POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

INSTALLMENT SALES (OLD)

Installment sale is a contract whereby a buyer makes a series of payments over an extended period of time in exchange
for property acquired (automobiles, equipment, appliances, real estate, land, etc.). When there is uncertainty as to
the collectability of the sales price, the revenue usually should be recognized when cash is actually received.

Three Methods of Revenue Recognition

1. Installment Sales Method
2. Cost Recovery Method
3. Cash Method

Installment Sales Method

It is the most commonly used method when dealing with uncertainty of cash collection. Under this method, the
recognition of gross profit is deferred until cash is collected. Each collection of cash from customer is regarded as
return of both cost and realization of gross profit.

Important Notes
• The gross profit (excess of sales price over cost) is deferred and recorded in the account Deferred Gross Profit
(DGP) or Unrealized Gross Profit.
• The deferred gross profit is considered realized when collections are made.
• The realized gross profit can be determined as the difference between the deferred gross profit balance at the
beginning of the period and the deferred gross profit balance at the end of the period.
• The deferred gross profit at the end is computed by multiplying the ending balance of installment receivable by
the gross profit rate.
• When gross profit rates are not indicated, they may be computed as follows:
On current year’s sales Gross Profit / Installment Sales
On prior year’s sales Deferred Gross Profit, beginning / Installment Receivables, beginning

Proforma Entries
Installment Sales Receivable xxx
Installment Sales xxx
To record sale of inventory.

Cost of Installment Sales xxx

Inventory/Shipments on Installment Sales xxx
To record cost of installment.

Installment Sales xxx

Cost of Installment Sales xxx
Deferred Gross Profit xxx
To adjust sales and cost and record DGP.

Cash xxx
Installment Receivable xxx
To record collection.

Deferred Gross Profit xxx

Realized Gross Profit xxx
To record realized gross profit.

PROBLEM 1
PUP COMPANY sold a machinery costing P800,000 for P1,000,000 on June 1, 2017. Collections were: 2017 - P400,000;
2018 – P300,000 and 2019 – P100,000.

Determine the following:

a. Entries to record the transactions in 2017-2019
b. Revenue to be recognized in 2017, 2018 and 2019
c. Income to be recognized in 2017, 2018 and 2019
d. Balance of:
• Installment Receivable
• Deferred Gross Profit

PROBLEM 2
CAF COMPANY is a seller of equipment and reports income on installment basis. The following data are gathered:
Installment Receivable Collections Installment Receivable
Sales during GP Rate
(01/01/2018) (during 2018) (12/31/2018)
2016 30% 100,000 100,000 0
2017 45% 200,000 100,000 100,000
2018 40% 0 75,000 150,000
Determine the following:
a. Entries to record the transactions
b. Revenue to be recognized
c. Revenue to be recognized
d. Balance of:
• Installment Receivable
• Deferred Gross Profit

DEFAULTED OR REPOSSESSED ACCOUNTS

When a customer fails to make any further payment, the seller repossesses the merchandise or property sold. The
repossessed merchandise is recorded at its market value (Net Realizable Value) or its unrecovered cost whichever is
lower. Net Realizable Value is the estimated selling price in the ordinary course of business less the sum of estimated
costs of reconditioning, the estimated costs necessary to make the sale and normal profit. The net realizable value is
then compared with the unrecovered cost to determine the gain or loss on repossession:
• If NRV of the merchandise is equal to its unrecovered cost, no gain or loss on repossession.
• If NRV is less than its unrecovered cost, there is a loss on repossession.
• If NRV is greater than unrecovered cost, there is a gain on repossession, but the gain is deferred until the
merchandise is sold. In this case, the repossessed item is recorded at its unrecovered cost.

Proforma Entry
Repossessed Merchandise xxx
Deferred Gross Profit xxx
Loss on Repossession xxx
Installment Receivable xxx
To record repossession.

