On Year 1 ABC Company sell equipment to XYZ Company for $415,000 in an installment sale....
On Year 1 ABC Company sell equipment to XYZ Company for $415,000 in an installment sale. ABC Company has a basis in the equipment of $250,000. In year 1 ABC company will received three payments totaling $300,000 and in year 2 the final payment totaling $115,000.
- What is the gross profit on the sale?
- What is the gross profit percentage?
- How much taxable income is recognized in year 1?
- How much taxable income is recognized in year 2?
- If the equipment was sold for a price of $100,000 rather than $400,000, how much loss would be recognized in year 2?
Homework Answers
Gross Profit = Sale price - Basis = $415,000 - $250,000 = $165,000
Gross Profit Percentage = (Gross Profit / Sale Price) * 100 = ($165,000 / $415,000) * 100 = 39.76% (approx.)
Taxable income to be recognized in year 1 = $300,000 * 39.76% = $119,280
Taxable income to be recognized in year 2 = $115,000 * 39.76% = $45,724
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