INSTALLMENT SALES

Problem 1. On July 1, 2010, an entity sold a television set at an instalment price of P100,000. The
entity received P10,000 and an old television set with trade-in value of P30,000 as the down payment.
The fair value of the trade-in TV is P50,000. The agreement provides that the balance will be paid in
equal quarterly installment starting September 30, 2010. The entity manufactured the television set
at a cost of P90,000. The customer of the entity defaulted on the payment of fourth quarterly
installment which resulted to repossession of the television set with appraised value of P10,000. On
August 31,2011, the repossessed television set was resold by the entity at a cash price of P25,000
after being reconditioned at a cost of P6,000.
1. What is the realized gross profit to be recognized by the entity for the year ended December
31, 2010?
Answer: P17,500
Trade-in allowed P30,000
FMV 50,000
Over(Under) Allowance P(20,000)

Old Installment Sales P100,000

Under Allowance 20,000
Adjusted Installment Sales P120,000

Adjusted Installment Sales P120,000

Cost of Installment Sales 90,000
Gross Profit P30,000
Gross Profit Rate 25%

Downpayment P40,000
Two Quarterly Installment 30,000
Collections P70,000

Collections GPR RGP Balance GPR DGP

2010 P70,000 25% P17,500 P30,000 25% P7,500

2. What is the loss on repossession to be recognized by the entity for the year ended December
31, 2010?
Answer: P1,250
Appraised Value P10,000
Less: Unrecovered cost
Unpaid Balance P15,000
Less: DGP (3,750) (11,250)
Loss on repossession P1,250
3. What is the realized gross profit to be recognized by the entity for the year ended December
31, 2010?
Answer: P12,750

Collections GPR RGP Balance GPR DGP

2011 P15,000 25% P3,750 P15,000 25% P3,750

Cash Price P25,000

Reconditioning cost (6,000)
Appraised Value (10,000)
 Gain P9,000

P9,000
P3,750
P12,750

PROBLEM 2.

On January 1, 2017, Honda Makati Inc. sold a car at a price of P3,400,000. The terms of the
contract provides that P400,000 cash is payable at contract signing and a used car will be received 3
days after as additional down payment from the buyer. The trade-in value allowed on the used car is
P1,000,000. On the same date, the buyer issued a 10% interest bearing note for the balance of the
price. The note is payable in 4 equal semi-annual installments every June 30 and December 31. The
used car has an estimated selling price of P1,500,000 after reconditioning cost of P100,000 with a
normal profit of 20%. The production cost of the car is P2,450,000.

What is the realized gross profit for the year ended December 31,2017? P 810,000

SOLUTION:

Trade-in Value Allowed P 1,000,000

Less: Net Realizable Value (NRV)

Estimated Selling Price P 1,500,000

Less: Reconditioning Cost (100,000)

Normal Profit (P1,500,000 x 20%) (300,000) (1,100,000)

Over(Under) allowance (P 100,000)

Installment Price P 3,400,000

Add: Under allowance 100,000

Adjusted Installment Price 3,500,000

Less: Cost of Sales (Production costs) (2,450,000)

Gross Profit 1,050,000

Divide: Adjusted Installment Price 3,500,000

Gross Profit Rate (GPR) 30%

Adjusted Installment Sales P 3,500,000

Less: Downpayment (Cash) (400,000)

Additional Downpayment - Car (NRV) (1,100,000)

Installment Receivable 2,000,000

Divide: Installment Period 4

Quarterly Installment Receivable 500,000

Interest Income Outstanding

Date Cash Collection Principal Payment
(10%) Balance

January 1, 2017 P 3,500,000

January 1, 2017 P 1,500,000 0 P 1,500,000 2,000,000

June 30, 2017 700,000 200,000 500,000 1,500,000

December 31, 2017 650,000 150,000 500,000 1,000,000

June 30, 2018 600,000 100,000 500,000 500,000

December 31, 2018 550,000 50,000 500,000 0

P 3,700,000 200,000 P 3,500,000

Deferred
Realized
Cash Gross
Date GPR Gross Profit Balance GPR
Collections Profit
(RGP)
(DGP)

June 30, 2017 2,200,000 x 30% = 660,000 1,500,000 30% 450,000

December 31,2017 500,000 x 30% = 150,000 1000,000 30% 300,000

June 30, 2018 500,000 x 30% = 150,000 500,000 30% 150,000

December 31, 2018 500,000 x 30% = 150,000 30%

3,700,000 1,110,000

PROBLEM 3.

