installment sales - report

8/13/2019 Installment Sales - Report

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By: danicka acedera

Bsa-4b

Chapter 9:INSTALLMENT SALES


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RECOGNITION

GROSS PROFIT IS RECOGNIZED AT THE TIME OFSALE

Account Receivable (full price)

Sales (full price)

The point at which good have customer have beendelivered to the customers and a definite amount ofreceivable has been acquired.

Most of the expenses in selling goods are incurred andrecorded in the year of sale (also the REVENUEto

math cost and revenue).Require recognition of all expenses relating to the

sales of the same period so that the determination ofincome will be a reasonable process.

Expenses

Liability (post sale collection and repossession


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Bad Debts

Allowance for Uncollectible Installment ContractReceivable

for recording estimated uncollectible accountsGROSS PROFIT IS RECOGNIZED IN THE

PERIOD IN WHICH CASH IS COLLECTED

- Recognized in the period in which the installmentreceivables are collected instead of in the periods inwhich receivables are created. COST RECOVERY METHOD gross profit is not

recognized until collections are equal to the amount of cost

of good sold. Most applicable on the sale of services orproducts of a nature not permitting repossession and whenthe customer notes have no Fair market value.

GROSS PROFIT REALIZATION METHOD the firstcollection are regarded as realization of gross profit

INSTALLMENT METHOD cash collection is regarded as


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THE INSTALLMENT METHOD OF

ACCOUNTING The difference between the selling price and the

cost of sale is recorded as deferred gross profit orunrealized gross profit

ILLUSTRATION:

assume that on March 31, 2008 aninstallment sale of property costing 60,000 wasmade. The selling price was 100,000. a downpayment of 20,000 was required, the balance

payable in forty manthly payments of 2,000 at theend of each month.

GROSS PROFIT = (100,000 60,000) = 40,000

GROSS PROFIT RATE = gross profit selling price

(40,000 100,000) = 40%


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REALIZED GROSS

PROFIT

DEFERRED

GROSS PROFIT

Gross profit receivable Gross profit

YearCollection

s

X

Rate= RGP

Balance

s, End

X

Rate= DGP

2008 *38,000 40 % 15,200 62,000 40% 24,800

2009 24,000 40 9,600 38,000 40 15,200

2010 24,000 40 9,600 14,000 40 5,600

2011 14,000 40 5,600 - 40 -

100,000 40,000 144,000 45,600

*P20,000 down payment plus 18,000(2k*9mos)installment collections


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SALES

requires the examination of the consistency inthe treatment of the related expenses.

Operating expenses incurred in making the sale

are to be deferred.

The matching of revenues and expenses on

installment sales applies only to those cost and

expenses necessary to and directly related with

the acquisition or manufacture of the

merchandise.


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INTEREST ON INSTALLMENT CONTRACT

RECEIVABLE

Interest charged to customers may be computedusing one of the following plans:

Equal periodic payments from customer, with a

portion of each payment representing interest on

the outstanding balance of the principal and the

remainder representing a reduction from the

aforementioned balance.

Interest computed each month or the outstanding

principal balance during the month.

Interest computed on the installment due, from

the date of the sales contract to the date of the

installment payment.


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DATE

(1)

CASH

COLLECTION

(DEBIT)

(2)

INTEREST

INCOME

(CREDIT)

(3)

INSTALLMENT

CONTRACTS

RECEIVABLE

(CREDIT 1-2)

(4)

OUTSTANDIN

G PRINCIPAL

(4-3)

Jun

30

P 60,000

30 P 20,000 - P 20,000 40,000

Jul 31 7,383.90 P 1,200 6,183.90 33,816.10

Aug

31

7,383.90 1,014.48 6,369.42 27,446.68

Sept

30

7,383.90 823.40 6,560.50 20,886.18

Oct

31

7,383.90 626.59 6,757.31 14,128.87


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Total collections, june 30 dec 31 (1)P64,303.40

Less total interest income (2)

4,303.40

Collections applying to principal (3)

60,000

Multiply by gross profit rate:

Gross profit = 60,000-42,000 30%

Imstallment sales P60,000

Realized gross profit on the contract

P18,000


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ACCOUNTING PROCEDURES

UNDER INSTALLMENT METHOD

Installment sales of conventional merchandise

Installment sales of real estate

By non dealer (casual sales)

By a dealer


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2010 2011

Sales

Regular (on account)

Installment- down payment

balance (payable w/in 3yrs at the start of

each month, apply 36 % interest for

3yrs)

