Pedro, Not a Dealer, Sold Real Property That He Owned

question 42

Multiple Choice

Pedro, not a dealer, sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2016. The terms of the sale required Pat to pay $28,000 cash, assume the $56,000 mortgage, and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate) . The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals. Pedro did not "elect out" of the installment method for reporting the transaction. If Pat pays the 2018 note as promised, what is the recognized gain to Pedro in 2018 (exclusive of interest) ?

• A) $12,000
• B) $7,200
• C) $4,800
• D) $0
• E) None of the above

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Definitions:

Standard Cost

An estimated or predetermined cost of performing an operation or producing a good, used in budgeting and pricing decisions.

Raw Material

Basic materials used in the production process as inputs to create finished goods.

Work in Process

Items that are in the middle stages of production, neither raw materials nor finished goods, reflecting the cost of ongoing manufacturing activities.

Property, Plant, and Equipment

Long-term assets owned by a business for use in production, manufacturing, or administrative functions, not intended for sale.