Lesson 8 Installment Sales PDF

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LESSON 8 INSTALLMENT SALES (4 HOURS)Introduction An entity shall apply the principles set forth under PFRS 15 Revenue from Contracts with Customers in accounting for revenues from contracts with customers, regardless of the nature of the contract entered into with a customer, except for lease contra...

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LESSON 8 INSTALLMENT SALES (4 HOURS) Introduction An entity shall apply the principles set forth under PFRS 15 Revenue from Contracts with Customers in accounting for revenues from contracts with customers, regardless of the nature of the contract entered into with a customer, except for lease contracts, insurance contracts, financial instruments, and non-monetary exchanges between entities in the same line of business to facilitate sales to customers.

The accounting procedures in the succeeding discussions are not in accordance with PFRS 15. (For detailed discussion on the revenue recognition principles of PERS 15, please refer to Chapter 40 of Intermediate Accounting Part 3.)

1. What is an Installment Sales Contract? It is a special type credit arrangement which provides for a series of payments over a period of months.

2. What are the Methods of Gross Profit Recognition? A. Gross Profit recognized at the time of sale-full Gross Profit recognized at the time of sale B. Gross Profit recognized in the period cash is collected METHOD

APPLICATION OF COLLECTIONS (principal and interest)

Cost recovery method

First applied to cost of property, all subsequent cash collection after recovery of cost is realized gross profit.

Gross Profit realization method

First applied to realization of gross profit, all subsequent collections are applied to cost of the property sold.

Installment method

First applied as partial recovery of cost and realization of GP.

3. What are the different formulas that may be used in computing Realized and Deferred Gross Profit using the Installment Method? a. Realized GP=total collections x GP Rate b. Realized GP=Deferred Gross Profit, ending - Deferred Gross Profit, beginning. c. Realized GP=Installment Receivable, ending balance - Installment Receivable, beginning balance d. Deferred Gross Profit= Deferred Gross Profit, beginning - Realized GP e. Deferred Gross Profit=Ending balance - Installment receivable minus x GP Rate

4. How to compute for the gain/loss on repossession? Fair Value* of Repossessed Inventory

xxxx

Less: unrecovered cost Installment receivable Deferred gross profit Gain/Loss on repossession

Fair Value* = Appraised Value or Estimated Selling Price - Reconditioning Cost

xxx (xx)

xxx xxxx

- Normal Profit Margin on Resale - Costs to Sell

5. How to account for Trade-ins? Trade in Value allowed less Net Realizable Value of merchandise trade in is equal to the Estimated Selling Price less reconditioning cost less Normal Profit Margin on Resale less cost to sell. The answer is whether Zero, Over allowance, Under allowance. Zero if the Trade in Value Allowed is equal to the Net realizable Value of merchandise traded in. Over allowance if Trade in Value Allowed exceeds the Net Realizable Value of merchandise traded in, and a reduction to sales to arrive at the net sales price. Under allowance if Net realizable Value if the Net Realizable Value of the merchandise traded in exceeds the trade in Value allowed and addition to the sales Price.

REVIEW PROBLEMS PROBLEM 1: On January 1, 2013 DN BLack Company commenced its sales of gas stoves. Separate accounts were set up for installment and cash sales, but perpetual inventory record was not kept. On the installment sales a down payment of 1/3 was required, with the balance payable in 18 equal monthly installments plus 12% interest on the original balance. The company adjusted its records at the end of each year to the “installment basis” by use of deferred gross profit account. When contracts were defaulted, the unpaid bal-ances were charged to a bad debts expense account, and sales of repossessed merchandise were credited to this account. At the end of the year the expense account was adjusted to reflect the actual loss.

