Question

TPW, a calendar year taxpayer, sold land with a $544,000 tax basis for $795,000 in February....

TPW, a calendar year taxpayer, sold land with a $544,000 tax basis for $795,000 in February. The purchaser paid $84,000 cash at closing and gave TPW an interest-bearing note for the $711,000 remaining price. In August, TPW received a $58,950 payment from the purchaser consisting of a $35,550 principal payment and a $23,400 interest payment. Assume that TPW uses the installment sale method of accounting.

A.Compute the difference between TPW’s book and tax income resulting from the installment sale method.

B.Is this difference favorable or unfavorable?

C.Using a 21 percent tax rate, compute PTR’s deferred tax asset or liability (identify which) resulting from the book/tax difference. Complete this question by entering your answers in the tabs below.

Compute the difference between TPW’s book and tax income resulting from the installment sale method. the nearest whole dollar amount incorrect

Required A=213940 is wrong

Is this difference favorable or unfavorable?

Required B =Favorable

Using a 21 percent tax rate, compute PTR’s deferred tax asset or liability (identify which) resulting from the book/tax difference. (Round gross profit percentage to 2 decimal places, and other intermediate calculations to the nearest whole dollar amount.)

Required C =Deferred Liability= is correct but    $53484 is wrong

Business   Accounting   
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Homework Answers

Answer #1

A.

Total Consideration = $711,000 + $84,000 = $795,000

Tax basis = $544,000

Gain = $251,000 (as per accounts)

Tax gain using instalment method

Gross margin calculation = Gain/Consideration = $251,000/$795,000 = 31.57%

Total cash received as consideration for land (excluding interest component)

= $84,000 + $35,550

= $119,550

Tax gain = $119,550 x 31.57% = $37,741.935

Difference between Accounts gain and tax gain = $251,000 - $37,741.935 = $213,258.065

(B)

As the gain under tax is lower than the books of account, the difference is favourable

(C)

As the taxable income is lower than the book of accounts income, this results in an Deferred tax liability. There will be future tax liability for the sales made this year.

Deferred tax liability = 21% x $213,258.065 = $44,784.19

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