1- Perry acquired raw land as an investment 16 years ago. The land cost $50,000.
ID: 2563151 • Letter: 1
Question
1-
Perry acquired raw land as an investment 16 years ago. The land cost $50,000. In the current year, the land is sold for a total sales price of $120,000, consisting of $10,000 cash and the buyer's note for $110,000. Assume that Perry uses the installment method to recognize the gain and receives only the $10,000 down payment in the year of sale. How much gain should Perry recognize in the current year?
a.$5,833
b.$7,000
c.$4,166
d.$9,000
e.None of these choices are correct.
2-
In the current year, Henry, a sole proprietor, sold for $65,000 a machine that was used in his business. The machine had been purchased a few years ago for $50,000, and when it was sold, it had accumulated depreciation of $20,000 and an adjusted basis of $30,000. For the current year, how should this gain be treated?
a.Section 1231 gain of $15,000 and ordinary income of $20,000
b.Ordinary income of $35,000
c.Section 1231 gain of $35,000
d.Section 1231 gain of $20,000 and ordinary income of $15,000
e.None of these choices are correct.
3-
Choose the incorrect statement.
a.The choice to file on a fiscal year-end basis must be made with an initial tax return.
b.Books and records may be kept on a different year-end basis than the year-end used for tax purposes.
c.Almost all individuals file tax returns using a calendar year accounting period.
d.An individual may request IRS approval to change to a fiscal year-end basis if certain conditions are met.
Explanation / Answer
Solution - 1:
Cost of Land = $50000
Sale Price of Land = $120000
Total Profit on Land = $120000 - $50000 = $70000
Total Amount received in cash in current Year = $10000
Profit to be reconginzed in current year using installment method = Total Profit *Cash Received/Sales Consideration
= $70000 * $10000/$120000 = $5833
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