7 Installment sales questions

7 views

Skip to first unread message

Tax Pro

unread,

Jun 26, 2013, 1:59:46 AM6/26/13

to enrolled-agen...@googlegroups.com, Marlyn Cox

Those of us who took notes on Ida's challenge question earlier tonight should not have a problem answering this one:

101. In 2002, Raymond used the installment
method to sell his home. Several years later, he needed money to pay some
expenses, so he sold the installment note for $29,000 when the balance due to
him was $35,000. His gross profit percentage was 25.5%. How much profit must Raymond report on the sale of the note?
A. $20,075
B. $8,925
C. $7,395 
D. $2,925

Then let's apply what we learned about gross profit margins and installment sales by answering the next six questions:

102. Paul and 
Josie purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years. What is their gross profit percentage?

A. 82%

B. 72%

C. 68.33%

D. 60%

103. Paul and 
Josie purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years. How much is their taxable gain for this transaction in 2011?
A. $0
B. $40,000
C. $60,000
D. $100,000
 
104. Paul and Josie 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years. What is the return of their basis on the $100,000 payment that they received in 2011? 
A. $0

B. $40,000

C. $60,000

D. $100,000

105.  Paul and Josie
 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years.  In 2012, Paul and Josie received $33,333 payment from the buyer.  How much is their taxable gain for 2012?
A. $0
B. $13,333
C. $20,000
D. $33,333

106. Paul and Josie
 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years.  In 2012, Paul and Josie received $33,333 
payment from the buyer.  If the buyer paid the same installment amount in 2021, how much would Paul and Josie's return of basis be for that year?
A. $0
B. $13,333
C. $20,000
D. $33,333

107. Paul and Josie
 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years.  If Paul and Josie received $33,333 installment payment in the year 2020, how much would their gross profit margin (GPM) be?
A. The same GPM as in Question #102
B. The GPM in Question #102 divided by 15
C. 33.33%
D. We need to ask additional questions to get the GPM in 2020.

Whoever is the first to e-mail the correct answers for Questions 101-107 to me or to our study group gets a prize.

Tax Pro

unread,

Jul 4, 2013, 1:42:16 PM7/4/13

to enrolled-agen...@googlegroups.com

Josie Martinez turns around and solves the entire set of questions on Installment Sales.  Naturally, I upgraded her
 prize.

She gets to
 choose from only one of the following prizes:    A. One dozen of cooked balut + 1 bowl of Pozole
    B. AYCE Lunch at
 Tahoe Galbi Restaurant + 1 dozen Guava Cheese Strudels
    C. AYCE Lunch at Todai Woodland Hills + 1 dozen doughnuts
    D. Unlimited one-on-one tutorial for SEE2 (upon successful
 passing of SEE1 and SEE3) Offer Valid thru 28FEB2014.

Happy Fourth of July!

 ----- Forwarded Message -----
   From: Tax Pro <taxpr...@ymail.com>
 To: "enrolled-agen...@googlegroups.com" <enrolled-agen...@googlegroups.com> 
Cc: Marlyn C. <EA, circa 2012> 
 Sent: Tuesday, June 25, 2013 10:59 PM
 Subject: 7 Installment sales questions
  

Those of us who took notes on Ida's challenge question earlier tonight should not have a problem answering this one:

101. In 2002, Raymond used the installment
method to sell his home. Several years later, he needed money to pay some
expenses, so he sold the installment note for $29,000 when the balance due to
him was $35,000. His gross profit percentage was 25.5%. How much profit must Raymond report on the sale of the note?
A. $20,075
B. $8,925
C. $7,395 

D. $2,925  Josie Martinez was the first to answer this 
question correctly.

If Raymond waited for the $35,000 balance due to be paid as scheduled, he would have reported 25.5% of it as profit ($35,000 x 25.5% = $8,925).  This also means that the other 74.5% of the payment was simply a return of his basis, i.e., not taxable. [$35,000 x (100-25.5%, or $74.5%) = $26,075]. One can also solve for this by saying $35,000 payment minus $8,925 gross profit = $26,075 return of basis].

