INSTALLMENT

SALES
U.S. GAAP
INSTALLMENT SALES METHOD (U.S. GAAP)

Applied by entities providing financing through

long-term installment sales of real properties
and personal properties having relatively high
values when there is uncertainty in the
collection of the consideration.
INSTALLMENT SALES METHOD (U.S. GAAP)

Gross profit from installment sales are initially

deferred. Once installment payments are
collected, a portion of the collections is
recognized as Realized Gross Profit by multiplying
the collections by the gross profit rate

REALIZED GROSS PROFIT (RGP) =

GROSS PROFIT RATE x COLLECTIONS
ILLUSTRATION 1.

The following data pertain to ABC Co. for year 2016:

• Installment sales, 545,000
• Mark up on cost is 35%
• Down payment 20%. Collections after down payment are 40% during the year
of sale, 35% during the year after sale and 25% on the third year.

Required: (1.1) Provide the Journal entries for the year

(1.2) Determine how much is the realized gross profit for 2016
(1.3) Presentation of accounts in 2016 financial statements
ANSWERS TO (1.1) and(1.2)
ANSWER TO (1.3) Presentation of accounts in the 2016 Financial Statements
ILLUSTRATION 2.

The following data pertain to installment sales of ABC Co.:

• Installment sales 2016, 545,000
• Installment sales 2017, 785,000
• Installment sales 2018, 968,000
• Mark up on cost is 35%
• Down payment 20%. Collections after down payment are 40% during the year of sale, 35%
during the year after sale and 25% on the third year.

Determine the following:

(2.1) deferred gross profit for the installment sales made during 2017
(2.2) the installment accounts receivable on December 31, 2018
 ANSWER TO (2.1)

Take note that the requirement is to compute only for the Deferred Gross Profit that is related to the sales made during
2017, Hence, we shall only focus on the installment sales made during 2017, which is 785,000.

Solution 1.
Compute for the 2017 Installment Contract Receivable (ICR)
balance as of Dec. 31, 2017 by subtracting all the collections
made in 2017 to the Installment Sales.
Then, multiply the ICR by the GPR to get the DGP made
during 2017.
Solution 2.
Compute for the Unadjusted balance of DGP for 2017 I/S.
Then subtract the RGP for 2017 I/S to the Unadjusted balance
of DGP – 2017 I/S to get the DGP made during 2017.
 ANSWER TO (2.2)

As of Dec. 31, 2018 the total balance of Installment Contracts Receivable is 621,640.
The 2016 I/S accounts are fully collected as of Dec. 31, 2018.
For the 2017 I/S, the outstanding balance is 25% of 80%, which will be collected on the third year after sale (2019).
Lastly for the 2018 I/S, the remaining balance is (35% and 25%, total 60%) of 80% which will be collected on 2019 and 2020
respectively
ILLUSTRATION 3. (TRADE-INS AND REPOSSESIONS)

The Sassy Company is a dealer of air conditioners. On May 1, 2016, 5 units of air conditioners with a
total invoice price of 90,000 and a total cost of 59,800 were sold to Mr. Rusty.

Sassy granted an allowance of 10,000 for Mr. Rusty’s used air conditioner as trade-in, the current
market value of the equipment is 12,000. The balance is payable as follows: 20% of the balance paid at
the time of purchase; the rest payable in 10 months starting June 1, 2016.

After six months of paying, Mr. Rusty defaulted in the payment of December 1, 2016 installment. The
five air conditioners were repossessed and it would require 2,000 reconditioning cost for each air
conditioner before it could be resold for 6,000 each. A 15% gross profit rate was usual from the sale of
used equipment.

Operating Expenses amounted to 5,380.

Determine: (3.1) How much is the total realized gross profit for 2016?
(3.2) How much is the gain or loss on repossession?
(3.3) How much is the net income for 2016?
 TRADE-IN
These are non-cash items (particularly of the same merchandise the seller is selling,
usually old and used) that the seller is willing to accept from the buyer as part of the
payment for the sale. Sellers usually offer an allowance for trade-in that is included in
the total selling price.

