Question

In 2020, Jeff sold inventory with a cost basis of $100,000 to a customer. In return, for the inventory, Jeff received $50,000 cash and an installment note for $200,000 to be paid over five years. Assuming Jeff did not receive any other payments in the current year, how much income must he recognize for tax purposes in 2020?

Answer 1

Assuming the installment note doesn't contain any interest amount, the income recognised for tax =

200,000 + 50,000 - 100,000 = $150,000

Although if interest amount is included in 200,000 it must be reduced from it as that would not be for sale of inventory that consideration is for the time value of money. Also the whole interest will not be the income of one year.

Note that Tax is calculated on accrual basis of accounting.

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