Problem 8-7 Calculation of Gain or Loss, Installment Sales (LO 8.3, LO 8.9) Stev
ID: 2531117 • Letter: P
Question
Problem 8-7 Calculation of Gain or Loss, Installment Sales (LO 8.3, LO 8.9)
Steve Drake sells a rental house on January 1, 2016, and receives $120,000 cash and a note for $45,000 at 10 percent interest. The purchaser also assumes the mortgage on the property of $35,000. Steve's original cost for the house was $180,000 and accumulated depreciation was $30,000 on the date of sale. He collects only the $120,000 down payment in the year of sale.
a. If Steve elects to recognize the total gain on the property in the year of sale, calculate the taxable gain.
b. Assuming Steve uses the installment sale method, complete Form 6252 for the year of the sale.
If an amount is zero, enter "0". Enter all amounts as positive numbers. Round all decimals to three places and any dollar amount to the nearest dollar.
Explanation / Answer
Ans (A):- $36,364
Gain on sale = cash received + note received + mortagae assumed - adjusted basis
Gain on sale = 120,000 +45,000 + 35,000 - 150,00 (180,000-30,000)
= $ 50,000
Taxable gain= Total gain realized on the sale /Contract price x Cash collections during the year
= $ 50,000/165000 x 120,000
Taxable gain = 0.303 x 120,000
= 36,364