need help with homework

Question

Pat sells real estate for $30,000 cash and a $90,000 5-year note. If her basis in the property is $90,000 and she receives only the $30,000 down payment in the year of sale, how much is Pat’s taxable gain in the year of sale using the installment sales method?
A. $0
B. $7,500
C. $22,500
D. $30,000
E. $120,000

 

Can you help me understand this problem and the formula behind it?

Answer 1

The installment sales method is one of several approaches used to recognize revenue under US laws when revenue and expense are recognized at the time of cash collection rather than at the time of sale.

 

The idea here is that revenue will be taxed when that revenue is received. In this case, $30,000 was received, and that is the amount that will be taxed. Revenue received at a later time will be taxed in the year in which it will be received.

 

So, the answer is option D.

 

There is no formula.