Wiley GAAP 2008

Concepts, Rules, and Examples

The Installment Method

The installment method was developed in response to the increasing incidence of sales contracts that allowed buyers to make payments over several years. As the payment period becomes longer, the risk of loss resulting from uncollectible accounts increases; consequently, circumstances surrounding a receivable may lead to considerable uncertainty as to whether payments will actually be received. Under these circumstances, the uncertainty of cash collection dictates that revenue recognition be deferred until the actual receipt of cash.

The installment method can be used in most sales transactions for which payment is to be made through periodic installments over an extended period of time and the collectibility of the sales price cannot be reasonably estimated. This method is applicable to the sales of real estate (covered in the last section of this chapter), heavy equipment, home furnishings, and other merchandise sold on an installment basis. Installment method revenue recognition is not in accordance with accrual accounting because revenue recognition is not normally based upon cash collection; however, its use is justified in certain circumstances on the grounds that accrual accounting may result in “front‐end loading” (i.e., all of the revenue from a transaction being recognized at the point of sale with an improper matching of related costs). For example, the application of accrual accounting to transactions that provide ...