Question

TPW, a calendar year taxpayer, sold land with a $536,000 tax basis for $755,000 in February....

TPW, a calendar year taxpayer, sold land with a $536,000 tax basis for $755,000 in February. The purchaser paid $76,000 cash at closing and gave TPW an interest-bearing note for the $679,000 remaining price. In August, TPW received a $56,250 payment from the purchaser consisting of a $33,950 principal payment and a $22,300 interest payment. Assume that TPW uses the installment sale method of accounting.

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

Homework Answers

Answer #1

Solution:

Calculation of the difference between Book income and Tax income:

First we calculate Amount realized on sale of land:

= $76,000 + $679,000

= $755,000

And,

Adjusted tax basis in land = $536,000 (given)

Now,

Book income = (Amount realized on sale of land - Adjusted tax basis in land)

= $755,000 - $536,000

Book income = $219,000

Tax income = $109,950 (note) * 29% (note)

= $31,885 (approx)

Now,

Difference between Book income and Tax income:

= $219,000 - $31,885

= $187,115

Difference between book income and tax income = $187,115

Working notes:

Cash received on sale of land = $76000 + $33,950  = $109,950

Gross profit percent = $219,000 / $755,000 * 100  = 29% (approx)

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