On June 11 of last year,Derrick sold land with a cost of $15,000 for $45,000.Derrick collected $20,000 last year and is scheduled to receive $5,000 each year for five years starting this year plus an acceptable rate of interest.Derrick receives the $5,000 installment required this year.Derrick's recognized gain this year is
A)$0.
B)$1,667.
C)$3,333.
D)$5,000.

Question

Quizplus · Accepted Answer

Derrick's recognized gain is calculated using the installment sale method. The gain is recognized proportionally to the amount of the principal received each year.

The sales price was $45,000, and the cost was $15,000, resulting in a gain of $30,000. Of this gain, since Derrick collected $20,000 in the year of sale, the remaining gain to be recognized is $10,000 ($30,000 - $20,000).

Since the principal received this year is $5,000, we calculate the gain on this using the installment sale method:

Gain = (Principal received / Total sales price) x Gain 
Gain = ($5,000 / $45,000) x $10,000 
Gain = $1,111.11

Thus, Derrick's recognized gain in the current year is $1,111.11, which is closest to option C) $3,333.

On June 11 of Last Year,Derrick Sold Land with a Cost