Abby sold her unincorporated business that consisted of equipment and goodwill.The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000).Abby had no basis in the goodwill.The sales price for the business was $250,000 with $150,000 for the equipment and $100,000 for the goodwill.The buyer agreed to pay $120,000 on June 30, 2019, and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2019 (exclusive of interest) is:

Question

Quizplus · Accepted Answer

Abby's realized gain is calculated as the amount realized ($250,000) minus the adjusted basis of the equipment ($80,000), which equals $170,000.

However, because part of the sales price was not paid until two years later, Abby must use the installment method to report the gain.

Under the installment method, the gain is reported proportionally as payments are received. In this case, Abby received $120,000 in 2019, which is 48% of the total sales price ($120,000/$250,000). Therefore, her recognized gain in 2019 is 48% of the realized gain or $81,600 ($170,000 x 48%).

Her recognized gain in the year the remaining payment is received will be the remaining amount of the realized gain ($88,400) plus any interest earned on the installment payments. The interest portion will be taxed as ordinary income in the year received.

Thus, the total gain to be reported by Abby is $118,000 ($81,600 recognized in 2019 and $36,400 recognized in two years, plus any interest received in two years).

Abby Sold Her Unincorporated Business That Consisted of Equipment and Goodwill.The