B is corrent. The requirement is to determine the amount of gain to be reported using the installment method. Under the installment method, gain from the sale is prorated and recognized over the years in which payments are received. The amount of gain recognized for a tax year is calculated by multiplying the payment received in that year by the gross profit ratio. The gross profit ratio is equal to the gross profit divided by the payments that are to be received from the sale. Here, property with a basis of $500,000 - $80,000 = $420,000 was sold for $600,000, resulting in a gross profit of $180,000. Since only $120,000 of the $600,000 selling price was received in the year of sale, the amount of gain to be reported under the installment method for the year of sale would be $120,000 x ($180,000/$600,000) = $36,000.
A is incorrect because $36,000 of gain must be included in gross income for the year of sale under the installment method.
C is incorrect because $36,000 of gain must be included in gross income for the year of sale under the installment method.
D is incorrect because $36,000 of gain must be included in gross income for the year of sale under the installment method.
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