On January 1, 2020, Abenson Inc. sold a TV Set at a price of P100,000. The contract provides that
10% is payable on the date of contract and an old cellphone will be received as additional down
payment within 10 days. The old cellphone has a trade-in value of P30,000. On the same date,
Abenson Inc. received a 1-year 10% interest bearing note payable in four equal quarterly installments
every March 31, June 30, September 30, and December 31 for the balance of the price. The interest
will be based on the outstanding balance of the note. At the date of the contract, the old cellphone
has an estimated selling price of P60,000 after reconditioning cost of P4,000 with normal profit of
10%. The production cost of TV set is P84,000.

Abenson was able to collect the installment due and its corresponding interest on March 31 and
June 30. However, the buyer defaulted on the installment due on September 30 but was able to pay
the interest for that period. It resulted to the repossession of the TV set. The fair value of the TV on
the date of repossession is P15,000. On November 1, 2020, the repossessed TV set was resold at a
selling price of P19,000 after being reconditioned at a cost of P3,375.

What is the Abenson’s net income for the year ended December 31, 2020? P 55,645

SOLUTION:

Trade-in Value Allowed P 30,000

Less: Net Realizable Value (NRV)

Estimated Selling Price P 60,000

Less: Reconditioning Cost (4,000)

Normal Profit (P60,000 x 10%) (6,000) (50,000)

Over(Under) allowance (P 20,000)

* Over allowance is a reduction to installment price/sales while under allowance is an addition to

installment price/sales.

* Trade-in Allowed > NRV = Over allowance

Trade-in Allowed < NRV = Under allowance

Installment Price P 100,000

Add: Under allowance 20,000

Adjusted Installment Price 120,000

Less: Cost of Sales (Production costs) (84,000)

Gross Profit 36,000

Divide: Adjusted Installment Price 120,000

Gross Profit Rate (GPR) 30%

Adjusted Installment Sales P 120,000

Less: Downpayment (P120,000 x 10%) (12,000)

Additional Downpayment - Cellphone (NRV) (50,000)

Installment Receivable 58,000

Divide: Installment Period 4

Quarterly Installment Receivable 14,500

Deferred
Realized
Gross
Date Cash Collections GPR Gross Profit Balance GPR Profit
(RGP)
(DGP)

March 31 76,500 x 30% = 22,950 43,500 30% 13,050

June 30 14,500 x 30% = 4,350 29,000 30% 8,700

September 30 14,500 x 30% = 4,350 14,500 30% 4,350

December 31 14,500 x 30% = 4,350 30%

120,000 36,000

Interest Income Outstanding

Date Cash Collection Principal Payment
(10%) Balance

January 1 P 120,000

January 1 P 62,000 0 P 62,000 58,000

March 31 20,300 5,800 14,500 43,500

June 30 18,850 4,350 14,500 29,000

September 30 17,400 2,900 14,500 14,500

December 31 15,950 1,450 14,500 0

Fair Value of Repossessed P 15,000

Less: Unrecovered Cost

Unpaid Balance (P 29,000 + 1,450) P 30,450

Less: Deferred Gross Profit (P 30,450 x 30%) (9,135) (21,315)

Income (Loss) on Repossession (P 6,315)

Selling Price P 19,000

Less: Fair Value on date of Repossession (15,000)

Reconditioning Cost (3,375)

Gain (Loss) on Reselling P 625

Realized Gross Profit (22,950 + 4,350) 27,300

Loss on Repossession (6,315)

Interest Income 34,035

Gain on Reselling 625

Net Income 55,645