Installment Sales and Consignment Sales

LEARNING OUTCOMES:

At the end of the chapter, the student will be able to:

 Differentiate accounting for installment and consignment sales

 Compute remittance from the consignee, net income resulting from consignment transactions
and value of merchandise in the hands of the consignee
 Determine realized gross and profit and deferred gross profit balances using installment method
of accounting
 Journalize installment sales transactions with trade ins
 Journalize defaults and repossession and compute gain or loss on repossession to be
represented in the income statement
 Allocate cost of goods sold to regular sales and installment sales

NATURE OF INSTALLMENT SALES

Installments Sales is a type of sales where the enterprise offers an extended credit to the buyer
or accepts a promissory note from the buyer that bears either no interest or with interest below market
interest rate. In reality, installment sales contract always include interest either expressed or implied.
The problem now is what amount of revenue should the enterprise recognized? Normally, the amount
of consideration received or receivable is the amount of revenue. But since the cash inflow is deferred in
installment sales, PAS No. 18 provides that:

Revenue should be measured at the Fair Value of the consideration received or receivable, net
of trade discounts or volume rebates allowed by the enterprises. In installment sales, the fair
value of consideration is determined by discounting all future receipts using an imputed interest
rate, which is:

a) The prevailing rate for a similar instrument of an issuer with a similar credit rating; or
b) A rate of interest that discounts the nominal amount of the instrument to the current
sales price of the goods.

ILLUSTRATION:

On January 1, 2015, Toyota Motors offer a special cash price of P750,000 for a 2015 Toyota Innova
costing P500,000 for all purchases made on or before December 31, 2015 or a zero down payment with
extended credit terms of 24 monthly installments of P34,000.

The entry to record the transaction is:

At the date of sale:

January 1, 2015

Installment Receivable-2015 (P34,000 x 24) 816,000

Installment Sales 750,000
Unearned interest revenue
66,000 Cost of Installment Sales 500,000
Inventory
500,000
At year end:

Installment Sales 750,000

Cost of Installment sale 500,000
Deferred Gross profit-2015
250,000

To recognized realized profit assuming monthly collections of P34,000 was received for 12 months.

Deferred gross profit-2015 125,000

Realized profit 125,000
GPR = 250,000/750,000 = 33 1/3 %
Realized profit = Collections on principal x GPR
= 375,000 x 33 1/3 %
= P125,000

Total collections (P34,000 x 12) P 408,000

Principal (750,000 x ½) 375,000
Applied to interest P
33,000

To amortize Unearned interest revenue

Unearned interest revenue 33,000
Interest revenue
33,000

The difference between the cash price and the aggregate amount of expected future receipt is
interest or financing cost which is recognized over a period of two years on a time proportion basis. The
interest portion of the contract payment is recognized as revenue in the period which cash is received,
and the balance of the payment is treated as collection on the installment receivable.

INSTALLMENT METHOD

The deferred gross profit is recognized as realized profit using the installment method of revenue
recognition.

Installment method. The installment method of recognizing profit requires determination of gross profit
rate for the sale of each year. The gross profit rate is then multiplied by the collection on installment
receivable (principal) to arrive at the profit to be realized.

METHODS OF DETERMINING GROSS PROFIT RATE:

Year of Sale
GPR = Gross Profit / Installment Sales

Year after Sale

GPR = Deferred Gross Profit-beg. / Installment Receivable-beg.

COMPUTATION OF REALIZED GROSS PROFIT

ILLUSTRATION: Collection is given

Presented below are the information taken from the books of LG Corp.

2014 2015 2016

Sales:
Regular P 250,000 P 380,000
 P 550,000 Installment Sales 365,500
417,800 610,750 Cost of Goods sold:
Regular
175,000 258,400 357,500 Installment Sales
233,920 254,858 366,450 Collections on account form:
Regular Sales
200,000 280,000 450,000 Installment
sales – 14 165,500 120,000 60,000
Installment sales – 15 217,800 110,000
Installment sales – 16 310,750

Required: Determine the total realized profit for 2016.

1) Determine the GPR for each account

2014 (365,500 – 233,920) / 365,500 36%
2015 (417,800 – 254,858) / 417,800 39%
2016 (610,750 – 366,450) / 610,750
40%
2) Determine the realized profit
2014 (60,000 x 36%) P 21,600
2015 (110,000 x 39%)
42,900 2016 (310,750 x 40%)
124,300 Total realized profit on installment sales
P 188,800 Add: Realized profit on regular sales
192,500 Total Realized profit in 2016
P 381,300

ILLUSTRATION: Collection is not given

The following data were taken from the records of Samsung Company, before the accounts are closed
for the year 2016 The Company sells exclusively on the installment basis and use the installment method
of recognizing profit.

