ExpertMedium1 markMultiple Choice
CPA · Question 64 · Area IV: Property Transactions
A taxpayer sells land (Basis $60,000) for $100,000 in Year 1. They receive $20,000 in Year 1 and a note for $80,000 payable in Year 2. They use the installment method. What is the recognized gain in Year 1?
A taxpayer sells land (Basis $60,000) for $100,000 in Year 1. They receive $20,000 in Year 1 and a note for $80,000 payable in Year 2. They use the installment method. What is the recognized gain in Year 1?
Answer options:
A.
$40,000
B.
$20,000
C.
$8,000
D.
$0
How to approach this question
1. Gross Profit = $40k. 2. GP % = $40k / $100k = 40%. 3. Recognized Gain = Cash Received * GP %.
Full Answer
C.$8,000✓ Correct
C
IRC §453. Gross Profit Ratio = Gross Profit ($40,000) / Contract Price ($100,000) = 40%. <br/>Year 1 Recognized Gain = Payment ($20,000) * 40% = $8,000.
Common mistakes
Recognizing the full gain or just the cash amount.
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