In year 1, Aldo sold investment land with a $61,000 tax basis for $95,000. Payme
ID: 2337648 • Letter: I
Question
In year 1, Aldo sold investment land with a $61,000 tax basis for $95,000. Payment consisted of $15,000 cash down and the purchaser's note for $80,000. The note is being paid in 10 annual installments of $8,000, beginning in year 2. a. Compute Aldo's recognized gain under the installment sale method in years 1 and 2. b. In year 4, Aldo pledged the note as partial collateral for a $75,000 bank loan. The unpaid principal at date of pledge was $56,000 Determine the tax consequences of this pledge to Aldo Answer is complete but not entirely correct Complete this question by entering your answers in the tabs below RequiredA Required B Compute Aldo's recognized gain under the installment sale method in years 1 and 2. (Round gross profit percentage to 2 decimal places and final answers to the nearest whole dollar amount.) Recognized Gain Year 1 Year 2 5,368 2,683 Required BExplanation / Answer
Answer 1. Total Amount Received from Sale - $15,000 + $80,000 95,000.00 Cost of Land 61,000.00 Realised Gain 34,000.00 Gross Profit Percentage - $34,000 / $95,000 35.79% Recognized Gain - Year 1 - $15,000 X 35.79% 5,369 Recognized Gain - Year 2 - $8,000 X 35.79% 2,863 Answer 2. At the date of pledge, Basis in Installment Note = $56,000 (Principal) - $20,042 (Deferred Gain - $56,000 X 35.79%) Basis in Installment Note = $35,958 Pledge is treated as disposition of Note for $56,000 cash So, in Year 4, Deferred Gain will be recognized = $20,042