Ponce acquired raw land costing $60,000 as an investment in 1998.In 2011,the land is sold for a total sales price of $150,000,consisting of $30,000 cash and the buyer's note for $120,000.Assume that Ponce uses the installment method to recognize the gain and receives only the $30,000 down payment in the year of sale.How much gain should Ponce recognize in 2011?

Question

Quizplus · Accepted Answer

To calculate Ponce's gain, we need to determine the adjusted basis of the land and the installment sale gain for the year. Ponce's adjusted basis is the original cost of $60,000.

The installment sale gain is calculated as follows:
Total contract price - Adjusted basis = Installment sale gain
$150,000 - $60,000 = $90,000

However, since Ponce only received $30,000 in cash in the year of sale, only a portion of the gain is recognized. The recognized gain is calculated using the gross profit percentage:
Cash received / Total contract price = Gross profit percentage
$30,000 / $150,000 = 0.2

The recognized gain is then calculated by multiplying the gross profit percentage by the installment sale gain:
Installment sale gain x Gross profit percentage = Recognized gain
$90,000 x 0.2 = $18,000

Therefore, Ponce should recognize a gain of $18,000 in 2011.

Ponce Acquired Raw Land Costing $60,000 as an Investment in 1998.In