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How is income reported from an installment sale? What are the components of the payments received...

How is income reported from an installment sale? What are the components of the payments received in an installment sale, and how is the gross profit percentage calculated?

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Answer #1

Installment sale is a sale of a capital asset where the payments are received over multiple years and therefore, can be opted for spreading the capital gain in over multiple years of payments. There are two components in this type of sale, that are, interest income and gain made on the sale of the capital asset.

Under Gross Profit Percentage Method, gain on the sale of a capital asset is calculated just once and then the percentage is applied to each payment received.

Gain = Sale Consideration - Cost Basis - Selling Expenses

Gross Profit Percentage = Gain / Sale Consideration

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