The transactions of the Blue Company are as follows: 2013

2014

Sales: New gas stoves for cash P 27,000 P 37,000 New gas stoves on installment

(Including the 1/3 cash down payment) 235,000

330,000

Repossessed gas stove 750 875 Purchases 193,000

215,000

Physical inventories at Dec. 31: New gas stoves at cost 45,000 60,000 Repossessions at appraised value 180 200 Unpaid balance of installment contracts defaulted: 2013 sales 3,580

4,650

2014 sales --

3,750

Total cash collections on installment contracts, exclusive of down payments 2013 sales 54,000

77,000

2014 sales --

70,000

REQUIRED: 1. Balance of Installment receivable-2013 in 2014

Installment sales-2013

235,000

Down payment

(78,333)

Collections on principal- 2013 (35,200)* 2014 (58,200)** Defaults 2013 (3,580) 2014 (4,650) Installment rec.-2013

55,037

bal. in 2014

Collections on principal-2013

54,000

Interest (235,000X2/3)X12%

(18,800)

35,200*

Collections on principal-2014

77,000

Interest (235,000X2/3)X12%

(18,800)

58,200** 2. Gross profit rate for 2013 and 2014? Cost of Sale for 2013 and 2014?

Cost of Sale for 2013 and 2014 & Gross profit rate for 2013 and 2014 2013 sales Sales:

27,000+235,000

2014 sales 262,000

37,000+330,000 367,000 Less: COGS Inventory, beg 45,500

---

Purchases

193,000

215,000

COGAS

193,000

260,500

Inventory, end

(45,500)

COGS

(60,000) 147,500

200,500 Gross profit

114,500

Gross Profit Rate 166.5/367

114.5/262

44%

45%

166,500

3. Cost of Sale for 2013 and 2014 Total Realized Gross Profit for 2014 2013 Sales

2014 Sales

Downpayment

--

110,000

Collections in 2014, applying to principal

58,200

58,200

43,600

153,600

times GP rate

44%

45%

Gross profit on Installment sales

25,608 94,728

Gross Profit on

+

69,120

cash sales-2014 16,650 Total Realized Gross Profit for 2014 111,378

1.

Total realized gross profitfor2014

2013 Sales

2014 Sales

Downpayment

-110,000

Collections in 2014, applying to principal 58,200 43,600 58,200

153,600

x GP rate

44% 45%

Gross profit on Installment sales 69,120 94,728

25,608

GP on cash sales-2014 16,650 Total RGP for 2014 111,378

5. Balance of Gross profit to be shown in the Statement of Financial Position2014 2013 sales Installment Receivable 330,000 Down payment 110,000

2014 sales 235,000

78,333

+

156,667

220,000

Defaults

2013

3,580

2014

3,750 4,650

Collections

2013

2014

35,200 58,200

55,037

43,600

172,650

GP rate x 45%

44%

24,216.28

77,692.5

Deferred gross profit 101,908.78

TEACHER’S INSIGHTs · Merchandise received as trade-in is recognized at "fair value." The fair value of merchandise traded-in is considered as part of collections when determining the realized gross profit in the year of sale. The excess of the trade-in value over the fair value represents an "over allowance on trade-in." The "over allowance is treated as reduction to the installment sale price when

computing for the gross profit rate. · The deficiency of the trade-in value on the fair value represents an "under allowance on trade-in." The under allowance is treated as addition to the installment sale price when computing for the gross profit rate. · When a seller needs to allocate cost of goods sold to regular sales and installment sales, the allocation is made based on the relative cash price equivalents of the goods sold. · Under the cost recovery method, the initial collections on the sale are treated as recovery of the cost of the inventory sold. Thus, no gross profit or interest income is recognized until total collections from the sale equals the cost of inventory sold.

RELATE TO PRACTICE Direction: Place your answer in a short bond paper (either handwritten or encoded may do), those who are using LMS, must submit the output while those who are using the ILG (offline), must compile their output in the Learning Portfolio to be submitted before giving the next module. The output must include your complete name in the higher left side while the date must be placed higher on the right side. Essay: Who is the owner of the inventory purchased under installment sale? Discuss.