PROBLEM 3
On March 2, 2017, Toyota Motors sells Innova car costing P576,000 for P960,000. In 2017, a total of P330,000 is
collected on the contract of which P30,000 represents finance charges. After making religious payments in 2017,
the customer defaulted in payment and the vehicle was repossessed. How much is the gain or loss on repossession,
realized gross profit and what are the entries to record the transactions under different assumptions?
a. It was estimated that the repossession can be sold for P396,000.
b. It was estimated that the market value of the repossessed vehicle is 80% of its unrecovered cost.
c. It was estimated that the repossession can be sold for P500,000 after reconditioning the same at P25,000 and a
normal profit of 10%.

TRADE IN

Sometimes, companies accept second-hand item as initial payment for the item sold and this is measured at its Net
Realizable Value (NRV). Net Realizable Value is the estimated selling price in the ordinary course of business less
reconditioning cost, cost to sell and normal profit. An allowance is normally allowed on the trade in item and this
amount is compared with its net realizable value to arrive at over allowance or under allowance on trade in.
• If NRV is equal to allowance on trade in, there is no over or under allowance on trade in.
• If NRV is greater than the allowance on trade in, there is under allowance. Under allowance on trade in is
treated as addition to installment sales.
• If NRV is less than the allowance in trade in, there is over allowance. Over allowance on trade in is treated as
deduction from installment sales.

*The over or under allowance is adjusted to the original sales price to arrive at adjusted sales.

Proforma Entry
Cash (downpayment) xxx
Trade-in Merchandise xxx
Installment Receivable xxx
Installment Sales xxx
To record installment sales.

PROBLEM 4
Nissan Company sells new automobiles. A new Escapade costing P700,000 was sold on October 1, 2017 for P1,000,000.
A Used Toyota Revo was accepted as down payment and an allowance of P300,000 was accepted on the trade in. The
balance is payable in 20 equal monthly installments of P35,000 starting November 1, 2017. How much is the realized
gross profit and what are the entries to record the transactions under different assumption?
a. Nissan anticipates selling price on reconditioned automobile of P350,000 after reconditioning it for P20,000.
Selling costs equal to 5% of selling price is also anticipated. The gross profit for reconditioned automobile is
expected to be 15%.
b. Nissan anticipates selling price on reconditioned automobile of P450,000 after reconditioning it for P20,000.
Selling costs equal to 5% of selling price is also anticipated. The gross profit for reconditioned automobile is
expected to be 15%.

PROBLEM 5
On January 2, 2017, Ford Philippines sold a Ford Escape car costing P620,280 for P960,000. A used car is accepted as
a downpayment, P250,000 being allowed on the trade in and the balance is payable in 20 months plus 1% a month on
diminishing balance starting February 2, 2017. The used car can be resold for P190,000 after reconditioning cost of
P10,000. The company’s gross profit rate on the sale of used car is 15%. After making religious payments in 2017, the
customer defaulted and the vehicle was repossessed on December 5, 2017. Toyota Motors estimated that the market
value of the repossessed vehicle is P300,000 after reconditioning costs of P25,000. The gross profit rate of 15% is also
applicable to repossessed cars.

Determine the following:

a. Over (Under) Allowance
b. Gain or Loss on Repossession
c. Revenue to be recognized
d. Net Income to be recognized
e. Entries to record the transactions

Cost Recovery Method

Under this method, no income is recognized on a sale until the cost of the item sold is fully recovered through cash
receipts. Collections are first applied to recovery of cost of item sold. After full recovery, all subsequent collections
are treated as realization of gross profit. This method is used when collections are so uncertain and when the nature
of the services or products sold do not permit repossession or when the customers’ notes have no fair market value.

PROBLEM 6
On March 2, 2017, Toyota Motors sells Innova car costing P576,000 for P960,000. Collections made were: 2017 –
P300,000; 2018 – P300,000 and 2019 – 360,000.

Determine the following:

a. Entries to record the transactions
b. Realized Gross profit in 2017, 2018 and 2019

Cash Method

Under this method, all costs are charged to expenses as incurred and revenue is recognized as collections are made.
This method is appropriate only when the potential losses on a contract cannot be estimated with any degree of
certainty.