Question

Roger Company sold machinery for a total price of $20,000 to be paid in four equal installments, plus interest. The first payment was made in the current year. The original cost of the machinery was $12,000 and $8,000 of depreciation had been taken on it. Ignoring interest income, what amount of income must Roger Company recognize in the current year under the installment method for this sale

Answer 1

$8,000 ordinary income and $2,000 capital gain.

Step-by-step explanation:

Calculation to determine what amount must Roger recognize in the current year

Since total gain is $16,000 calculated using this formula

Total gain=Selling price-Basis

Total gain=$20,000-$4,000

Total gain=16,000

Which means that he must recognize the complete $8,000 . Hence, the revised gain of $8,000 will be the ORDINARY INCOME in the current year which is calculated as:

Ordinary Income=Selling price-Adjusted basis

Ordinary Income=$20,000-$12,000

Ordinary Income=$8,000

Lastly is to determine The gross profit percentage of which will be applied to each using this formula

Gross profit percentage=Gross profit ÷Contract price

Gross profit percentage=$8,000 ÷ $20,000

Gross profit percentage=40%

Hence, the CAPITAL GAIN for the current year will be:

Capital gain = [($20,000 ÷ 4) × 40%]

Capital gain=$2,000

Therefore the amount that Roger must recognize in the current year is $8,000 ordinary income and $2,000 capital gain.