Installment Sales Method

Accounting Procedure
Gross profit from an installment sale is initially deferred and
periodically recognized as the installment payments are
received by multiplying the gross profit rate by the installment
received.
Realized Gross Profit = Gross Profit Rate x Collection on Sale
Example 1:
ABC Co used the installment sale method. On January
1, 2020 ABC Co sold a bulldozer for P1,000,000 with the
following terms; 20% down payment on date of sale
and the balance is payable in 4 equal annual
installments every December 31. The cost of the
bulldozer is P600,000.
Prepare journal entries:
Jan 1, 2020 Installment Accounts Receivable P1,000,000
Sales P1,000,000

Jan 1, 2020 Cost of Sales 600,000

Inventory 600,000

Jan 1, 2020 Cash on Hand (1M x 20%) 200,000

Installment Accounts Receivable 200,000

Dec 31, 2020 Cash on hand 200,000

Installment Accounts Receivable 200,00

Dec 31, 2020 Income Summary 240,000

Deferred Gross Profit 240,000
To adjust the realized gross profit for the period
The Presentation of Statement of Profit and Loss will be:

Sales P1,000,000
Less: Cost of Sales 600,000
Gross Profit P 400,000
Less: deferred Gross Profit 240,000
Realized Profit P 160,000

Note: Deferred Gross Profit will reflect in Financial Position as Non-Current Liabilities and at the same time in
the statement of profit and loss as deduction from the gross profit
Dec 31, 2021 Cash on hand 200,000
Installment Accounts Receivable 200,00

Dec 31, 2021 Deferred Gross Profit (200,000 x 40%) 80,000

Realized Gross Profit 80,000
To recognize gross profit for the period

Gross Profit Rate = Deferred Gross Profit

Installment Accounts Receivable

Gross Profit Rate = 240,000____

(40%) 600,000
Dec 31, 2022 Cash on hand 200,000
Installment Accounts Receivable 200,00

Dec 31, 2022 Deferred Gross Profit (200,000 x 40%) 80,000

Realized Gross Profit 80,000
To recognize gross profit for the period

Installment Receivable, Jan 1 2022 600,000-200,000) P 400,000

Deferred Gross Profit, Jan 1, 2022 (240,000-80,000) 160,000

Gross Profit Rate = 160,000____

(40%) 400,000
Dec 31, 2023 Cash on hand 200,000
Installment Accounts Receivable 200,00

Dec 31, 2023 Deferred Gross Profit (200,000 x 40%) 80,000

Realized Gross Profit 80,000
To recognize gross profit for the period

Installment Receivable, Jan 1 2023 (400,000-200,000) P 200,000

Deferred Gross Profit, Jan 1, 2023 (160,000-80,000) 80,000

Gross Profit Rate = 80,000____

(40%) 200,000
Deferred Gross Profit Installment Receivable

Date Debit Credit

Date Debit Credit Balance Balance

1.1.20 1,000,000.00
12.31.20 400,000.00 400,000.00 1,000,000.00

1.1.20 200,000.00
12.31.20 160,000.00 240,000.00 800,000.00

12.31.20 200,000.00
12.31.21 80,000.00 160,000.00 600,000.00

12.31.21 200,000.00
12.31.22 80,000.00 80,000.00 400,000.00

12.31.22 200,000.00
12.31.23 80,000.00 - 200,000.00

12.31.23 200,000.00
-
 Example 2:
ABC Co uses installment sales methoid. Below were the transactions for Year 1 and Year 2:
Year 1 Year 2
Installment Sales 1,000,000 1,200,000
Cost of Sales 600,000 660,000
Gross Profit 400,000 540,000
Cash Collection from:
Year 1 Sales 400,000 200,000
Year 2 Sales 480,000

Compute the total realized gross profit in year 2.

 Year 1 Year 2
Gross Profit 400,000 540,000
Installment Sales 1,000,000 1,200,000
Gross Profit Rate 40% 45%

Realized Gross Profit in Year 2

Collection in Year 2 from
Year 1 Sales (200,000 x 40%) P 80,000
Year 2 Sales (480,000 x 45%) 216,000
Total Realized Gross Profit P296,000
Example 3
The following were taken from the ABC Co

2001 2002
Installment sales ? ?
Cost of sales 600,000 660,000
Installment Receivable – 2001 600,000 400,000
Installment Receivable – 2002 720,000
Gross profit based on sales 40% 45%

Compute the total realized gross profit in 2002?

