Question

Ms. D sold a business that she had operated as a sole proprietorship for 18 years. On date of sale, the business balance sheet showed the following assets:

Accounts receivable$50,750

Inventory 153,600

Furniture and equipment:    

Cost 60,000

Accumulated depreciation (48,000)

Leasehold improvements:    

Cost 24,500  

Accumulated amortization (4,900)

The purchaser paid a lump-sum price of $303,750 cash for the business. The sales contract stipulates that the FMV of the business inventory is $170,000, and the FMV of the remaining balance sheet assets equals adjusted tax basis. Assuming that Ms. D’s marginal tax rate on ordinary income is 35 percent and her rate on capital gain is 15 percent, compute the net cash flow from the sale of her business.

Net Cash Flow ---------------

Answer 1

Purchaser paid a lump-sum price of= $303,750

7ssuming that Ms. D’s marginal tax rate on ordinary ,income is 35 percent(13200x35%)=4620

Her rate on capital gain is 15 percent(51400x15%)=7,710

=303,750-4620-7,710

=$291,420

	Amount realized	Amount adjusted	Normal-gain	Captial-gain
Inventory	170,000	156,800	13200
other	82.350	82.350	0
Goodwill	51400			51,400
Total	303,750	239,150	13,200	51,400

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