But Raymond needed the money sooner, so he sold his receivable for
 $29,000. 
 His basis on the note remained at $26,075 so his gross profit is $2,925 ($29,000 payment minus $26,075 return of basis = $2,925).

102. Paul and 
Josie purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years. What is their gross profit percentage?

A. 82%

B. 72%

C. 68.33%

D. 60%  Josie Martinez was the first to answer this question correctly.
We discussed this at the group meeting on 25JUN2013.  I just re-shuffled the choices.

103. Paul and 
Josie purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years. How much is their taxable gain for this transaction in 2011?
A. $0
B. $40,000

C. $60,000    Josie Martinez was the first to answer this question correctly.
D. $100,000
 Taxable gain = $100,000 payment x 60% gross profit percentage = $60,000.

104. Paul and Josie 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years. What is the return of their basis on the $100,000 payment that they received in 2011? 

A. $0

B. $40,000   Josie Martinez was the first to answer this question correctly.

C. $60,000

D. $100,000
The return of basis = $100,000 payment received - $60,000 gross profit = $40,000.

105.  Paul and Josie
 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years.  In 2012, Paul and Josie received $33,333 payment from the buyer.  How much is their taxable gain for 2012?
A. $0
B. $13,333
C. $20,000   Josie Martinez was the first to answer this question correctly.
D. $33,333
Taxable gain = $33,333 payment received x 60% gross profit percentage = $20,000.

106. Paul and Josie
 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years.  In 2012, Paul and Josie received $33,333 
payment from the buyer.  If the buyer paid the same installment amount in 2021, how much would Paul and Josie's return of basis be for that year?
A. $0

B. $13,333   Josie Martinez was the first to answer this question correctly.
C. $20,000
D. $33,333
Return of basis = $33,333 payment received - $20,000 gross profit/taxable gain = $13,333 same as $33,333 x 40%. 

107. Paul and Josie
 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years.  If Paul and Josie received $33,333 installment payment in the year 2020, how much would their gross profit margin (GPM) be?
A. The same GPM as in Question #102 Josie Martinez was the first to answer this question correctly.

B. The GPM in Question #102 divided by 15
C. 33.33%
D. We need to ask additional questions to get the GPM in 2020.

Side note: Realistically, Paul and Josie would have charged interest on the installment sale.  If so, they would have simply reported interest income on the years they received the interest payments.

Tax Pro

unread,

Jul 3, 2013, 12:51:59 PM7/3/13

to enrolled-agen...@googlegroups.com

Once again, Josie Martinez wins a prize for being the fist to answer one of the "7 Installment sale questions."

She gets to choose from only one of the following prizes:
    A. One dozen of cooked balut

    B. AYCE Lunch at Tahoe Galbi Restaurant 

    C. AYCE Lunch at Todai Woodland Hills 

    D. Unlimited one-on-one tutorial for SEE2 (upon successful
 passing of SEE1 and SEE3) Offer Valid thru 31OCT2013.

 ----- Forwarded Message -----
   From: Tax Pro <taxpr...@ymail.com>
 To: "enrolled-agen...@googlegroups.com" <enrolled-agen...@googlegroups.com> 
Cc: Marlyn C. <EA, circa 2012> 
 Sent: Tuesday, June 25, 2013 10:59 PM
 Subject: 7 Installment sales questions
  

Paul and Josie
 
purchased 40 acres of
undeveloped land in 1960 for $120,000. They paid total real estate taxes
 on the
land of $50,000, which they elected to add to the basis of the land. In 
2011,
they sold the property for $600,000 and paid qualified settlement costs 
of
$70,000. Paul and Josie received a down payment of $100,000 with the 
balance
to be paid over 15 years.  If Paul and Josie received $33,333 installment payment in the year 2020, how much would their gross profit margin (GPM) be?
A. The same GPM as in Question #102 Josie Martinez was the first to correctly answer this question.

B. The GPM in Question #102 divided by 15
C. 33.33%
D. We need to ask additional questions to get the GPM in 2020.

Reply all

Reply to author

Forward

0 new messages