Pedro sells land that he held as an investment with a basis of $40,000 for $50,000.The terms of the sale require the buyer to pay Pedro $10,000 at the closing of the sale and $20,000 per year for the next 2 years with interest at 7% on the unpaid balance.What is the proper amount of gain to be reported from the sale during each year Pedro receives payments?

Current First Second
Year Year Year
A)$2,000 $4,000 $4,000
B)$10,000 $-0- $ -0-
C)$ -0- $4,000 $6,000
D)$ 3,333 $3,333 $3,334
E)$-0- $ -0- $10,000

Question

Pedro sells land that he held as an investment with a basis of $40,000 for $50,000.The terms of the sale require the buyer to pay Pedro $10,000 at the closing of the sale and $20,000 per year for the next 2 years with interest at 7% on the unpaid balance.What is the proper amount of gain to be reported from the sale during each year Pedro receives payments?
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Current First Second
Year Year Year
A)$2,000 $4,000 $4,000
B)​$10,000 $-0- $ -0-
C)​$ -0- $4,000 $6,000
D)​$ 3,333 $3,333 $3,334
E)​$-0- $ -0- $10,000

Quizplus · Accepted Answer

The correct answer is A because the gain is recognized over the life of the installment sale. The gain is calculated as the difference between the selling price and the basis, which is $50,000 - $40,000 = $10,000. The gain is then recognized over the three years of the installment sale, with $2,000 of gain recognized in the first year, $4,000 of gain recognized in the second year, and $4,000 of gain recognized in the third year.

Pedro Sells Land That He Held as an Investment with a Basis