SELF REFLECTION Based from your readings of the above notes, readings from other materials and the videos you watched, answer the following as best as you can. 1. What is installment sales method? Discuss. 2. What is realized gross profit? Discuss. 3. What is the formula of deferred gross profit? Discuss. 4. What is the formula of collection? Discuss. 5. What is the formula of realized gross profit? Discuss.

ACTIVITY

Direction: Place your answer in a short bond paper (either handwritten or encoded may do), those who are using LMS, must submit the output while those who are using the ILG (offline), must compile their output in the Learning Portfolio to be submitted before giving the next module. The output must include your complete name in the higher left side while the date must be placed higher on the right side. NO SOLUTIONS NO POINTS. 1.ABC Co. has the following information: 20x1 20x2 Installment sales

?

Cost of sales 660,000

600,000

Installment receivable - 20x1

?

600,000

400,000

Installment receivable - 20x2 Gross profit rates based on sales

720,000 40%

45%

Ø How much is the total realized gross profit in 20x2?

2. ABC Co.’s records show the following information:

20x1

20x2

Deferred gross profit (adjusted ending balances): from 20x1 sale 240,000 160,000 from 20x2 sale 324,000 Gross profit rates based on sales 40% 45% Cash collections from: 20x1 sales 400,000

200,000

20x2 sales 480,000 Ø How much is the total installment receivable on December 31, 20x2? Ø How much are the installment sales in 20x1 and 20x2, respectively?

3. ABC Co. uses the installment sales method. The following information was taken from ABC’s records:   20x2

20x1

Installment sales Cost of sales 660,000

1,000,000

1,200,000

600,000

Cash collections from: 20x1 sales 200,000

400,000

20x2 sales

480,000

Ø How much is the total deferred gross profit on December 31, 20x2? Gross profit rate in 20x1: (1,000,000 – 600,000)/1,000,000 Gross profit rate in 20x2: (1,200,000 – 660,000)/1,200,000

40% 45%

4. ABC Co. uses the installment sales method. ABC Co. has the following collection policy on its installment sales: •

20% down payment

• Balance collectible as follows: 50% in the year of sale, 30% in the second year, and 20% in the third year. • Installment sales during 20x1, 20x2 and 20x3 were ₱1,200,000, ₱1,500,000 and ₱1,800,000, respectively. •

Gross profit rate throughout the three years was 40% based on sales.

Ø How much are the realized gross profits in 20x1, 20x2 and 20x3, respectively?

Use the following information for the next three questions: Rooster Co. uses the installment sales method. Relevant information follows:

20x1 20x2 Sales

300,000 480,000

Cost of sales 336,000

240,000

Installment receivable - 20x1 60,000

180,000

Installment receivable - 20x2 360,000 Rooster Co. repossessed a property that was sold in 20x1 for ₱50,000. Total collections from this sale were ₱24,000. Rooster Co. expects to resell the property for ₱30,000 after reconditioning costs of ₱4,000. The normal profit margin on resale of repossessed property is 30%. Ø How much is the gain or loss on repossession? Ø How much is the total realized gross profit in 20x2? Ø How much is the profit recognized in 20x2?

Garden Co. uses the installment sales method. Garden Co. sells a good costing ₱10,000 for an installment sale price of ₱16,000. Garden Co. accepts old merchandise as down payment and gives the customer a trade-in value of ₱4,000 for this merchandise. The fair value of the old merchandise is ₱6,000. Subsequent cash collections during the period amount to ₱6,000. Ø How much is the realized gross profit recognized in the year of sale?

Demolish Co. uses the “cost recovery method” (traditional accounting based on old US GAAP). The records of Demolish Co. show the following information: 20x1 20x2 Sales Cost of sales

10,000 8,000

15,000 9,000

Cash collections: - from 20x1 sales - from 20x2 sales

7,000

3,000 12,000

How much is the gross profit recognized by Demolish in 20x2?

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