Question

john owns a classic automobile that had a cost basis of $32,000. john paid $38,000 to have the automobile fully restored. john sells the automobile through an installment sale for $100,000. john is to receive a $25,000 down payment in the current year, and $15,000 per year for five years, beginning this year. what amount of gain must john recognize during the current year?

Answer 1

To determine the amount of gain John must recognize during the current year, we calculate his basis in the automobile and compare it to the selling price. John will recognize a gain of $1,666.67 during the current year.

Step-by-step explanation:

To determine the amount of gain John must recognize during the current year, we need to calculate his basis in the automobile and compare it to the selling price. John's basis is the original cost of the automobile plus the cost of restoration. So, his basis would be $32,000 + $38,000 = $70,000.

The down payment of $25,000 reduces the selling price to $75,000. For an installment sale, John must recognize a proportionate amount of gain for each payment he receives. The gain is calculated by multiplying the payment received by the ratio of the gain to the selling price. In this case, the gain is the difference between the selling price and the basis ($75,000 - $70,000 = $5,000) and the selling price is $75,000.

So, for the down payment of $25,000, John would recognize a gain of $5,000 * ($25,000 / $75,000) = $1,666.67 during the current year.