Question

Perry acquired raw land as an investment 16 years ago. The land cost $50,000. In the current year, the land is sold for a total sales price of $120,000, consisting of $10,000 cash and the buyer's note for $110,000. Assume that Perry uses the installment method to recognize the gain and receives only the $10,000 down payment in the year of sale. How much gain should Perry recognize in the current year?

Answer 1

The cost of the land = $50000

The selling price of the land = $120000

Total profit gained on the land = $120000-50000=70000$

Total amount received in cash in current Year = $10000

As given , let us assume that Perry uses the installment method to recognize the gain

Profit to be recognized in current year using installment method =

(Total Profi *Cash Received) /Sales Consideration

= $\frac{70000*10000}{120000}$ =5833.33

Hence, Perry should recognize a gain of $5833.33