A taxpayer purchased a factory building in 1985 for $800,000.After claiming ACRS-accelerated depreciation of $800,000,she sells the asset for $1,000,000 during the current year.No payment is received during the current year,and the $1,000,000 balance to be paid with interest at the interest rate in four annual payments beginning one year from date of sale.The installment sales method is adopted.How much ordinary income is recognized in the current year?
A)$0
B)$200,000
C)$800,000
D)$1,000,000

Question

Quizplus · Accepted Answer

The amount of ordinary income recognized in the current year under the installment sales method is determined by multiplying the gross profit percentage by the interest portion of each payment received during the year. The gross profit percentage is equal to the gain on the sale divided by the total contract price ($1,000,000/$1,000,000 = 100%). The interest portion of each payment received during the year is calculated using the applicable federal rate (AFR). Assuming an AFR of 3%, the interest portion of each payment is 25% of the payment ($250,000 x 3% = $7,500, and $7,500/$30,000 = 25%). Therefore, the amount of ordinary income recognized in the current year is 25% of the gross profit, or $200,000 ($1,000,000 x 100% x 25%).

A Taxpayer Purchased a Factory Building in 1985 for $800,000