Installment Receivable 2001, Jan 1,2002 600,000
Installment Receivable 2001, Dec 31, 2002 400,000

Collection of Receivable 200,000

Multiply by Gross Profit Rate 40%
Realized Gross Profit in 2002, for IS of 2001 80,000

Installment Sales -2002 (660,000/55%) 1,200,000

Installment Receivable 2002 720,000
296,000
Collection of Receivable 480,000
Multiply by Gross Profit Rate 45%
Realized Gross Profit in 2002, for IS of 2002 216,000
Balances of ABC Company as follows:
2001 2002
Deferred Gross profit
from 2001 sale 240,000 160,000
from 2002 sale 324,000
Gross Profit Rate based on sales 40% 45%
Cash Collection:
from 2001 sale 400,000 200,000
from 2002 sale 480,000

1. Compute the balances of installment receivable on Dec 31, 2002

2. Compute the installment sales in 2001 and 2002
2001 Realized GP 160,000.00
Deferred GP 240,000.00
Gross Profit 400,000.00
GP Rate 40%
Installment Sales 1,000,000.00

2002 Realized GP 216,000.00

Deferred GP 324,000.00
Gross Profit 540,000.00
GP Rate 45%
Installment Sales 1,200,000.00

2002 Installment Sales 2001 2,200,000.00

Less: Collection 2001 400,000.00
Collection 2002 680,000.00
Installment Receivable 1,120,000.00
Balances of ABC Company as follows:
2001 2002 2003
Installment sales 2,000,000 2,400,000 ?
Cost of Sales ? ? ?
Gross Profit ? ? ?
Gross Profit Rates ? ? 25%
Collection:
from 2001 sales
from 2002 sales
from 2003 sales
Realized Gross Profit 220,000 ? 710, 800

1. Compute for the cost of sales in 2002

 2003
Instal l me nt Sal e s
Col l e cti on 1,800,000.00
Instal l me nt re ce i vabl e - 1,800,000.00

Col l e cti on 2001 400,000.00

X GPR 0.22
Re al i ze d GP 88,000.00

Col l e cti on 2002 720,000.00

X GPR 0.24
Re al i ze d GP 172,800.00

Col l e cti on 2003 1,800,000.00

X GPR 0.25
Re al i ze d GP 450,000.00

Total Re al i ze d Gross Profi t 710,800.00

Installment Sales 2,400,000.00

Less Cost of Sales (76%) 1,824,000.00
Gross Profit (24%) 576,000.00
Balances of ABC Company as follows:
2001 2002
Installment sales 1,000,000 1,200,000
Cost of Sales 600,000 660,000
Collection:
from 2001 sales 400,000 200,000
from 2002 sales 480,000

1. Compute the total deferred gross profit on December 31, 2002

Installment Sales 2001 1,000,000.00
Less: Collection (400,000+200,000) 600,000.00
Installment Receivable 400,000.00
x GPR 40% 160,000.00

Installment Sales 2002 1,200,000.00

Less: Collection 480,000.00
Installment Receivable 720,000.00
x GPR 45% 324,000.00
Deferred GP 484,000.00
ABC Co. used installment sales method. ABC has the following
collection policy
• 20% down payment
• Balance collectible as follows: 50% on the year of sale , 30% on the
second year and 20% on the third year
• Installment sales during 2001, 2002, 2003 were P1,200,000,
P1,500,000 and P1,800,000 respectively.
• Gross profit rate throughout the 3 year was 40% based on sales

Compute the total realized gross profit in each year 2001, 2002 and 2003
 2001 2002 2003
Installment Sales 1,200,000.00 1,500,000.00 1,800,000.00
Collection-DP 240,000.00 300,000.00 360,000.00
2001 Sales
Balance 50%, 30%, 20%480,000.00 288,000.00 192,000.00
2002 Sales
Balance 50%, 30%, 20% 600,000.00 360,000.00
2003 Sales
Balance 50%, 30%, 20% 720,000.00

Total Collection 720,000.00 1,188,000.00 1,632,000.00

x GPR 40% 40% 40%
Realized GP 288,000.00 475,200.00 652,800.00