On November 15, 2016, LaGrow Developers sold a parcel of land for $5,000,000. They had originally paid $3,600,000 for the land. The terms of the sale called for a $1,000,000 down payment, and the balance in two equal installments payable on November 15, 2017 and November 15, 2018. Disregard interest charges. LaGrow has a December 31 year-end. Refer to LaGrow Developers. Assume that LaGrow uses the installment sales method. The buyer defaulted on the note receivable after making the down payment. At the date of repossession, the land had a fair value of $4,000,000. What will be the gain or loss on repossession?
A) $0 loss or gain
B) $1,000,000 loss
C) $1,000,000 gain
D) 2,000,000 gain

Question

Quizplus · Accepted Answer

Under the installment sales method, the gain is recognized as cash is received. Since the buyer defaulted after the down payment, LaGrow only recognized a gain on the $1,000,000 received. The land is repossessed at a fair value of $4,000,000, which is more than the remaining cost basis of $2,600,000 ($3,600,000 original cost - $1,000,000 gain recognized), resulting in no gain or loss on repossession.

On November 15, 2016, LaGrow Developers Sold a Parcel of Land