The valuation of a traded-in merchandise received from the buyer should be at its Fair
Market Value. Any difference between the allowance for trade-in and the FMV is called
Over/Under Allowance On Trade-in, which is an adjustment to the total amount of
Installment Sales.

Traded-in Merchandise is included in Purchases in determining cost of goods sold.

 ANSWER TO (3.1)

Based on Illustration 3, Sassy granted an allowance of 10,000

but the FMV of the trade-in is 12,000. The difference is
accounted as an UNDER ALLOWANCE ON TRADE-IN. The
under allowance should be ADDED to the Installment Sales
price in order to get its adjusted balance.

After the adjustment in the Installment Sales amount, the

GPR rate is affected, which will now be 35%.

Take note, that the FMV of Trade-in is included in the total

collections, as it is part of the consideration received from
the buyer.
 REPOSSESSION
As protection for the uncertainty of collectability of installment receivables, It is the right of the seller to
repossess the item sold upon default by the buyer.

The valuation of the repossessed item received from the buyer is the (A) Fair Value at the time of repossession.

The fair value is either

(1) the appraised value or
(2) the estimated selling price less reconditioning costs less normal profit margin.

At the date of repossession, the remaining balance of the defaulting buyer’s Installment Contract Receivable and
the related Deferred Gross Profit is determined. The difference between this two accounts is called the
(B) Unrecovered Cost.

The difference between the (A) Fair Value of the Repossessed Item and the (B) Unrecovered Cost is called the
Gain/Loss on Repossession.

Repossessed Merchandise is included in Purchases in determining cost of goods sold.

ANSWER TO (3.2) and (3.3)

ICR as of Dec. 1 can be also computed as:

Or
ILLUSTRATION 4.

The CBA Company recognizes profit on credit sales on installment basis. At the end of 2020,
before the accounts are adjusted, the ledger shows the following:

Installment Accounts Receivable 2019 337,500

Installment Accounts Receivable 2020 525,000
Deferred Gross Profit 2019 185,000
Deferred Gross Profit 2020 272,500
Regular Sales 1,500,000
Cost Regular Sales 960,000

Each year the gross profit on installment sales was 8% lower than the regular sales. In 2020,
the gross profit on installment sales was 4% higher than 2019.

(4.1) How much is the total realized gross profit in 2020?

ANSWER TO (4.1)
 INTEREST
Normally, the installment sales price is higher than the cash sales price because of interest.

The revenue to be recognized from installment sales should be the sales price exclusive
interest or the cash sales price equivalent. This is computed by discounting the installment
receivables at the imputed rate of interest.

Subsequent collections are apportioned to both principal and interest. The interest element is
recognized as revenue as it is earned using the effective interest method. The realized gross
profit is computed by multiplying the gross profit rate to the collection relating to the
principal.
ILLUSTRATION 5.

On January 1, 20x1, CBA Co. sold goods costing 780,717 for an installment sales price of
2,000,000 collectible as follows:

• 20% down payment

• Balance is collectible in 5 equal annual installments of 352,000 starting on December 31, 20x1
• Imputed rate of interest is 10%

Required:
(a)Gross profit based on sales
(b)Realized gross profits in 20x1 and 20x2
(c)Net Income in 20x1 and 20x2
(d)Deferred gross profits on Dec 31, 20x1 and 20X2
 ANSWERS TO ILLUSTRATION 5
(a) Gross Profit Rate
 ANSWERS TO ILLUSTRATION 5
(b) RGP for 20x1 and 20X2 (c) Net income for 20x1 and 20x2

Step 1: Prepare an amortization table

(d) DGP on Dec 31, 20x1 and 20x2

 References

• Millan, Zeus Vernon B. (2018). Accounting for Special Transactions, Bandolin Enterprise
• CPA Review School of the Philippines (2016), Advanced Financial and Accounting Hand-
outs