2014 2015 2016

Installment sales P1,200,000 P1,320,000
P1,260,000 Cost ratio 60%
62% 61% Operating expenses 100,000
94,000 104,000 Balances as of Dec. 31:
Inst. Receivable – 2014 660,000
330,000 84,000 Inst. Receivable – 2015
750,000 276,000 Inst. Receivable – 2016
714,000 Deferred gross profit – 2014
132,000 132,000 Deferred gross profit – 2015
285,000 285,000

In 2016, a customer defaulted and the company repossessed the merchandise with an estimated market
value of P20,000 after cost of reconditioning estimated at P4,000. The merchandise had been purchased
in 2014 by a customer who still owed the company P25,000 at the date of repossession. The entry made
to record the repossession was:

Repossessed merchandise 25,000

Installment Receivable 25,000

Required: Determine the following (a) Total collection by account and (b) the Total Realized profit
SOLUTIONS:

2014 2015 2016

Installment Receivable, Jan 1, 2016 P330,000 P 750,000
Sales-2016
P1,260,000 Installment Receivable, Dec 31, 2016 84,000
276,000 714,000 Decrease in Installment Receivable P 246,000
P 474,000 P 546,000 Credits to receivable not representing
collection
-25,000 0 0 (a) Total collections
P 221,000 P 474,000 P 546,000 X GPR
40% 38% 39% Realized gross profit
P 88,400 P 180,120 P 212,940 (b) Total
realized profit P 481,460

Or
2014 2015 2016
Deferred gross profit, Jan. 1, 2016 P 132,000 P 285,000
P491,400 Cancelled profit during the period
due to repossession -10,000
Deferred gross profit-ending bal* -
33,600 -104,880 -278,460 Realized Profit P
88,400 P180,120 P 212,940

Deferred Gross Profit, end = Installment Receivable, end x GPR

IR, Dec 31 GPR DPG-end

Accounts:
2014 P84,000 40%
P33,600 2015 276,000 38%
180,120 2016 714,000
39% 278,460

REPOSSESSIONS

Repossession is recorded at its Net Realizable Value (NRV) or its unrecovered cost whichever is lower.
Net realizable value is the estimated selling price in the ordinary course of business less the sum of
estimated costs of reconditioning, the estimated costs necessary to make the sale, and normal profit.
The net realizable value is then compared with the unrecovered costs to determine the gain or loss on
repossession.

Net Realizable value P00

Unrecovered cost (unpaid balance x cost ratio 000
Loss on repossession
(P0)

 If NRV of the merchandise is equal to its Unrecovered cost, no gain or loss on repossession
 If NRV is less than its unrecovered cost, there is loss on repossession
 If NRV is greater than unrecovered cost, there is gain on repossession but the gain is deferred
until the merchandise is sold. This means that the gain on repossession is not recorded in the
books, therefore, not reflected in the income statement. In this case, the repossessed
merchandise is recorded at its unrecovered cost.

Pro-forma entry to record repossession:

Repossession 000
Loss on repossession 000
Deferred gross profit
 000 Installment receivable (unpaid balance)
000

ILLUSTRATION. Installment sales resulting to repossession

On March 2, 2015, Toyota Motors sells Innova car costing P576,000 for P960,000. In 2015 a total of
P130,000 is collected on the contract of which P30,000 represents finance charges. After making
religious payments in 2015, the customer defaulted and the vehicle was repossessed. Toyota Motors
estimated that the market value of the repossessed vehicle is 80% of its unrecovered cost. The company
uses the installment method in recognizing profit.

SOLUTIONS:

1st Determine the gross profit rate

Installment Sales P
960,000 Less: Cost of installment sales
576,000 Gross profit
384,000 Gross profit rate 384,000/960,000
40%

2nd Determine the unrecorded cost (unpaid balance x cost ratio)

Installment Receivable P
960,000 Less: collections 130,000-30,000
100,000 Balance, end of 2015
P 860,000

3rd To arrive at the gain or loss on repossession, compare thee unrecovered cost with the
recoverable amount or net realizable value of the repossessed merchandise.

Installment Receivable P 960,000

Less: Payments on principal
100,000 Unpaid defaulted account
860,000 Deduct: Cancelled profit (860,000 * 40%)
344,000 Unrecovered costs
516,000 Recoverable amount (80% * 516,000)
412,800 Loss on repossession
P 103,200

TRADE IN

Sometimes companies accept second hand item as initial payment for the item sold and this is measured
at its net realizable value. An allowance is normally allowed on the trade in item and this amount is
compared with its net realizable value to arrive at over allowance or under allowance on trade in.

