Answer:
$2,000 ordinary gain and $15,000 long term capital gains
Explanation:
Under the installment method, the taxpayer will recognize gains based on the installments that they actually receive, not the whole contract. This method is generally used for real estate transactions that involve installments payments during several years.
In this case, Mr A received $60,000:
$40,000 for inventory, so gain = $40,000 - $38,000 = $2,000 ordinary gain
$20,000 for real property (25% of transaction price) = $20,000 x [($40,000 - $20,000) x 25%] = $20,000 - $5,000 = $15,000 long term capital gains
