INSTALLMENT SALE AND TAXES. On January 1, 19x2, Fountain Square Products sold a tract of land for $40,000 under a long-term contract, resulting in a longterm capital gain of $14,000. The contract requires an initial payment of $10,000 and 10 annual payments of $5,200 each, with the first payment due on December 31, 19x2.

Thus, a total of $62,000 (principal of $40,000 and interest of $22,000) is to be paid to Fountain Square under the terms of the contract. In its financial statements, Fountain Square recognizes interest on a straight-line basis at a rate of $2,200 per year. It uses the installment sales method for its income tax return.

REQUIRED:
1. How much income does the contract contribute to Fountain Square’s income statements for 19x2 and 19x3?
2. How much income does the contract contribute to Fountain Square’s corporate tax returns for 19x2 and 19x3?
3. Why does the tax law permit the installment sales method?