INSTALLMENT

SALES
Are you ready to have fun

?
in this learning session
 1. Learn the applicability
of the "installment sales
method" of recognizing
in g
Lea
rn revenues.
s
bject
iv e
2. Apply the "installment
O
sales method."
INSTALLMENT SALES

A financing arrangement in which the seller

allows the buyer to make payments over
an extended period of time. Revenue and
expense are recognized at the time of
cash collection and not at the time of sale.
Let's

compare!
Realized

gross profit
Applicability

INSTALLMENT SALES METHOD

- a special case of revenue recognition
which deviates from the revenue
recognition principles of PFRS 15.
Applicability

When entity uses income tax

basis
- may be used for external reporting if
the reporting entity is a micro entity
Applicability

when entity makes a

departure from pfrs
- In extremely rare circumstances ...
compliance with PFRS ... would be so
misleading ... the entity shall depart from
that requirement. PAS 1.19
 The installments sales method
originated from the traditional US
GAAP.
Brief Usually applied by entities
history 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.
.
 Gross profit is initially
deferred and periodically
Accounting recognized as the
procedures installment payments are
received by multiplying
the gross profit rate by the
installments received.
 Adjusted for any REALIZED
Accounting GROSS PROFIT as
procedures
installment payments are
received.
 Realized

gross profit

gross profit rate

x
collection on sale
 Deferred

gross profit

This account will be

adjusted for any realized
gross profit as installment
payments are received
Present Value

The sale price of INSTALLMENT

SALES is higher than the sales price
of CASH SALES because the sales
price of an Installment Sales is
INCLUSIVE of INTEREST.
Present Value

When the collection of sales price

is extended, the seller is providing
the buyer a means of FINANCING.

Therefore, the sales price of an

Installment Sales is increased by
the FINANCE CHARGE to
compensate for the extended
period of collection.
 As protection for the
collectability of the
consideration
Repossession
receivable, the seller in
installment sales
normally reserves his
RIGHT TO REPOSSESS the
property sold in case of
default by the buyer.
Repossession
Repossession
 Trade-ins

Buyers may give a trade-in in addition to

monetary considerations, usually a
second-hand version of the item being
bought.
FAIR VALUE (FV) TRADE-IN VALUE

Appraised value Over allowance

Estimated SP less
reconditioning cost and
Under allowance
normal profit margin
 When the seller has both regular
sales and installment sales and
uses the periodic inventory
ALLOCATION system, the seller may need to
OF COGS
allocate the cost of goods sold
to the regular and installment
sales normally based on the
RELATIVE CASH PRICE
EQUIVALENT of the goods sold.
 No gross profit or interest
COST income is recognized
RECOVERY until total collections from
METHOD
the sale exceed the cost
of inventory sold.
Let's solve some

problems!
 TRUE OR FALSE
Under the installment sales method of
revenue recognition, realized gross profit is
equal to gross profit rate multiplied by
collection on sale.

 TRUE OR FALSE
Under the installment sales method of
revenue recognition, realized gross profit is
equal to gross profit rate multiplied by
collection on sale.

 TRUE OR FALSE
Monkey Co. buys bananas for P2 and sells
them at an installment price of P10. Monkey
uses the installment sale method of revenue
recognition. If Monkey collects P1 from the
sale, Monkey's realized gross profit is P0.50.
 TRUE OR FALSE
Monkey Co. buys bananas for P2 and sells
them at an installment price of P10. Monkey
uses the installment sale method of revenue
recognition. If Monkey collects P1 from the
sale, Monkey's realized gross profit is P0.50.
 TRUE OR FALSE
Sales P10 RGP = [Link]
COGS P2 = P1 x 0.80
Gross Profit P8 = 0.80
Gross Profit Rate = GP/Sales
= P8/P10
= 0.80

 TRUE OR FALSE
Bamboo Co. uses the installment sale method.
At the end of its first year of operations period,
Bamboo Co. reported a deferred gross profit
of P10 and a receivable of P100 in its financial
reports. If the total collections on the sale
during the period were P500, the cost of sale
must have been P500.
 TRUE OR FALSE
Bamboo Co. uses the installment sale method.
At the end of its first year of operations period,
Bamboo Co. reported a deferred gross profit
of P10 and a receivable of P100 in its financial
reports. If the total collections on the sale
during the period were P500, the cost of sale
must have been P500.
TRUE OR FALSE
 MULTIPLE CHOICES
The following income recognition methods are
in accordance with the principles of the PFRSs
Installment Sales Method Cost Recovery Method
a. Yes Yes
b. No Yes
c. Yes No
d. No No
 MULTIPLE CHOICES
The following income recognition methods are
in accordance with the principles of the PFRSs
Installment Sales Method Cost Recovery Method
a. Yes Yes
b. No Yes
c. Yes No
d. No No
 MULTIPLE CHOICES
Under the installment sales method, gross profit
from an installment sales is

