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.

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)