Question

Will’s Whitewater Rafting sold 3 acres of land used in the business. The sales price was $6,000 and the adjusted basis of the land was $4,200. Will receives a down payment of $4,000 at the time of sale and the remaining $2,000 early next year. The realized gain on the sale is $___. Will’s recognized gain for the current year is $_____ and the gain recognized next year will be $_____.
a. 1,800;
b. 1,200 ($1,800/$6,000 = 30%; $4,000 x .30 = $1,200);
c. 600 (30% x $2,000 = $600)

Answer 1

Answer:a. 1,800;

b. 1,200 ($1,800/$6,000 = 30%; $4,000 x .30 = $1,200);

c. 600 (30% x $2,000 = $600)

Explanation:

In tax accounting, adjusted basis refers to the original cost, or the net cost of an asset, after adjusting various tax-related items normally reduced by depreciation deductions.

Given:

Selling Price(S.P) = $6,000

Adjusted Basis (A.B) = $4200

The gain realized from the sale of the land would be:

= S.P - A.B = $(6,000-4200)= $1,800

Now, we calculate the percentage profit on gain realized to enable ease of gain calculation for fragmented payments.

The percentage gain (P.G) is:

(S.P-A.B)/S.P * 100 = (6,000-1,800)/6000 * 100

P.G = (1,800/6,000) * 100 = 30%

Therefore we say that:

Recognized Gain on current year = Amount paid * P.G = $(4,000*0.3) = $1,200

And

Recognized Gain next year = Amount paid * P.G = $(2,000 * 0.3) = $600

Note: P.G is percentage gain.