 If NRV is equal to Allowance on trade in, there is no over or under-allowance on traded

in.
 If NRV is greater than the allowance on trade in, there is under-allowance. Under-
allowance on trade in is treated as addition to installment sales.
 If NRV is lesser than allowance on trade in, there is over-allowance. Over allowance on
trade in is deducted from installment sales.

ILLUSTRATION: Installment Sales with trade in

Nissan Company sells new automobiles. A new Escapade costing P700,000 was sold on October 1, 2015
for P1,060,000; a 2012 Toyota Revo was accepted as down payment and an allowance of P300,000 was
accepted on the agreed trade in. The balance is payable in 36 equal monthly installments of P25,500
starting November 1, 2015, Nissan Company anticipates selling price on reconditioned automobile of
P350,000 after reconditioning it for P50,000. Selling costs equal to 5% of selling price is also anticipated.
The gross profit for reconditioned automobiles is expected to be 20%.

REQUIRED: Determine the following

1) Entry to record the sale

2) Gross Profit Rate

SOLUTIONS:

NRV = Est. Selling price 350,000

Less: Reconditioning costs P 50,000
Cost to sell 17,500
Normal profit
70,000 137,500

NRV P 212,500

Allowed trade in value 300,000

Over allowance P 87,500

1) Entry to record the sale, Oct. 1, 2015:

Installment Receivable-2015 760,000

Trade In 212,500
Installment Sales
972,500

The over allowance on trade-in is treated as reduction from installment sales.

Installment Sales P1,060,000

Over allowance on trade In
87,500 Adjusted installment sales P
972,500 Cost of Installment Sales
700,000 Gross profit
P 272,500

2) Gross Profit Rate = P272,500/972,500 = 28.02%

ILLUSTRATION: Installment Sales with trade-in and repossession

On March 2, 2015, Ford Philippines sells a Ford Escape car costing P620,280 for P960,000. A used car is
accepted as down payment, P250,000 being allowed on the trade in and the balance is payable in 20
months plus 1% a month on diminishing balance starting April 2, 2015. The used car can be resold for
P190,000 after reconditioning costs of P10,000. The company’s gross profit rate on the sale of used car is
15%. After making religious payments in 2015, the customer defaulted and the vehicle was repossessed
on January 5, 2016. Toyota Motors estimated that the market value of the repossessed vehicle is
P300,000 after reconditioning costs of P25,000. The gross profit rate of 15% is also applicable to
repossessed cars. The company uses the installment method in recognizing profit.

Required: Determine the following:

a) Entry to record installment sales

b) Realized profit in 2015
c) The amount of cancelled profit
 d) Gain or loss on repossession
e) Entry to record repossession

SOLUTIONS:

Sales price P 960,000

Trade in allowance
250,000 Receivable balance
P 710,000 Estimated selling price – old car
P 190,000 Less: Reconditioning costs P
10,000 Normal gross profit (15%)
28,500 38,500 Net realizable value
151,500 Trade in allowance-old car
250,000 Over allow. (Adjustment to sales)
98,500

a) Entry to record the sales:

Installment Receivable-2015 710,000

Trade in 151,500
Installment sales
861,500 (960,000 – 98,500 = 861,500)

Gross profit rate:

Installment sales 861,500
Costs of Installment sales 620,280
Gross profit 241,220
GPR = 241,220/861,500 = 28%

b) Realized profit in 2015:

Trade in (NRV) P 151,500

Collections (710,000 x 9/20)
319,500 Total collections
417,000 X GPR
28% Realized gross profit
P 131,880

Amortization schedule from date of sale to December 31, 2015 is shown below:

Date Items Principal Interest Balance

Mar 2 960,000-250,000 710,000
4/2 1st Instalment 35,500 7,100 674,500
5/2 2nd Installment 35,500 6,745 639,000
6/2 3rd Installment 35,500 6,390 603,500
7/2 4th Installment 35,500 6,035 568,000
8/2 5th Installment 35,500 5,680 532,500
9/2 6th Installment 35,500 5,325 497,000
10/2 7th Installment 35,500 4,970 461,500
11/2 8th Installment 35,500 4,615 426,000
12/2 9th Installment 35,500 4,260 390,500
Total P319,500

Repossession: January 5, 2016

Unpaid balance (710,000-319,500) 390,500

X GPR
28% Cancelled profit P
109,340

Unpaid balance P 390,500

X cost ratio
72% Unrecovered cost
281,160 Net realizable value of repossessed car:
Est. Sales price P 300,000
Less: Reconditioning costs
25,000 Normal profit (15%)
45,000 230,000 (a) Loss on repossession
P 51,160

b) Entry to record repossession

Repossession 230,000
Deferred gross profit 109,340
Loss on repossession 51,160
Installment receivable
390,500

I. Assessment

 Recitations

 Quizzes

 Homework