INSTALLMENT SALES AND REVENUE FROM CONTRACTS WITH CUSTOMER

(IFRS15)
REVENUE RECOGNITION: Installment Sales and Revenue from Contracts with Customer (IFRS15)
IFRS (PFRS) 15 replace the following standards and interpretations:

 PAS 18 Revenue
 PAS 11 Construction Contracts
 SIC 31 Revenue – Barter Transactions Involving Advertising Services
 PFRIC 13 Customer Loyalty Programs
 PFRIC 15 Agreement for the Construction of Real Estate and
 PFRIC 18 Transfer of Assets from Customers
OBJECTIVE of REVENUE RECOGNITION
The core principle of IFRS (PFRS) 15 is that an entity will recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration (payment) to which the entity expects
to be entitled in exchange for those goods or services.


PFRS 15 contains guidance for transactions not previously addressed (service revenue, contract
modifications)
 PFRS 15 improves guidance for multiple-element arrangements;
 PFRS 15 requires enhanced disclosures about revenue.
REVENUE FROM CONTRACTS WITH CUSTOMERS adopts an asset-liability approach. Companies

Account for revenue based on the asset or liability arising from contracts with customers
Are required to analyze contracts with customers
o Contracts indicate terms and measurement of consideration
o Without contracts, companies cannot know whether promises will be met.
The FIVE-STEP process for REVENUE RECOGNITION
1. Identify the contract with customers.
PFRS 15 defines a contract as an agreement between two or more parties that creates enforceable rights
and obligations and sets out the criteria for every contract that must be met.
2. Identify the separate performance obligations in the contract.
A performance obligation is a promise in a contract with a customer to transfer a good or service to the
customer

3. Determine the transaction price.

The transaction price is the amount of consideration (for example, payment) to which an entity expects
to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties.

4. Allocate the transaction price to the separate performance obligations.

For a contract that has more than one performance obligation, an entity should allocate the transaction
price to each performance obligation in an amount that depicts the amount of consideration to which the
entity expects to be entitled in exchange for satisfying each performance obligation.

5. Recognize revenue when each performance obligation is satisfied.

REVENUE RECOGNITION SITUATIONS:

 Types of Sale of Product Performing a Permitting use of Sale of asset
Transaction from Inventory Service an asset other than an
inventory
Description of Revenue from Revenue from Revenue from Gain or loss on
Revenue Sales Fees or Services interest, rents, disposition
and royalties
Timing of Date of Sale or Services As time passes Date of sale or
Revenue delivery performed or or assets are trade-in
Recognition billable used

INSTALLMENT SALES (SPECIAL REVENUE RECOGNITION) (PAS 18)

1. Gross Profit (GP) is recognized at the time of Sale
- ACCRUAL METHOD
- Ordinary or Regular Sales
- Uses Matching Principle
- Post-sale transactions – record expense, recognize liability (Estimated Liability)
- Doubtful collection – Bad Debt Expense
- COLLECTION is reasonably ASSURED.

2. Gross Profit (GP) – is recognized at the time of Collection

- Collection is NOT reasonably assured
o COST-RECOVERY method – recover first the cost before realizing profit.
o PROFIT-REALIZATION method – Profit is recognized first before recovering the
cost.
- NOT Conservative
o INSTALLMENT method – recovery of both cost and profit.
- RGP = collection – interest x GPR

