Albatross Corporation acquired land for investment purposes in 2002 at a cost of $100,000 . Albatross sold the land to Monty on December 30, 2016, and did not elect out of the installment method of accounting. The selling price of the property was

Question

$400,000 . Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note, payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum. The first installment of $50,000 was due in 2017 which Monty paid, plus interest of $21,000 . Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2016 and 2017.

Answer 1

The gross profit percentage on the sale is 75%, computed as follows: $300,000 (gross profit) ÷ $400,000 (selling price). In 2016, Albatross includes a long-term capital gain of $37,500 in its taxable income (75% of the $50,000 cash down payment). However, the entire gain of $300,000 increases E & P in 2016 . Thus, to compute E & P, taxable income will be increased by the $262,500 gain not already recognized ($300,000 total gain less $37,500 gain recognized in 2016). In 2017, Albatross Corporation again includes a long-term capital gain of $37,500 in taxable income (75% of the $50,000 installment), plus ordinary interest income of $21,000 . In determining its 2017 E & P, it reduces taxable income by $37,500.