SBI Company consigned products costing $250,000 to Furad Company. SBI paid $10,000 in freight costs. Furad spent $2,000 on advertising that SBI will reimburse. Furad sold 2/3 of the products for $230,000 cash, retaining a 20% commission and remitting the proceeds to SBI. To record the transaction, SBI debits Consignment Out and credits Inventory. Furad debits Cash, Credits Payable to SBI and debits Commission Expense and Advertising Expense. SBI's gross profit on the consignment sale will be calculated separately from regular sales by subtracting the cost of consigned goods from consign

1. Chapter - 3
ACCOUNTING FOR INSTALLMENT AND
CONSIGNMENT SALES
1

2. Consignment Sales
A consignment is an arrangement
Method of marketing a product in
which the goods is transferred to
another party who is to act as an
agent in selling the goods. The
transfer of a goods on consignment
is not considered a sales
transaction. 2

3. However, both parties must
establish adequate procedures to
control and account for goods on
consignment.
3

4. INSTALLMENT SALES
An installment sale is a financing
arrangement in which the seller allows the
buyer to make payments over an extended
period of time. In an installment sale, the
buyer receives the goods at the beginning
of the installment period and makes
payments over an installment period.
4

5. Realizations of Gross Profit on Installment
sales
The determination of net income on
installment sales is complicated by the fact
that the amounts of revenue and related
costs and expenses seldom are known in the
accounting period when sales are made.
Substantial expenses (as for collection,
accounting, repairs and repossession) may
be incurred in subsequent accounting
periods.
5

6. INSTALLMENT SALES
 Installment sale is a sale of real or personal property or
services which provides for series of payments over a
period of months or years.
 A down payment generally is required at the time of sale.
 Because the seller must wait for a considerable period of
time to collect the entire selling price, it is customary to
provide for interest charges on the unpaid balance.
 To protect themselves against the risk of non-collection,
sellers of real or personal property select a form of contract
called a security agreement that enables them to repossess
the property if the purchaser fails to make payments.
6

7. Realizations of Gross Profit on Installment
sales
In recognition of Gross Profit on
Installment sales, accountants use the
following three approaches for the
recognition of gross profit on installment
sales:
1. The accrual basis of accounting
2. The cost recovery Method
3. The installment Method of accounting
7

8. 1. Accrual basis of Accounting
To recognize the entire gross profit as at the time
of an installment sale is to say that installment
sales are the same as regular sales on credit.
The merchandise has been delivered to
customers, and accounts receivables of definite
amount have been acquired.
The excess of the accounts receivable over the
cost of merchandise sold is realized gross
profit in the traditional meaning of them.
8

9. Accrual basis of Accounting
The journal entry consists of a debit to
installment contracts receivable and a credit to
installment sales.
If the perpetual inventory system is used, a second
journal entry is needed to transfer the cost of the
merchandise from the inventories account to the
cost of installment sales account.
Exp. A Machine was sold $50,000 for an Installment
sales, the cost of the machine was $25000.
A $10,000 of a down payment is made.
Record the Journal Entries.
9

10. JOURNAL ENTRIES
• Account title Dr Cr
Installment contract receivable $ 50,000
Installment sales $50000
Cost of installment sales $25000
Inventory $25000
Cash $10,000
Installment A/R $10000
10

11. 2. Cost recovery Method
Under the cost recovery method, no
profit is recognized until all costs of
the merchandise sold have been
recovered. Does not recognize Profit
until the cash collected exceeds the
cost of the good or service sold.
The cost recovery method of accounting
rarely is used.
11

12. 12
Example
CAALAMI STORE Sold inventory Costing
$80,000 for a Total selling price of $110,000
implying a $30,000 of profit.
The retail store made sales of $110,000 in
period 0 and received cash flows from sales of
Yr1 $50,000 and Yr2 $60,000 in the following
two periods, respectively.
Record the related Journal Entries of the
three period.

13. Journal Entries
Account title Dr Cr
Installment receivable $110,000
Cost of Installment $80,000
Deferred Gross Profit $30,000
Yr1: Cash $50,000
Installment receivables $50,000
Yr2 Cash $60,000
Installment receivables $60,000
Deferred Gross Profit $30,000
Realized Gross Profit $3000013

14. Install Method of Accounting
Under the install method of
accounting, each cash collection
on the contract is regarded as
including both a return of cost
and a realization of gross profit in
the ratio that these two elements
were included in the selling price.
14

15. For Example, Assume that a farm
equipment dealer sells for $ 10,000 a
machine that cost $ 7,000. the $ 3000
excess of the sales price over cost is
regarded as deferred gross profit.
Because Cost 70%, gross profit 30%
constituted on the sales price. 70:30
ratio is used to divide each collection.
15

