)
3. The account defaulted is canceled.
4. The gain or loss on repossession is recorded.
Unrecovered cost is equal to the account defaulted
balance x the cost percentage.
 Illustrative Problem:
A sale on installment basis was made in 2007 for
P16,000 at a gross profit of P5,600. At the end of
2008, when the installment account receivable
had a balance of P7,000, it was ascertained that
the customer would not be able to make further
payments. The merchandise was then
repossessed. It was estimated that the
repossession can be resold for P6,000 after
reconditioning the same at P1,500 and a
commission of 10%.
Illustrative Problem on Trade in
On March 30,2008, the Hanash Co. sold a machine
for P155,000. The machine costs P100,000. The
customer is allowed a trade-in allowance of P50,000
for an old machine. A down payment of P45,000
was made and the balance is to be paid in 12
monthly installments of P5,000 each. The old
machine is estimated to have a resale value of
P70,000 after incurring reconditioning cost of
P7,500. The seller expects a 20% profit from the sale
of the used machine; commission is 5%.
To compute the MV or NRV of the
merchandise received as trade-in?
Estimated selling price xxxx
Less: reconditioning cost xxxx
cost to sell xxxx
gross profit xxxx xxxx
Market value or net realizable value xxxx
 How to compute the gross profit?
Sales xxxx
Less: overallowance on trade-in
trade-in allowance xxxx
less market value xxxx xxxx
Adjusted sales xxxx
Cost of sales xxxx
Gross profit xxxx
 Ang Tanong ☺
Jane Enterprises used the installment method o
accounting and it has the following data at the year
end:
Gross Margin on cost 66.67%
Unrealized gross profit P192,000
Cash collections including down payment P360,000
What was the total amount of sales on installment
basis?
 Ang Sagot ☺
P840,000
 One More Q ☺
The Cindy Inc. began operating at the beginning of the
calendar year 2016 and using the installment method of
accounting, presented the following data for the first year:
Installment sales… P400,000
Gross margin based on cost… 66.67%
Inventory, end… P80,000
General and Admin expense… P40,000
Accounts receivable, Dec 31,2016… P320,000

How much is the balance of deferred gross profit account at

the end of 2016?
 Answer Q ☺
P128,000
Question pa more!
G Corp. started operation on Jan 1, 2015 selling home appliances and
furniture sets both for cash and on installment basis. Data on the
installment sales operation of the company as as follows:
2015 2016
Installment sales 400,000 500,000
Cost of installment sales 240,000 350,000
Cash collected on installment sales
2015 installment contract 210,000 150,000
2016 installment contracts - 300,000

Additional info:
On Jan 5, 2017 an installment sale in 2015 was defaulted and the
merchandise with appraised value of P5,000 was repossessed.
Related installment receivable balance on Jan 5, 2017 was P8,000.
1. How much is the balance of DGP on Dec 31,2106?
2. How much is the gain or loss on repossession in 2017?
 Answer ☺
1. P76,000
2. P200
 What is a business combination?
It occurs when a corporation and one or more
other businesses are brought together as a
single entity to carry on the activities of the
previously separated enterprises.

It is the result of the acquiring of control of one

of one or more enterprise by another enterprise
or the union of ownership interests of two or
more entities.
1. Acquisition of Assets
a. Statutory merger
A Corp + B Corp. = A Corp or B Corp.

b. Statutory Consolidation
Ding Corp + Bato Corp. = Darna Corp.
2. Stock Acquisition
Financial statement of P Corp + Financial
statement of S Corp. = Consolidated financial
statement of P Corp and S Corp
 Method of Accounting
STEPS OON ACQUISITION METHOD
1. Identifying the acquirer
2. Determining the acquisition date and
consideration transferred (purchase price)
3. Recognizing and measuring the identifiable
assets acquired and liabilities assumed, and
any non-controlling interest in the acquiree
4. Recognizing goodwill or gain on bargain
purchase
1. Identifying the acquirer
The acquirer is the combined entity that obtains
control of the other combining entities or
businesses.
2. Determining the acquisition date and
consideration transferred (purchase price)

Acquisition date is the date on which the acquirer

obtains control of the acquiree.

