Three years ago, ChaGo Inc. sold a business asset with a $39,400 adjusted tax basis for $130,000. The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of the price. ChaGo is using the installment sale method to recognize its gain on sale. This year, ChaGo sold the note to a financial institution for the note's $55,000 face value (ChaGo had received a total of $25,000 principal payments on the note.) Compute ChaGo's gain recognized on sale of the installment note.

Question

Quizplus · Accepted Answer

The amount realized from the sale of the note is $55,000, which is the face value. The adjusted basis of the note is determined by multiplying the remaining principal balance by the gross profit percentage of the original sale, which is ($80,000 - $25,000) / $130,000 = 46.15%. The adjusted basis of the note is therefore $55,000 x 46.15% = $25,332. The gain recognized is the amount realized ($55,000) minus the adjusted basis of the note ($25,332), which comes out to $29,668. However, the gain recognized is limited to the remaining unrecognized gain from the original sale, which is $130,000 - $39,400 = $90,600. Therefore, the gain recognized is $29,668 or the unrecognized gain of $90,600, whichever is less. In this case, the gain recognized is $29,668.

Three Years Ago, ChaGo Inc