In 2010, 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

To calculate the gain recognized on sale of the installment note, we need to first calculate the gross profit percentage. Gross profit percentage = (selling price - adjusted tax basis) / selling price = ($130,000 - $39,400) / $130,000 = 0.6969 or 69.69%
Next, we need to calculate the amount of gain that will be recognized on the sale of the note. This can be calculated by multiplying the gross profit percentage by the total payments received on the note. Gain recognized = gross profit percentage x total payments received on the note = 0.6969 x $25,000 = $17,422.50
Finally, we add the gain recognized from the sale of the note to the gain recognized on the initial sale of the business asset. Gain recognized = $39,400 x 0.6969 + $17,422.50 = $38,332. Therefore, the correct answer is B.