Pedro,not a dealer,sold real property that he owned with an adjusted basis of $60,000 and encumbered by a mortgage for $28,000 to Pat in 2009.The terms of the sale required Pat to pay $14,000 cash,assume the $28,000 mortgage,and give Pedro eleven notes for $6,000 each (plus interest at the Federal rate).The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2012 note as promised,what is the recognized gain to Pedro in 2011 (exclusive of interest)?
A)$6,000.
B)$3,600.
C)$2,400.
D)$0.
E)None of the above.

Question

Quizplus · Accepted Answer

The recognized gain in 2009 is calculated as follows:

Selling price = $14,000 cash + $66,000 notes ($6,000 x 11) = $80,000
Selling price - Adjusted basis - Selling expenses = $80,000 - $60,000 - 0 = $20,000

Since the installment method is not elected out, the gain is recognized proportionally as each payment is received. Therefore, the recognized gain in 2011 is:

2011 payment received: $6,000 (principal only)
Total payments received: $6,000 + $6,000 (first note paid in 2013) = $12,000
Gain to be recognized: ($20,000 ÷ $80,000) x $12,000 = $3,000
However, since the 2012 note has not yet been paid, the gain is not yet recognized. Therefore, the recognized gain in 2011 is zero.

Pedro,not a Dealer,sold Real Property That He Owned with an Adjusted