P250,000

20,000

80,000

P230,000

24,000

96,000

Cost of sales

regular

Installment

120,000

60,000

130,500

69,600

Collections

Accounts Receivable

Installment contract receivable

2010 Sales Applying to interest

Applying to principal2011 Sales Applying to interest

Applying to principal

120,000

26,000

19,000-

-

130,500

18,000

26,00031,000

22,000

Operating expenses paid 50,000 65,000

Accrued interest receivable2007 sales 1,800 1,020

Installment sales of conventional merchandise


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Journal entries

January december 2010

perpetual inventory system To record regular sales

Accounts receivable 250,000

Sales 250,000

To record installment sales

Cash 20,000Installment Contracts receivable 2010 80,000

installment sales 100,000

To record cost of sales

cost of sales 120,000

Cost of Installment sales 60,000Merchandise Inventory 180,000

if the periodic inv sys is used

Cost of installment sales 60,000

Shipment of Installment Sales 60,00


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To record collection of accounts receivable

Cash 120,000

Accounts Receivable 120,000

To record collection of installment contracts receivable

Cash 45,000

Installment Contracts Receivable, 2010 19,000

Interest Income 26,000 To record payment of operating expenses

Operating Expenses 50,000

Cash 50,000


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adjusting & closing entries,

december 31, 2010 To recognized accrued interest receivable for

Dec.31,2010Accrued Interest Receivable 1,800

Interest Income 1,800

To set up deferred gross profit on 2010 Installment Sales 100,000

Cost of Installment Sales 60,000

Deferred Gross Profit,2010 40,000

Gross profit rate = P40,000100,000=40%

To record realized gross profit on installment sales deferred Gross Profit,2010 15,600

Realized Gross Profit 15,600

Collections applying t principal P39,000

Multiply by gross profit rate 40 %


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To close realized gross profit account


Income Summary 15,600

To close other nominal accounts

Sales 250,000


Cost of Sales 120,000Operating Expenses 50,000


To close result operations for 2010

Income Summary 123,400Retained Earnings 123,400


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January December 2011 To reverse accrued interest receivable


Accrued Interest Receivable 1,800

To record regular sales


Sales 230,000

To record installment sales

cash 24,000

Installment Contracts receivable2011 96,000

Installment sales 120,000


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To record cost of sales Cost of sales 130,400

Cost of Installment Sales 69,600

Merchandise Inventory 200,000

To record collection of accounts receivable Cash 130,500


To record collection of installment contracts receivable Cash 97,000

Installment Contracts Receivable,2010 26,000

Installment Contracts Receivable,2011 22,000

Interest Income 49,000 To record payment of operating expenses

operating Expenses 65,000

Cash 65,000


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adjusting & closing entries,

december 31, 2011 To recognized accrued interest receivable for Dec.31,2011

Accrued Interest Receivable 3,270Interest Income 3,270

To set up deferred gross profit on 2011 Installment Sales 120,000

Cost of Installment Sales 69,600Deferred Gross Profit,2010 50,400Gross profit rate = P50,000120,000=42%

To record realized gross profit on installment sales deferred Gross Profit,2010 10,400

deferred Gross Profit,2011 19,320Realized Gross Profit 29,720

Collections applying t principal2010 sales 26,000 x 40% = 10,4002011 sales 46,000 x 42% = 19,320



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To close realized gross profit account



To close other nominal accounts

Sales 230,000


Cost of Sales 130,400Operating Expenses 65,000


To close result operations for 2011

Income Summary 114, 790Retained Earnings 114,790


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Allocation of Cost of Good Sold Procedure will depend upon the circumstances and info

available.

ILLUSTRATION:

Cash sales P150,000

Charge Sales 300,000

Installment Sales 750,000

Mer Inv, jan1 120,000

Purchases 725,000

Freight In 30,000Repossessed Merch 35,000

Mer Inv, Dec 31 130,000


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Defaults and repossessions

repossessed merch subsequently sold after

incurring reconditioning costs and at a normal profitmargin.

PROCEDURES:

Record the repossessed merchandise in an appropriate

inventory account at its fair value

Cancel uncollected installment receivable balance of the

defaulted contract.

Write-off the balance of the deferred gross profit relating

to the above receivable.

recognize the resulting gain or loss on repossession.


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Installment Contract Recceivable, 2011P2,000

Gross Profit Rate,2011 Sales 30%

Estimated market value of reposses merchandise

P1,200

Loss on Repossession

FMV of repossessed merchandise1,200

Less unrecovered cost

Installment contract Receivable 2,000

Less deferred Gross profit(30%x2,000) 600 1,400


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2011

Apr 30 Repossessed Merchandise 1,200

Deferred Gross Profit,2011 600Loss on Repossession 200

Installment Contract Receivable,2011

2,000

To record repossession assuming

periodic inventory is made

Reconditioning cost which relate to repossessedmerchandise should be charged to Repossessed

Merchandise Account.

