INSTALLMENT SALES
Part II
Learning Objective
• Allocating cost of goods sold in different cases
• Accounting treatment for defaults and
repossessions
• Accounting treatment for trade-ins
Allocation of cost of goods sold
A company selling on the installment plan will normally have cash
sales and sales on short-term credit. If the company uses periodic
or physical inventory method in the determination of cost, then
the problem of proper allocation of the total cost of goods sold
among the different types of sales will arise. The procedure to be
followed in allocating the cost of goods sold will depend upon the
circumstances and information available.
There can be only 3 case:
1. The gross profit rate is given.
2. Based on cash sales
3. No additional facts is given.
Allocation of cost of goods sold
Illustration: Assume that WILL Company sells merchandise for cash,
on short-term and on the installment basis. The company employs
the periodic inventory method in determining cost.
At the end of 2023, the following information are available:
Cash sales P150,000
Charge sales 300,000
Installment sales 750,000
Merchandise Inventory, beginning 120,000
Purchases 725,000
Freight-in 30,000
Repossessed merchandise 35,000
Merchandise Inventory, Ending 130,000
Cost of Sales?
Cost of sale
To compute cost of sale:
Merchandise Inventory, January 1 120,000
Add: Purchases P725,000
Freight in 30,000
Repossessed Merchandise 35,000 790,000
Cost of goods available for sale 910,000
Less: Merchandise Inventory, December 31 130,000
Cost of goods sold P780,000
Case 1: The gross profit rate is given.
*Assume that WILL Company’s gross profit rate on selling price is
25% on cash sales, 35% on charge sales, and 37% on installment
sales.. What is the allocation of cost of goods sold?
Cash sales=150,000; Charge Sales=P300,000; Installment=P750,000
Cost of goods sold=P780,000
Type Amount GP Gross Allocation
Of sale of sales Rate Profit of Cost
Cash P150,000 25% P37,500 P112,500
Charge 300,000 35% 105,000 195,000
Installment 750,000 37% 277,500 472,500
P1,200,000 P420,000 P780,000
Case 2: Based on cash sales
Assume that the selling prices for charge sales and installment
sales of WILL Company are higher than cash sales price by 20% and
25%, respectively. What is the allocation of cost of goods sold for
each type of sales?
Cash sales=150,000; Charge Sales=P300,000; Installment=P750,000
Cost of goods sold=P780,000
Type Amount Amount base d Ratio to Allocation
Of sale of sales on cash sales Total of Cost
Cash P150,000 P150,000 150/1,000 P117,000
Charge 300,000 250,000 250/1,000 195,000
Installment 750,000 600,000 600/1,000 468,000
P1,200,000 P1,000,000 P780,000
Case 3: No additional facts is given.
Cash sales=150,000; Charge Sales=P300,000; Installment=P750,000
Cost of goods sold=P780,000
What is the allocation of cost of goods sold for each type of sales?
Type Amount Ratio to Allocation
Of sale of sales Total of Cost
Cash P150,000 150/1,200 P97,500
Charge 300,000 300/1,200 195,000
Installment 750,000 750/1,200 487,500
P1,200,000 P780,000
Accounting treatment for defaults and
repossessions
If a customer defaults on an installment contract and no further
collections can be made, the seller may repossess the property
sold to satisfy the remaining indebtedness. Normally, the
repossessed merchandise is subsequently sold after incurring
reconditioning costs and at a normal profit margin.
The following procedures to record repossession may be used.
1. Record repossessed merchandise in an appropriate inventory
account at its FAIR VALUE.
2. Cancel the uncollected installment receivable balance of the
defaulted contract.
3. Write off the balance of the deferred gross profit relating to
the above receivable.
4. Recognize gain or loss on repossession, if any.
Accounting treatment for defaults and
repossessions
FAIR VALUE OF REPOSSESSED MERCHANDISE
=ESTIMATED SELLING PRICE LESS RECONDITIONING COST AND
NORMAL PROFIT MARGIN
FAIR VALUE=MARKET VALUE=NET REALIZABLE VALUE
Accounting treatment for defaults and
repossessions
Illustration: Assume the following data with respect to a default
and repossession on January 1, 2023:
Installment contract receivable-2015 P40,000
Gross profit rate on installment sales on 2015 30%
Estimated selling price of repossessed item P55,000
Reconditioning cost 6,000
The company usually makes a gross profit of 20% on resale.
