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

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

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.

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