BASIC PRINCIPLES
On December 1, 2018, D Company sold merchandise to P Corporation for Php 400, 000. Terms of the sales
called for a down payment of Php 120, 000 and the balance is payable in two (2) annual installments of Php
140, 000 beginning December 31, 2019. The cost of the merchandise on D’s books on the date of sale was Php
240, 000. The company’s fiscal year end is December 31.
Determine the following:
1. The gross profit recognized using time of sale or point of delivery recognition of revenue:
2018 2019 2020
a. Php -0- Php 20, 000 Php 140, 000
b. Php 120, 000 Php 40, 000 Php -0-
c. Php 160, 000 Php -0- Php -0-
d. Php 48, 000 Php 56, 000 Php 56, 000
2. The deferred gross profit on December 31 using the time of sale or point of delivery recognition of revenue:
2018 2019
a. Php -0- Php -0-
b. Php 120, 000 Php -0-
c. Php 168, 000 Php 84, 000
d. Php 240, 000 Php 140, 000
3. The unrecovered cost on December 31, using the time of sale or point of delivery recognition of revenue:
2018 2019
a. Php -0- Php -0-
b. Php 120, 000 Php -0-
c. Php 168, 000 Php 84, 000
 d. Php 240, 000 Php 140, 000
4. The gross profit recognized using the time of collection – cost recovery method of recognizing revenue:
2018 2019 2020
a. Php -0- Php 20, 000 Php 140, 000
b. Php 120, 000 Php 40, 000 Php -0-
c. Php 160, 000 Php -0- Php -0-
d. Php 48, 000 Php 56, 000 Php 56, 000
5. The Deferred gross profit on December 31 using the time of collection – cost recovery method of
recognizing revenue:
2018 2019
a. Php -0- Php -0-
b. Php 112, 000 Php 56, 000
c. Php 160, 000 Php 140, 000
d. Php 40, 000 Php 140, 000
6. The unrecovered cost on December 31, using the time of collection – cost recovery method of recognizing
revenue:
2018 2019
a. Php -0- Php -0-
b. Php 120, 000 Php -0-
c. Php 168, 000 Php 84, 000
d. Php 240, 000 Php 140, 000
7. The gross profit recognized using the time of collection – profit recovery method of recognizing revenue:
2018 2019 2020
a. Php -0- Php 20, 000 Php 140, 000
b. Php 120, 000 Php 40, 000 Php -0-
c. Php 160, 000 Php -0- Php -0-
d. Php 48, 000 Php 56, 000 Php 56, 000
8. The unearned/deferred gross profit on December 31, using the time of collection – profit recovery of
recognizing revenue:
2018 2019
a. Php -0- Php -0-
b. Php 120, 000 Php -0-
c. Php 168, 000 Php 84, 000
d. Php 40, 000 Php -0-
9. The unrecovered/deferred cost on December 31, using the time of collection – profit recovery of
recognizing revenue:
2018 2019
a. Php -0- Php -0-
b. Php 120, 000 Php -0-
c. Php 168, 000 Php 84, 000
d. Php 240, 000 Php 140, 000
10. The gross profit recognized using the time of collection – installment sales method of recognizing revenue:
2018 2019 2020
a. Php -0- Php 20, 000 Php 140, 000
b. Php 120, 000 Php 40, 000 Php -0-
c. Php 160, 000 Php -0- Php -0-
d. Php 48, 000 Php 56, 000 Php 56, 000
11. The unearned/deferred gross profit on December 31, using the time of collection – installment sales of
recognizing revenue:
2018 2019
a. Php -0- Php -0-
b. Php 112, 000 Php 56, 000
c. Php 160, 000 Php 140, 000
 d. Php 40, 000 Php -0-
12. The unrecovered cost on December 31, using the time of collection – installment sales method of
recognizing revenue:
2018 2019
a. Php -0- Php -0-
b. Php 120, 000 Php -0-
c. Php 168, 000 Php 84, 000
d. Php 240, 000 Php 140, 000

Problem 1
SM appliance Company uses the installment method of accounting. Pertinent data from the company’s record
show the following:
2017 2018 2019
Installment sales 750, 000 937, 500 900, 000
Cost of installment sales 562, 500 712, 500 630, 000
Deferred gross profit, December 31
2017 141, 250 45, 000 -
2018 - 150, 000 30, 000
2019 - - 195, 000
How much is the total collection during 2019?
What is the total balance of the Installment Accounts Receivable account as of December 31, 2019?
Problem 2
My Home, Inc. sells appliances on installment basis. Below are some of the information from the records of the
company.
2019 2018 2017
Cost of Sales 850, 000 686, 000 596, 160
Gross profit on sales 32% 30% 28%
Collections on:
2019 sales 425, 000
2018 sales 258, 000 320, 000
2017 sales 185, 000 152, 000 280, 000
During 2018, write-offs of 2017 unpaid accounts were made amounting to Php 7, 200. During 2019,
repossessions were made on defaulted accounts on 2018 sales for which unpaid balance amounted to Php 4,
200. The fair value of the repossessed merchandise is Php 3, 800.
How much is the total deferred gross profit as of December 31, 2019?

Problem 3
Computers, Inc. sells computers on the installment basis. For the year ended December 31, 2019, the
following were reported:
 Cost of installment sales 525, 000
Loss on repossessions 13, 500
Fair value of repossessed merchandise 112, 500
Account defaulted 180, 000
Deferred gross profit, December 31 108, 000

How much was collected during the year?

Problem 4
Kia Motors sells cars both on installment and cash basis. On March 30, 2019, Kia Motors sold a car to Mr.
Tom for Php 525, 000 costing Php 414, 000. A used car is accepted as down payment, Php 128, 000 being
allowed on the trade – in. The used car can be resold for Php 160, 200 after reconditioning cost of Php 7, 660.
The company expects to make a 20% gross profit on the sale of used car. The balance of the sale is to be
paid on a 10-month installment basis starting May 1, 2019.
Mr. Tom defaulted payment starting November 1, 2019 and the car was immediately repossessed. The
repossessed car was appraised at a value of Php 93, 750 at the time of repossession. Kia Motors had to incur
additional cost of repairs amounting to Php 9, 250 before the car was subsequently resold on December 1,
2019 for Php 128, 750 cash to Mr. Lim.
What is the realized gross profit on December 31, 2019?
What is the net income for the year ended December 31, 2019?