16. If $ 1,000 received as a down payment, $ 300 of the
deferred gross profit is considered realized in the
current accounting period. Record the journal
Entries
Account title Dr Cr
Cash $1000
Installment sales Receivable $9000
Cost of instalment sales $7000
Deferred gross profit $3000
Deferred Gross Profit $300
Realized-Gross-Profit(1000*30%) $300
16

17. Compering Methods of Revenue
Recognition
• Illustration
Given:
Selling price = $ 80,000 Cost = $ 60,000
Gross Profit = $ 20,000 ( $80,000-$60,000)
Gross Profit Rate = 25% (20,000/80,000)
Collections Of Cash
First Month = $15000
Second Month = $15000
Third Month = $50000
17

18. Gross Profit Realization per Month
Methods First Month Second Month Third Month Total
Installment
Method
$3750 $3750 $12500 $20,000
Cost
Recovery
0 0 $20000 $20,000
Accrual
Basis
$15000 $5000 0 $20,000
18

19. The “circumstance” in which the use of
installment method of accounting is
permitted are.
1. Collection of installment receivables
is not reasonably assured.
2. Receivables are collectible over an
extended period of time.
2.There is no reasonable basis for
estimating the degree of collectability.
19

20. Practice Problem
January 1, MEECAAD furniture makes a sale for a piece of
furniture with a retail price of $20,000 at the end of
January. The cost of the furniture to the company is
$12,000. Therefore, the gross margin for the good is 40%.
The company strikes a deal with the customer in which the
customer is required to make installment payments of
$5000 each month for the furniture until the full amount is
paid ($20,000).
Record the Journal Entries in January-1 , January 31 and
February 28 using install method.
20

21. Defaults and Repossessions:
An event of default occurs when one (or more) terms
of a loan agreement are breached by a borrower.
A default happens when a lender decides you're not
going to be able to pay back what you've borrowed.
This can be because you miss too many payments or
don't make your payments in full.
Repossession is when a lender takes back his Asset or
what you offered as security on a loan – this could
be a house, car, sofa or a mobile phone – when you
default on an account.
21

22. Defaults and Repossessions:
Assume the following Data in October, 2022
1. Peace Company sold a machine into a $4000 and
the gross profit was 50%. The customary defaulted
to repay the amount on the due date . The Company
repossessed its merchandise for an estimated
market value of $1500
 Compute the loss or gain of the machine
 Record the Transaction
22

23. Solution
Computing gain or loss
Fair market value $1500
Less: Unrecovered Ins A/R $4000
Less: Deferred GP (50%*4000) $2000 $2000
loss: $500
Journal Entries Dr Cr
Repossessed Merchandise $1500
Deferred Gross Profit $2000
Loss on repossession $500
Installment Account Receivable $4000
23

24. Practice Problem
Assume the following Data in October, 2022
1. Hilaac Company sold a car into a $10,000 and the
gross profit was 50%. The customary defaulted to
repay the amount on the due date . The Company
repossessed its merchandise for an estimated
market value of $5000.
Compute the loss or gain of the machine
 Record the Transaction
24

25. Practice Problem
1. Hilaac Company sold a car into a $10,000 and
the gross profit was 50%. The customary
defaulted to repay the amount on the due date.
The Company repossessed its merchandise for an
estimated market value of $4000. there is a
Reconditioning cost of $500
Compute the loss or gain of the machine
 Record the Transaction
25

26. A trade-in is an arrangement in which
someone buys something such as a
new car or washing machine at a
reduced price by giving their old
one, as well as money, in payment.
26
Trade- ins

27. 1. Trade- ins
A familiar example of the use of trade-ins is
the acceptance by a dealer of a used car as
partial payment for a new car.
An accounting problem exists only if the dealer
grates an over allowance on the used car
taken in trade.
An over allowance on trade-ins is significant
because it represents a reduction in the stated
selling price of the new merchandise.
27

28. 1. Trade- ins
The stated selling price must be reduced by the
amount of the over allowance to compute the
net selling price. The gross profit on the sale
of the new merchandise is the difference
between the net selling price and cost.
Assume that merchandise with a cost of $
2,400 is sold on the installment plan for $
3,300. used merchandise is accepted as a
trade-in at a ‘value’ of $ 1,100, but the dealer
expects to spend $50 in reconditioning the
28

29. 1. Trade- ins
Used merchandise is reselling it for only
$1,000. Assume that the customary gross
profit percentage on used merchandise of this
type is 15%, an amount that will cover the
selling and overhead costs, and also provide
a normal gross profit on the resale.
Compute the Net Realizable value of the
trade-in and the amount of the over
allowance:
29

