Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses the installment sale method, compute Dolzer's book and tax gain in the year of sale.

Question

Quizplus · Accepted Answer

To calculate the gain for both book and tax purposes, we need to use the installment sale method.

For book purposes, we calculate the gross profit percentage, which is the gain divided by the selling price.

Selling price = $775,000
Adjusted book basis = $474,000
Gain = selling price - adjusted book basis = $775,000 - $474,000 = $301,000 
Gross profit percentage = gain / selling price = $301,000 / $775,000 = 0.38838 or 38.838%

The book gain reported in the year of sale is therefore $301,000 * 38.838% = $116,840.

For tax purposes, we also use the installment sale method, but we need to recognize some gain in the year of sale based on the gross profit percentage. The rest of the gain will be recognized in the years when payments are received.

So for the year of sale, we need to recognize the gain on the cash received ($100,000) and on the note received ($675,000 * 38.838% = $262,160).

Tax gain for year of sale = $100,000 + $262,160 = $362,160.

Therefore, the book gain in the year of sale is $116,840 and the tax gain in the year of sale is $362,160. The correct answer is C.