Problem 5
Presented below are the information taken from the books of Four Sisters Company:
2018 2019
Sales:
Regular 125, 000 187, 500
Installment 62, 500 100, 000
Cost of goods sold:
Regular 75, 000 112, 500
Installment 31,250 45, 000
Operating expenses 25, 000 31, 250
Collections on accounts from:
Regular sales 100, 000 137, 500
Installment sales – 2018 37, 500 25, 000
Installment sales – 2019 - 62, 500

What is the net income for the year ended December 31, 2019?
Problem 6
The following data pertain to installment sales of Heart’s Store:
Down payment, 20%
Installment sales:
2017 Php 545, 000
2018 785, 000
2019 968, 000
Mark up on cost, 35%
Collections after down payment are:
40% during the year of sale
35% during the year after
25% on the third year
What is the balance of Deferred Gross Profit – 2018 at December 31, 2018?

MULTIPLE CHOICES
The K Company accounts for its sales on the installment sales basis. At the beginning of 2018, ledger accounts
include the following account balances:
Installment Accounts Receivable, 2016 Php 90, 000
Installment Accounts Receivable, 2017 288, 000
Deferred Gross Profit, 2016 37, 800
Deferred Gross Profit, 2017 108, 000

At the end of 2018 account balances before adjustments for realized gross profit on installment sales are:
Installment Accounts Receivable, 2016 Php -0-
Installment Accounts Receivable, 2017 72, 000
Installment Accounts Receivable, 2018 390, 000
Deferred Gross Profit, 2016 37, 800
Deferred Gross Profit, 2017 103, 050
Deferred Gross Profit, 2018 180, 000
Installment sales in 2018 are made at 25% above the cost of merchandise sold; cash sales amounting to Php
700, 000 were made at a markup off 30% of sales and credit sales of Php 200, 000 at a markup of 32%. During
2018 upon default in payment by the customer, the company repossessed the merchandise with an estimated
market value of Php 6, 000. The sales was made in 2017 for Php 32, 400 and Php 19, 200 had been collected
prior to repossession.
1. Total realized gross profit before gain or loss on repossession in 2018
a. Php 489, 850
b. Php 215, 850
c. Php 113, 850
 d. Php 102, 000
2. Realized gross profit on installment sales in 2018
a. Php 489, 850
b. Php 215, 850
c. Php 113, 850
d. Php 102, 000
3. Realized gross profit on installment sales in 2018 for 2016 sales
a. Php 489, 850
b. Php 215, 850
c. Php 76, 050
d. Php 37, 800
4. Realized gross profit on installment sales in 2018 for 2017 sales
a. Php 489, 850
b. Php 215, 850
c. Php 76, 050
d. Php 37, 800
5. Realized gross profit on installment sales in 2018 for 2018 sales
a. Php 489, 850
b. Php 215, 850
c. Php 113, 850
d. Php 102, 000
6. (Subsequent Sale of Repossessed Merchandise) – Assuming that K Company wants to improve the
salability of the repossessed merchandise, the company incurred Php 500 for reconditioning. After which the
company was able to sell the merchandise to another customer for Php 8, 125 at a down payment of 40%.
Compute the realized gross profit on the subsequent installment sales:
a. Php 850
b. Php 812
c. Php 650
d. Php 520
T Inc. sells a new car costing Php 1, 080, 000 for Php 1, 530, 000 on installment basis on October 1, 2018.
Terms of the payment included the acceptance of a used car with a trade – in allowance of Php 540, 000. Cash
of Php 90, 000 was paid in addition to the trade-in car with the balance to be paid in ten (10) monthly installments
due at the end of each month commencing the month of sale. The estimated selling price of the car after
reconditioning cost of Php 22, 500 is Php 450, 000. A 15 percent (15%) gross profit was usual from the sale of
used car. The company uses the installment method of accounting to recognize gross profit.
7. What is the realized gross profit on installment sales in 2018?
a. Php 72, 000
b. Php 127, 059
c. Php 144, 000
d. Php 180, 000
The ABC Company is a dealer of printing equipment. For the period January 1, 2018 to August 31, 2018, ABC
Company gives a trade discount of 15% to all its buyers. On July 1, 2018, two units of printing equipment with a
total list price of Php 130, 000 and total cost of Php 75, 240 were sold to Mr. XY. ABC Company granted an
allowance of Php 20, 000 for Mr. XY’s used printing equipment as trade-in, the current market value of the
equipment is Php 14, 000. The balance was payable as follows: 20% of the balance paid at the time of purchase;
the rest payable in 16 months starting August 1, 2018. After eight months of paying, Mr. XY defaulted in the
payment of April 1 of the following year. The two units of printing equipment were repossessed and it would
require Php 2, 000 reconditioning cost for each equipment before it could be resold for Php 15, 500 each. A 15%
gross profit was usual from the sale of used equipment. The Operating expense in 2018 amounts to Php 6, 800.
8. How much is the net income for the year 2018?
A. Php 6, 359
B. Php 8, 523
C. Php 12, 340
D. Php 10, 073
TUV Company, which began operations on January 1, 2018 appropriately, uses the installment method of
accounting. The following data pertain to TUV’s operations for the year 2018:
 Installment Sales (Before adjustments) Php 450, 000
Regular Sales 187, 500
Cost of Regular Sales 107, 500
Cost of Installment Sales 315, 000
FMV of repossessed merchandise 27, 000
Actual value of trade-in merchandise 40, 000
Operating expenses (before write-off and repossession) 36, 000
Cash collections on installment sales including interest of Php 12, 000 156, 000
Installment receivables written-off due to defaults 22, 000
Repossessed Accounts 50, 000
Trade - in Allowance 70, 000

