Question 1

A taxpayer sells property for $100,000 in Year 1. The adjusted basis was $40,000. The buyer pays $20,000 in Year 1 and agrees to pay $20,000 per year for the next 4 years plus interest. What is the recognized gain in Year 1 under the installment method?

Accepted Answer

1. Calculate Gross Profit (Sales Price - Basis). 2. Calculate Gross Profit % (GP / Sales Price). 3. Multiply Cash Received in current year by GP %.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Recognizing full gain; applying ratio to interest (interest is separate ordinary income).

A taxpayer sells property for $100,000 in Year 1. The adjusted basis was $40,000. The buyer pays $20,000 in Year 1 and agrees to pay $20,000 per year for the next 4 years plus interest. What is the recognized gain in Year 1 under the installment method?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 5

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