Defaults and Repossessions
Installment sales transaction has higher risk associated on collection of its receivables. There may be customers that
default in paying their purchases. Because of that, the company urge to repossess the merchandise from the
customers who are in default
The repossessed merchandise will become part in computing the cost of goods sold and be brought back to the
inventory account. Repossessed merchandise shall be debited to the "Repossessed Merchandise Inventory" account.
The accounting problem is the amount to be debited to the repossessed merchandise account. The amount to be
debited to the "Repossessed Merchandise Inventory" account is the fair market value before reconditioning cost
and normal profit margin if any.
The accounting procedures to record repossessed merchandise are as follows:
1. Record the repossessed merchandise in an appropriate inventory account at its fair value (Estimated Selling
Price less Reconditioning Cost and normal profit margin) at the date of repossession
2. Cancel the uncollected installment accounts receivable balance related to the account defaulted only
3. Write off the balance of the deferred gross profit relating to the above receivable.
4. Recognize the resulting gain or loss on repossession.
Tip: If the given is the fair market value and no information is stated if it is after or before reconditioning cost, then
it is construed as before reconditioning cost, and no need to deduct the reconditioning cost from its fair market
value. But if the given is the selling price, then you have to deduct the reconditioning cost and normal profit margin
even if it is not stated the selling price is after or before the reconditioning cost. Another tip is if the given is selling
price, then deduct the normal profit margin. If given is fair market value whether after or before reconditioning
cost, then ignore normal profit margin.
(30%*2,000)
There’s a reconditioning cost incurred, it must be charged to the repossessed merchandise account and form part of
the inventory.
Note: When there’s repossession, the gross profit rate will not change.
Sometimes, there are customers who use their old items as a down payment for the new items they purchased. The
old item traded is called merchandise traded. The merchandise traded-in is considered also as a consideration
received by the seller from the buyer. It is included in computing the realized gross profit
Our concern in accounting the trade-ins is whether the is under or over allowance in accepting the trade-ins.
Under Allowance: Trade-in allowance < NRVof the merchandise Traded In
Over Allowance: Trade-in allowance > NRVof the merchandise Traded In
No Difference: Trade-in allowance = NRVof the merchandise Traded In
• Same case in computing the gain or loss on repossession in a way that when the given information if the selling
price or resale value, you have to deduct the normal profit margin.
• The accounting treatment for under allowance is in addition to the sales, while over allowance is recorded as either
Over Allowance on a Trade-in account or deduction from the sales
Note: that when there is under or over allowance arising from trade-in, gross profit rate may be changed.
Case 1. Assume that on April, 2020, the Motor Sales Company sells a car for an installment price of P145,000. The
car costs P100,000. The customer is allowed a trade-in value of P45,000 for his old car. He makes his down payment
of P40,000 and the balance to be paid in twelve equal installment is P5,000 each. It is estimated that the old car can
be sold for P70,000 after incurring reconditioning cost estimated at P11,000. The company usually makes a gross
profit of 20% on sale.
The entry to record the sale of new car is:
Merchandise Inventory - Traded-in 45,000
Cash 40,000
Installment AR - 2020 60,000
Installment Sales 145,000
Cost of Installment Sales 100,000
Merchandise Inventory 100,000
