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Installment Sales Method.

2012 AICPA Newly Released Que

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#1 cpamonk

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Posted 04 October 2013 - 10:56 PM

2012 AICPA Newly Released Questions

Q) In year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property.

The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?

 

a. $115,000
b.$125,000
c.$165,000
d.$175,000

 

Correct Answer:- 165,000.

 

Amount realized:                                        $200,000

(+) Mortgage Debt assumed by buyer -          $50,000

(-) Selling Expenses                         -          (10,000)

                                                             -------------------

Realized Amount                                    =      240,000

 

(-) Adjusted Basis                                    (-)      75,000

                                                              -------------------------

Gross Profit                                                   165,000     

                                                                   ========

 

I get the solution, but wonder why I cannot get the same answer using the formula :-

 

                 Gross Profit

Formula =  ------------------     * Amount Realized

                 Contract Price 

 

              Selling Price- ( Adj Basis + Selling Expenses)

        =     ---------------------------------------------------------------------   * 100,000

              Selling Price - Mortgage assumed by Buyer

 

        =    200,000 - (75,000+10,000)

             --------------------------------------- * 100,000 = 76,666   (not $165,000)

              200,000 - 50,000

 

 

 

 

 



#2 amitpatil83

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Posted 17 December 2013 - 08:06 AM

                             Gross Profit

Gross Profit % =  ------------------     * 100

                              Sales Price

 

 

     =  {250,000 - (75,000-10,000)/250000 } = 66 % 

 

Gross profit is $ 250,000 * 66% = $ 165,000

 

Please correct me if I am wrong :)