9. How much is the deferred gross profit at December 31, 2018? What is the net income for the year ended
December 31, 2018?
A. Php 50, 500; Php 65, 000
B. Php 41, 000; Php 63, 000
C. Php 50, 500; Php 91, 500
D. Php 41, 000; Php 75, 000
10. On January 1, 2019, Jeremiah Co. Sold land that cost P210,000 for P280,000, receiving a note bearing
interest at 10%. The note will be paid in three annual instalments of P112,595 starting on December 31,
2019. Because collection of the note is very uncertain, Shaw will use the cost-recovery method. How much
is revenue from this sale should Shaw recognize in 2019?
A. zero
B. 21,000
C. 28,000
D. 70,000

Jeremiah Corporation started operations on January 1, 2016 selling home appliances and furniture sets both for
cash and on instalment basis. Data on the instalment sales operations of the company gathered for the years
ending December 31, 2016 and 2017 were as follows:
2016 2017
Installment sales 400,000 500,000
Cost of instalment sales 240,000 350,000
Cash collected from:
2016 installment sales 210,000 150,000
2017 installment sales 300,000
Additional information:
On January 5, 2018, an instalment sale on 2016 was defaulted and the merchandise with an appraised value of
P5,000 was repossessed. Related instalment receivable balance on January 5, 2018 was P8,000.
11. The balance of the Deferred Gross Profit on December 31, 2016 was:
A. 64,000
B. 76,000
C. 160,000
 D. 190,000
12. The balance of the Deferred Gross Profit Control account at December 31, 2017 was:
a. 76,000
b. 130,000
c. 160,000
d. 190,000
13. The gain or loss on repossession should be:
a. no gain or no loss
b. P200 gain
c. P1,800 gain
d. P3,000 loss
14. The instalment method of accounting may be used if the
A. Installments are due in different years
B. Percentage of completion method is inappropriate
C. Collection period extends over more than 12 months
D. Ultimate amount collectible is indeterminate so that collection is not reasonably assured

15. On October 1, 2018, Pilinvest Co. sold to Mr. X a piece of property which cost P250,000. The company
received a down payment of P100,000 on the date of sale plus a mortgage note for P400,000that is payable
in 20 semiannual installments of P20,000 with interest on the unpaid principal at 16 % per annum. If gross
profit is recognized periodically in proportion to collections, the realized gross profit in 2018 would be
a. P0
b. P20,000
c. P50,000
d. P250,000

On October 1, 2017, Fastsavers Co sold article “A” costing P270,000, for P400,000. Article B, a used article,
was accepted as down payment, with the balance payable in monthly instalments of P20,000 starting Nov 1,
2017. P120,000 was allowed on the article traded in. The company estimated the reconditioning cost of this
article at P8,000 and a selling price of P110,000 after such reconditioning cost. The company normally makes a
20% gross profit on the sale of used articles. The company employs the perpetual inventory method. On April
1, 2018, the customer defaulted in the payment of his instalments. Article “A” was repossessed and its value to
the seller was estimated at P135,000 after allowing for the estimated reconditioning cost and the normal profit
on resale.
16. The gross profit rate on the instalment sale was
a. 25%
b. 27.5%
c. 28%
d. 30%
17. The amount of realized gross profit in 2017 was
a. 30,000
b. 31,500
c. 35,000
d. 40,000
18. The amount of loss on repossession was
a. 30,000
b. 31,500
c. 35,000
d. 40,000