30. Computation of over allowance:
Trade-in allowance $1,100
Less Net Realizable value :
Estimated resale value $1,000
Less: Reconditioning cost expected $50
less: Normal Profit Margin($1,000* 15%)$150
Net Realizable Value $800
Over all allowance on trade-in……………… $300
30

31. the journal entry to record the installment sale and the
trade-in appears below:
Inventories (Trade-ins)………….......$800
Over allowance on trade in………………….$300
Installment Accounts Receivable…………….$2200
Installment sales $33,00
The journal Entry To record the sale if the treatment of the
over allowance is deduction from sales is as follows
Merchandise inventory – Traded-in $800
Installment accounts receivable $2200
Installment sales $3000
31

32. Practice Problem
1. An automobile dealer lists a new model of car
costing $ 5,000 at $8,000. A customer trades in
an old model for an allowance of $2,000, the
reselling price is $1900 . reconditioning cost is
$300. Normal gross profit on used automobiles is
10%. Record the journal for the sale of new
model.
32

33. ACCOUNTING FOR CONSIGNMENTS
The term Consignment means a transfer
of possession of merchandise from the
owner to another person who acts as
the sales agent of the owner. Title to the
merchandise remains with the owner,
who is called a Consignor, the sale
agent who has possession of the
merchandise is called a Consignee.
33

34. Rights of Consignee
1. To receive compensation for merchandise
sold for the account of consignor.
2. To receive reimbursement for expenditure
(Such as freight and insurance) made it
concession with the consignment.
3. To sell consignor has not forbidden credit
sales.
4. To make the usual warranties as to the
quality of the consigned merchandise and to
bind the consignor to honor such warranties.
34

35. Duties of the Consignee
1. To give care and protection reasonable
in relation to the nature of the
consigned merchandise.
2. To keep the consigned merchandise
separate from owned inventories or be
able to identify the consigned
merchandise. Similarly, the consignee
must identify and segregate the
consignment receivable from other
receivables.
35

36. Duties of the Consignee
3. To use care in extending credit on the
sale of consigned merchandise and to
be diligent in setting prices on
consigned merchandise an collecting
consignment receivable.
4. To render complete reports of sales of
consigned merchandise and to make
appropriate and timely payments to the
consignor.
36

37. Accounting for consignor
The choice of accounting methods by the
consignor depends on:
1. Consignment gross profits are determined
separately from gross profits on regular
sales.
OR
1. Sales on consignment are combined with
regular sales without any effort to measure
gross profits separately for the two
categories of sales. 37

38. Illustration:
Example: Abdifitah company shipped on
consignment to Ramdan company 10
Television sets that cost $250 each. The
selling price was set at $ 400 each, the
cost of packing was $ 30; all costs
incurred in the packing department were
debited by Abdifitah to packing expense
account. Freight costs of $135 by an
independent truck line to deliver the
shipment to Ramdan trading were paid by
the consignee. All 10 sets were sold by the
38

39. Consignee for $400 each. After
deducting the commission of 20% and
the freight costs of $135, Ramdan
trading sent Abdifitah company a
check for $ 3,065, along with the
account sales.
 Record The Journal Entries for both
A/Fatah Comp and Ramadan Comp:
 Compute the Gross Profit
39

40. Abdi Fatah Company Ramadan Company
Consignment out- Ramdan trading..$2,500
Inventory $2500
No entry
Consignment out- Ramdan Trading……$30
Cash $30
No entry
No entry Accounts Receivable $ 135
Cash $135
No Entry Cash $4000
Accounts Payable $4000
Cash $3,065
Freight cost/ Consignment out $135
Commission Expense- $800
Consignment sales……………… $4,000
Accounts Payable $4000
Accounts Receivable $135
Commission Revenue $800
Cash $3065
Cost of Consignment Sales $2665
Inventory $2665
No Entry
40

41. Presentation in the income Statement:
Gross Profits determined separately
Consignment Sales…………………………… $4,000
Less: Cost of Consignment
Cost of Sales……………… $2,665
Commission Expenses……… $800 $3,465
Gross Profit on Consignment sale.. $535
41

42. Practice Problem
• SBI Company shipped Products costing $250,000 on
consignment sales to Furad Company. SBI pays
$10,000 of freight costs. Furad Company pays $2000
in advertising costs to Promote SBI comp products.
The advertising costs to be reimbursed by SBI Comp.
by the end of the period, Furad Comp has sold 2/3 (
two – thirds) of the consigned merchandises for
$230,000 Cash. Furad Comp rendered the report of
sales to SBI, retains 20% commission and remitted the
cash to SBI.
• Record the journal Entry for both SBI & Furad Comp.
• Compute the gross profit
42