Question

In: Accounting

asmine sold land for $250,000 in 2019. The land had a basis of $118,000 and she...

asmine sold land for $250,000 in 2019. The land had a basis of $118,000 and she incurred selling expenses of $10,000. Jasmine received $50,000 down in 2019 and will receive five additional annual payments of $40,000 each. How much income will Jasmine recognize in 2020 when she receives the first additional payment of $40,000?

Multiple Choice

$0.

$18,880.

$19,520.

$40,000.

Expert Solution

Answer: option C

Explanation:

In case of instalment sale method, revenue is recognised on the basis of proportionate profit at the receipt of each instalment.

In this method Gross profit is deferred until cash from the sale is received.

In the above question,

Sale value of land= 250000

Basis of land= 118000

Selling expense= 10000

Gross profit = 250000-118000-10000= 122000

Gross profit ratio= 122000÷250000= 48.8%

Down payment= 50000

Annual payment= 40000

At the time of receipt of down payment 24400 (50000*48.8%) to be recognised as income

At the time of first installment income to be recognised equal to:

Annual payment * Gross profit ratio

= 40000*48.8% = 19520

SUMMARY

Total profit to be recognised after the Last instalment=

Profit recognised on down payment + profit recognised annually=

24400+ (5*19520) = 122000 which is the gross profit

All the required information has been provided.

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