The consideration transferred:

⮚ Is measured at FV at acquisition date.
⮚ Is calculated as the sum of the acquisition date fair
values of :
* assets transferred by the acquirer;
* liabilities incurred by the acquiree to former owners of
the acquiree, and;
* the equity interest issued by the acquirer
 How about acquisition related cost?
Examples:
1. Legal fees
2. Advisory fees
3. Professional or consulting fees
4. Admin costs

Treatment: Expense as incurred

Except cost to issue debt or equity securities
 How about contingent consideration?
The acquirer shall recognize the acquisition date
fair values of contingent consideration as part of
the consideration transferred.
3. Recognizing and measuring the identifiable assets acquired
and liabilities assumed, and any non-controlling interest in the
acquiree

Identifiable assets acquired and liabilities assumed

are measured at their acquisition date FAIR VALUES.

Any non-controlling interest (NCI) in the acquiree is

measured either:
⮚ At FV (using full goodwill approach)
⮚ At the NCI’s proportionate share of the acquiree’s
identifiable net assets (using the partial goodwill
approach)
4. Recognizing goodwill or gain on bargain purchase

Goodwill
Consideration transferred > Acquirer’s interest
on the net FV of acquirees’ identifiable AALA.

Gain on bargain purchase

Consideration transferred < Acquirer’s interest
on the net FV of acquirees’ identifiable AALA.
 Let’s Try !!!
Aligaga paid finder’s fees of P40,000, accountant’s fee
(advisory) of P10,000, legal (advisory) fees of P15,000,
salaries of Aligaga’s employees assigned to the
implementation of the merger of P16,000, cost of closing
duplicate facilities of P12,000, cost of shareholder’s
meeting to vote on the merger of P14,000, cost of
printing stock certificates of P7,000, audit and
accountant’s fee related to the stock issuance of P3,000,
SEC registration fee of P5,000 and stock listing
application fees of P4,000.
Based on the preceding information, under the
acquisition method, what amount relating to the
business combination would be expensed?
 Answer
P107,000
 Let’s Try!!!
KK Inc. was merged to LL Inc. in a combination properly accounted for as acquisition of
interests. Their condensed balance sheets before the combination show:

Per independent report, KK’s assets have fair values of P1,653,600 for current assets,
P1,248,000 for PPE and P338,000 for patents. KK’s liabilities are properly valued. LL
purchases KK’s net assets for P3,068,000. How should the difference between the
book value of KK’s net assets and the consideration paid by LL be considered? How
much is the increase in assets?
 Answers
1. Zero goodwill
2. Increase In assets of P312,000
 One More Chance!
On June 1, 2016, Cline Company paid P800,000 cash for the assets
and liabilities of Renn Corp. The carrying values of Renn’s assets and
liabilities on June 1,2016 follow:
Cash 150,000
Accounts receivable 180,000
Capitalized software costs 320,000
Goodwill 100,000
Liabilities (130,000)

On the same date, Renn’s accounts receivable had a fair value of

P140,000. Additionally, Renn’s in process and development costs was
estimated to have a fair value of P200,000. All other items were
stated at their fair values. On Cline’s June 1 balance sheet, how much
is reported for goodwill?
 Answer
P120,000
 Isa pang Problem, Bes
On April 1,2016, ZZ Corp. paid cash of P620,000 for all the net assets
of AA Company appropriately recorded for as merger. The recorded
assets and liabilities of AA Corp. on April 5,2016 follow:
Cash P60,000
Inventory 180,000
PPE (net of P220,000 accum. Dep.) 320,000
Goodwill (net of P50,000 accum. Amort) 100,000
Liabilities (120,000)

On April 1,2016, AA’s inventory had a fair value of P150,000 and the
ppe (net) had a fair value of P380,000. The amount of goodwill
recorded in the books of ZZ as a result of the business combination
should be?
 Eto na Bes,
P150,000
THANK YOU!
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