Perpetual

repossessed property is debited toMerchandise Inventor re ossessed Account


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repossession

On the date of repossession, record therepossessed merchandise in an appropriate

account with a corresponding credit to loss on

repossession.

after the gross profit rat is established at the

end of the period, the installment contract

receivable balance of the defaulted contract and

the related deferred gross profit are close toLoss on Repossession. The realized Gross profit

is determined based on collection received prior

to the defaults.


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TRADE-INS

TRADE IN VALUE IS EQUAL TO ACTUAL

VALUE

Assume that on april 1, 2011, the Motor

sales Company sells a car for an

installment price of P145,000. the car costs100,000. the customer is allowed a trade-in

value of 45,000 for his old car. He makes a

downpayment of 40,000 and a balance tobe paid in 12 equal installments is 5,000

each. It is estimated that the old car can be

sold for 70,000 after incurring


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Trade-in value allowed to customer

P45,000

Less Net Realizable Value of merchandise trade-in:

estimated resale value 70,000

Less Reconditioning cost 11,000

normal profit margin(20%x70,000) 14,000

45,000

Difference

entry to record the sale

Merchandise Inventory Traded-in 45,000

Cash 40,000installment Contract Receivable 60,000

Installment Sales

145,000

perpetual


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TRADE-IN VALUE IS GREATER THAN NET

REALIZABLE

Assume that a stereo component with a cost of 12,000 is

sold for 17,000. a used stereo is accepted as a trade-in ata valuation of 6,000. the seller expects to spend 250 to

recondition the used merchandise before reselling it for

5,000. the seller expects a 15% profit from sale of the

used merchandise._______________________________________________

_____

Trade-in value allowed to customer

P6,000less NRV of the merchandise traded in;

estimated resale value 5,000

less reconditioning cost 250

normal profit margin(15%x5,000) 750 4,000


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Over allowance on Trade-in account, Perpetual

Merchandise inventory 4,000

over allowance on Trade-In 2,000

Installment Contract Receivable 11,000

Installment Sales 17,000

_______________________________________________

_____

Installment sales P17,000

Less over allowance 2,000

Net installment sales 15,000

Less Cost of Ins sales 12,000

Gross profit 3,000

GP rate (3,00015,000)

*%computing realized GP


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over allowance is treated as reduction

from installment sales account,

perpetual

Merchandise Inventory Traded-in 4,000

Installment Contract Receivable

11,000

Installment sales

15,000

*under allowance= addition to the SP of the new merc


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ALTERNATIVE PROCEDURES for computing

Realized gross Profit for a Series of Years

APPROACH 1

COLLECTION & GP RATE determine the collections during the year ( beg end

balance of installment contracts receivable) total credit of

the year.

gross profit rate = gross profit installment sales Realized GP for each installment period = total collections

X GP rate

APPRAOCH 2 DEFERRED GP BEFORE & AFTER

ADJUSTMENT

GP recognition adjustment, any decreased in the bal of

the Deferred GP = realized GP

balance of adj deferred GP = product of GP rate & ending


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ILLUSTRATION

2011

January December

__________________________________________________

_____

Installment Accounts Receivable,2010 P60,000P30,000

Installment Accounts Receivable,2011

70,000

Deferred Gross Profit, 2010 18,00017,400

Deferred Gross Profit, 2011

35,000

Installment sales 2011

A h 1 2010 2011


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Approach 1 2010SALES

2011

SALES

Installment contracts receivable,

Jan1

60,000 100,000

Less Installment contracts

Receivable

30,000 70,000

Total credit for representing theperiod

30,000 30,000

Less credit representing

repossession

2,000

Credit representing collections 28,000 30,000

Multiply by gross profit rate 30% 35%


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2010: Deferred gross profit, jan 1 18,000 =30%

installment contract receivable,jan1 60,000

2011: Deferred gross profit,b4 adj,Dec31 35,000 =

35%

installment sales 100,000

*repossession in 2011 of CGS, the deferred GP relating tothe unpaid balance of the repossessed merchandise

should be added back to the deferred GP bal before adj at

the end of the period.

2010 2011


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Approach 22010

SALES

2011

SALES

Deferred GP before

adjstment,Dec31

17,400 35,000

Less Deferred GP, Dec31(installment Contract receivable X

GP rate)

2010: P30,000 X 30%

2011: P70,000 X 35%

9,000

24,500

Realized Gross Profit 8,400 10,500

Fely Sales Corporation


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Fely Sales Corporation

statement of Comprehensive

income

Year Ended December 31,2011

(Installment Sales not shown)

sales 230,000

Cost of Good sold 130,400

GP on reg sales 99,600

add realized GP on installment sales 29720

total GP 129,320

Operating Expenses 65,000

Operating Income 64,320

Add interest Income 50,470

Net Income 114,790


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Computation of Realized GP on Installment Sales

2,010.00 2,011.00

Installment Sales 100,000.00 120,000.00

Cost of Installment Sales 60,000.00 69,600.00GP on installment sales 40,000.00 50,400.00

GP rate 40% 42%

Collections in 2011 applying to principal 26,000.00 46,000.00

Realized GP 2011

2010 installment sales 10,400.00

40%X26,000


42%X46,000

Total 29,720.00


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ASSETS

Current Assets

Installment Contract Receivable:

2010 Sales 35,000.00

2011 Sales 74,000.00 109,000.00

LIABILITIES

Noncurrent Liability

Deferred gross profit, 2010 14,000.00

Deferred gross profit, 2011 31,080.00 45,080.00


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ESTATE

CASUAL SALES ILLUSTRATIONAssume that on October 1, 2011 Mr.