a. recognized in full at the point of sale

b. initially deferred and ammortized over the period of settlement
using the effective interest method
c. initially deferred and periodically recognized as the installment
payments are received by multiplying the gross profit by the
installments received
d. recognized only when collections exceed the cost of goods sold.
 MULTIPLE CHOICES
Under the installment sales method, gross profit
from an installment sales is
a. recognized in full at the point of sale
b. initially deferred and ammortized over the period of settlement using the effective
interest method
c. initially deferred and periodically recognized as the
installment payments are received by multiplying the
gross profit by the installments received
d. recognized only when collections exceed the cost of goods sold.
 MULTIPLE CHOICES
Under the installment sales method, realized gross
profit is computed as

a. Sale price less COGS

b. GPR divided by Collection on Sale
c. GRP multiplied by Collection on Sale
d. Excess of Collection over COGS
 MULTIPLE CHOICES
Under the installment sales method, realized gross
profit is computed as

a. Sale price less COGS

b. GPR divided by Collection on Sale
c. GPR multiplied by Collection on Sale
d. Excess of Collection over COGS
MULTIPLE CHOICES
Deferred gross profit may be computed as

a. Installment sales less Cost of Goods Sold

b. Total unrealized gross profit less Realized
gross profit
[Link] account receivable multiplied by
Gross profit rate
d. Any of these
MULTIPLE CHOICES
Deferred gross profit may be computed as

a. Installment sales less Cost of Goods Sold

b. Total unrealized gross profit less Realized gross profit
[Link] account receivable multiplied by Gross
profit rate
d. Any of these
 MULTIPLE CHOICES
Gross profit rate based on sale is computed as

a. Gross profit divided by Sales

b. Gross profit divided by Cost of Sales
c. Deferred gross profit divided by collections
d. All of these
 MULTIPLE CHOICES
Gross profit rate based on sale is computed as

a. Gross profit divided by Sales

b. Gross profit divided by Cost of Sales
c. Deferred gross profit divided by collections
d. All of these
PROBLEM # 1
RAB Co. reported deferred gross profit of P200,000
and P60,000 at the beginning and end of the year,
respectively. RAB Co. consistently made sales at a
25% gross profit rate. How much were the total
collections during the year?

a. 480,000
b. 560,000
c. 580,000
d. 620,000
PROBLEM # 1
RAB Co. reported deferred gross profit of P200,000
and P60,000 at the beginning and end of the year,
respectively. Home Co. consistently made sales at a
25% gross profit rate. How much were the total
collections during the year?

a. 480,000
b. 560,000
c. 580,000
d. 620,000
PROBLEM # 1
PROBLEM # 2
The RAB Co., on September 30, 2021, sold for P48,000 a piano
costing P30,000. The down payment was P4,800 and equal amount
was to be paid at the end of each succeeding month. Monthly
interest of 1% yield rate was to be charged on the unpaid balance
of the installment contract, with payment applying first to accrued
interest and the balance to principal. After paying a total of
P19,200, the customer defaulted and the piano was
correspondingly repossessed on February 28, 2022, at which time
it was estimated to have a value of P16,800 on a depreciated cost
basis. RAB Co. uses a perpetual inventory system and records the
total deferred gross profit at the time of sale.
PROBLEM # 2
How much was the realized gross profit at the end of 2021?

a. 7,200 c. 6,763
b. 7,039 d. 6,489
PROBLEM # 2
How much was the realized gross profit at the end of 2021?

a. 7,200 c. 6,763
b. 7,039 d. 6,489
PROBLEM # 2
PROBLEM # 2
How much was the gain or loss on the repossession in 2021?

a. 1,928 c. 2,124
b. 1,867 d. 1,678
PROBLEM # 2
How much was the gain or loss on the repossession in 2021?

a. 1,928 c. 2,124
b. 1,867 d. 1,678
PROBLEM # 2
PROBLEM # 3
RAB Co. uses the installment sales method. During 2021, RAB Co.
sold new equipment costing P12,000 to FUTURE CPA, Inc. for an
installment sales price of P20,000. As down payment, ABC Co.
accepted old equipment from FUTURE CPA, Inc. as trade-in. The
fair value of the old equipment is P5,000. Subsequent collections
on the balance totaled P7,000 during 2021.

Compute for the following:

What is the realized gross profit if:
a. the trade-in value is P5,000
b. the trade-in value is P7,000
c. the trade-in value is P2,500
PROBLEM # 3
What is the realized gross profit if the trade-in value
is P5,000?

a. 4,800 c. 4,000
b. 5,600 d. 5,000
PROBLEM # 3
What is the realized gross profit if the trade-in value
is P5,000?

a. 4,800 c. 4,000
b. 5,600 d. 5,000
PROBLEM # 3
What is the realized gross profit if the trade-in value
is P7,000?

a. 4,800 c. 4,000
b. 5,600 d. 5,000
PROBLEM # 3
What is the realized gross profit if the trade-in value
is P7,000?

a. 4,800 c. 4,000
b. 5,600 d. 5,000
PROBLEM # 3
What is the realized gross profit if the trade-in value
is P2,500?

a. 4,800 c. 4,000
b. 5,600 d. 5,000
PROBLEM # 3
What is the realized gross profit if the trade-in value
is P2,500?

a. 4,800 c. 4,000
b. 5,600 d. 5,000
THANK YOU SO MUCH,
JPIAnS!