Question

Wilson bought three acres of land for a total price of $140,000. Several years later, the land was sold to Ammerson for $200,000. Ammerson paid $40,000 in that year and then an additional $80,000 payment each year until the debt was paid off. Wilson qualified to use the installment sales method on this sale for income tax purposes. Interest is calculated separately. In the year of the sale, what profit will Wilson recognize in computing taxable income

Answer 1

$12,000

Step-by-step explanation:

the initial journal entry to record this transaction would be:

Dr Installment accounts receivable 200,000

Cr Land 140,000

Cr Deferred gross gain 60,000

the journal entries to record the first payment

Dr Cash 40,000

Cr Installment accounts receivable 40,000

Dr Land 28,000

Dr Deferred gross gain 12,000

Cr Revenue 40,000

Since $40,000 represents 20% of the land's total value, the same proportion must be kept when recording land cost and deferred gross gain.