ILLUSTRATIVE PROBLEM:

Assume the following data summarize the transactions of Jury Sales Corporation for two consecutive years:
2018 2019
Installment Sales
Down Payment 60,000 72,000
Balance 240,000 288,000
Cost of installment sales 180,000 208,800
Collections on Installment Sales
2018 Sales:
Applying to interest 78,000 54,000
Applying to principal 57,000 78,000
2019 Sales:
Applying to interest - 93,000
Applying to principal - 66,000

Assuming the perpetual inventory system is used, the related entries relevant to installment sales for 2018 and 2019 are
as follows:
Journal Entries for the year 2018
1 Cash 60,000
Installment Contracts Receivable - 2018 240,000
Installment Sales 300,000
To record installment sales.

2 Cost of Installment Sales 180,000

Merchandise Inventory 180,000
To record cost of sales.

3 Cash 135,000
Installment Contracts Receivable - 2018 57,000
Interest Income 78,000
To record collection of installment sales.

Journal Entries for the year ended December 31, 2018

4 Installment Sales 300,000

Cost of Installment Sales 180,000
Deferred Gross Profit - 2018 120,000
To set-up deferred gross profit on 2018 installment sales.
[Gross profit rate = P120,000/300,000 = 40%]

5 Deferred Gross Profit - 2018 46,800

Realized Gross Profit 46,800
To record realized gross profit on installment sales.

Computation:
Collections applying to principal (60,000+57,000) 117,000
Multiply by: Gross Profit Rate 40%
Realized Gross Profit 46,800

6 Realized Gross Profit - 2018 46,800

 Income Summary 46,800
To close realized gross profit account.

Journal Entries for the year 2019

1 Cash 72,000
Installment Contracts Receivable - 2019 288,000
Installment Sales 360,000
To record installment sales.

2 Cost of Installment Sales 208,800

Merchandise Inventory 208,800
To record cost of sales.

3 Cash 291,000
Installment Contacts Receivable - 2018 78,000
Installment Contacts Receivable - 2019 66,000
Interest Income 147,000
To record collection of installment sales.

Journal Entries for the year ended December 31, 2019

4 Installment Sales 360,000

Cost of Installment Sales 208,800
Deferred Gross Profit - 2019 151,200
To set-up deferred gross profit on 2018 installment sales.
[Gross profit rate = P151,200/P360,000 = 42%]

5 Deferred Gross Profit - 2018 31,200

Deferred Gross Profit - 2019 57,960
Realized Gross Profit 89,160

Computation:
Collections Gross Realized
Year (Principal) x Profit Rate = Gross Profit
2018 P78,000 40% P31,200
2019 138,000 42% 57,960
P89,160

6 Realized Gross Profit 89,160

Income Summary 89,160
To close realized gross profit account.