How much is the recognized gain or loss on repossession?
Accounting treatment for defaults and
repossessions
Fair market value of repossessed item:
Estimated Selling price P55,000
Less: Reconditioning cost 6,000
Normal profit margin 11,000
Fair value P38,000
Fair value of repossessed merchandise P38,000
Less unrecovered cost:
Installment contract receivable 40,000
Less: DGP (40K*30%) 12,000 28,000
Gain on repossession P10,000
Accounting Treatment for Trade ins
Companies using installment sale plans sometimes find it
necessary to accept merchandise traded –in as part of the down
payment.
3 Cases::
1. Trade-in value is equal to net realizable value
2. Trade-in value is greater than net realizable value
3. Trade-in value is less than net realizable value
Where as: NET REALIZABLE VALUE
=ESTIMATED SELLING PRICE LESS RECONDITIONING COST AND
NORMAL PROFIT MARGIN
FAIR VALUE=MARKET VALUE=NET REALIZABLE VALUE
Trade-in value is equal to net realizable value
Illustration: Assume that on December 31, 2023, the WQC Motor
Sales Company sells a car for an installment price of P125,000. The
car costs P100,000. The customer is allowed a trade in value of
P45,000 for his old car. He makes a down payment of P40,000 and
the balance to be paid in eight equal monthly installments is
P5,000 each. It is estimated that the old car can be sold for P70,000
after incurring reconditioning expenses estimated at P11,000. The
company usually makes a gross profit of 20 percent on resale.
Net realizable value of trade in merchandise?
Answer: P45,000
Gross profit based on sale?
Answer: (25/125) 20%
Realized gross profit in 2023?
Answer: (85,000*20%) 17,000
Trade-in value is greater than net realizable value
Illustration: Assume that on December 31, 2023, the WQC Motor
Sales Company sells a car for an installment price of P125,000. The
car costs P100,000. The customer is allowed a trade in value of
P45,000 for his old car. He makes a down payment of P40,000 and
the balance to be paid in eight equal monthly installments is P5,000
each. It is estimated that the old car can be sold for P70,000 after
incurring reconditioning expenses estimated at P16,000. The
company usually makes a gross profit of 20 percent on resale.
Net realizable value of trade in merchandise?
Answer: P40,000
Gross profit based on sale?
Answer: (20/120) 16.67%
Realized gross profit in 2023?
Answer: (80,000*16.67%) 13,336
Trade-in value is less than net realizable value
Illustration: Assume that on December 31, 2023, the WQC Motor
Sales Company sells a car for an installment price of P125,000. The
car costs P100,000. The customer is allowed a trade in value of
P45,000 for his old car. He makes a down payment of P40,000 and
the balance to be paid in eight equal monthly installments is
P5,000 each. It is estimated that the old car can be sold for P70,000
after incurring reconditioning expenses estimated at P6,000. The
company usually makes a gross profit of 20 percent on resale.
Net realizable value of trade in merchandise?
Answer: P50,000
Gross profit based on sale?
Answer: (30/130) 23.08%
Realized gross profit in 2023?
Answer: (90,000*23.08%) 20,227
Exercise
I. Assume that a stereo component with a cost of P12,000 is sold
for P17,000. A used stereo component is accepted as a trade in at a
valuation of P6,000. The seller expects to spend P250 to
recondition the used merchandise before selling it for P5,000. The
seller expects a 15% profit from the sale of the used merchandise.
Questions: 1. Over or under allowance?
2. Gross profit rate?
3. Realized Gross profit after sale?
Exercise
II. Assume that a stereo component with a cost of P12,000 is sold
for P17,000. A used stereo component is accepted as a trade in at a
valuation of P6,000. The seller expects to spend P250 to
recondition the used merchandise before selling it for P10,000. The
seller expects a 15% profit from the sale of the used merchandise.
Questions: 1. Over or under allowance?
2. Gross profit rate?
3. Realized Gross profit after sale?