Marco Ruiz for sold for 100,000 a parcel

of land acquired for 60,000. the contractof sale called for a down payment of

20,000 and the issuance of a note for the

balance. Payment of the balance entails24 monthly installment of 4,723.79 each

starting on Nov. 1, 2011. the interest is

the annual rate of 36% and is applied to


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TABLE OF PAYMENTS FOR 2011

Appying to Appying to Unpaid

Interest Principal Principal

1-Oct 100,000

1-Oct 20,000.00 20,000.00 80,000.00

1-Nov 4,723.79 2,400.00 2323.79 77,676.21

2-Nov 4,723.79 2,330.29 2393.5 75,282.71

Date Collections

1-Oct Cash 20,000.00


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,

Notes Receivable 80,000.00

Land 60,000.00

Deferred Gain on Sale of land 40,000.00

To record sale of Land

1-Nov Cash 4,723.79


Interest income (3%X80,000) 2,400.00To record monthly collection

and the recognition of interest income

earned in October

1-Dec Cash 4,723.79


Interest Income(3%X77676.21) 2,330.29

To record monthly collection

and the reco nition of interest income


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ADJUSTING ENTRIES

Accrued Interest Receivable 2,258.48

Interest Income(3%X75,282,71) 2,258.48To recognized accrued interest

for December

Deferred Gain on Sale of Land 9,886.92Realized gain in sale of land 9,886.92

To record the realized gain in 2011

Collections Applying to principal 24,717.29X GP rate(40,000/100,00) 40%

Reallized Gain 9,886.92


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INSTALLMENT SALE OF REAL ESTATE BY

A DEALER

The entire contract price applicable to the installmentsale is reported as revenue on the year the sale is

recorded.

cost of sales including future improvement costs are

charged to income of the current accounting period.

gross profit is deferred and recognized as income if

payments of principal are received on the installment

contract receivable. interest at the estate contract rate is recorded as

income when received, and the balance of the

deferred gross profit is deducted from related

installment contracts receivable in the balance sheet.


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ILLUSTRATION - FilEstate Realty, Inc in 2011

Total Selling price of lots 1,000,000.00

Total cost of lots:

Acquisition cost 150,000.00

Improvement cost 450,000.00 600,000.00

Gross Profit 400,000.00

Sales made during the year(lot no.1) 35,000.00

collections during the year including int of 5,0 12,000.00


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a) To record the acqui s i tion cost and the improvement cost of the

Land 150,000.00

Improvement Co 450,000.00Cash 600,000.00

b) To record ins ta l lment sa les for the pe riod

Installment Contract Receivable 35,000.00

Installment Sales 35,000.00

c) To record the rel ated cos t of ins ta l lment sa les (60%X35,000)Cost of installment sales 21,000.00

Land 5,250.00

Improvement Cost 15,750.00


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total Percantag Allocated

to total Cost

Acquisition cost 150,000.00 25% 5,250.00

Improvement cost 450,000.00 75% 15,750.00Total 600,000.00 100% 21,000.00

d) to record collection


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Cash 12,000.00

Installment Contracts Receivable2011 7,000.00

Interest Income 5,000.00

YEAR END ADJUSTING ENTRIES

e) To set up deferred GP

Installment sales 35,000.00

Cost of Installment sales 21,000.00Deferred Gross profit 14,000.00

GP rate = 14,000/35,000 = 40%

f) to recognized GPDeferred Gross Profit 2,800.00

Realized gross Profit 2,800.00

collection applying to principal 7,000.00

GP rate 40%

2,800.00


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FINANCIAL STATEMENT PRESENTATION

Assets

Merchandise Inventory

Land 144,750.00Improvement Cost 434,250.00 579,000.00


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StrawHat Comp sells appliances on the installment basis.

Below are the info.

2012 2011

Installment sales 750,000.00 600,000.00

Cost of sales 450,000.00 375,000.00

Collectiions on:


2011 installment sales 180,000.00 240,000.00

the realized gross profit in 2012 collections of 2012

installment sales was


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realized GP in 2012P275,000 X 40%

110,000

(750,000-450,000)/750,000 = 40%

installment sales - report

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