In 2007, 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

ChaGo's gain on the sale of the installment note is calculated by determining the gross profit percentage from the original sale and applying it to the amount received from the sale of the note. The gross profit percentage is ($130,000 - $39,400) / $130,000 = 69.69%. The gain recognized on the sale of the note is 69.69% of $55,000, which is approximately $38,332.