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.

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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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