Pedro,not a dealer,sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2014.The terms of the sale required Pat to pay $28,000 cash,assume the $56,000 mortgage,and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate).The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2016 note as promised,what is the recognized gain to Pedro in 2016 (exclusive of interest)?
A)$12,000
B)$7,200
C)$4,800
D)$0
E)None of the above

Question

Quizplus · Accepted Answer

To find the recognized gain, we need to calculate the Gross Profit Percentage first.

Total contract price = $56,000 (assumed mortgage) + $28,000 (cash) + $12,000 x 11 = $200,000

Gross Profit = Total contract price - Adjusted basis = $200,000 - $120,000 = $80,000

Gross Profit Percentage = Gross Profit / Total contract price = $80,000 / $200,000 = 40%

Now, we need to apply this Gross Profit Percentage to the 2016 payment of $12,000.

Realized Gross Profit = Gross Profit Percentage x 2016 payment = 40% x $12,000 = $4,800

Recognized gain = Realized Gross Profit - Gain Previously Reported = $4,800 - $0 = $4,800

Therefore, the answer is B) $4,800.

Pedro,not a Dealer,sold Real Property That He Owned with an Adjusted