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14 November, 12:20

Brenda sold investment land for $200,000 in June. Her basis in the land was $75,000. The purchaser paid Brenda $40,000 cash and gave her his 5-year, interest-bearing note for the $160,000 remaining contract price. In December, Brenda received a $20,000 principle payment on the note. Brenda's recognized gain this year is:a. $22,500 b. $37,500 c. $125,000 d. $60,000

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  1. 14 November, 13:56
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    b. $37,500

    Explanation:

    a. Realized gain = (cash down payment + Purchase Note) - Adjusted Tax basis

    = (40000 + 160000) - 75000

    = 200000 - 75000

    = 125000$

    Gross profit percentage = profit / sales

    =125000 / (40000 + 160000)

    =125000 / 200000

    =62.5%

    year 1 Realised gain = downpayment * 62.5%

    = 400000 * 62.5%

    =25,000$

    Realised gain = installment payment * 62.5%

    = 20000 * 62.5%

    = 12,500$

    i. e 37,500$
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