Question

TPW, a calendar year taxpayer, sold land with a $578,000 tax basis for $865,000 in February....

TPW, a calendar year taxpayer, sold land with a $578,000 tax basis for $865,000 in February. The purchaser paid $86,500 cash at closing and gave TPW an interest-bearing note for the $778,500 remaining price. In August, TPW received a $62,325 payment from the purchaser consisting of a $38,925 principal payment and a $23,400 interest payment. In the first year after the year of sale, TPW received payments totaling $119,650 from the purchaser. The total consisted of $77,850 principal payments and $41,800 interest payments.

  1. For the first year after the year of sale, compute the difference between TPW’s book and tax income resulting from the installment sale method.
  2. Is this difference favorable or unfavorable?
  3. Using a 21 percent tax rate, determine the effect of the difference on the deferred tax asset or liability generated in the year of sale.
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Homework Answers

Answer #1

1) Ans:- Calculation of the difference between book income & Tax income:

Book Income = Annual realized on sale of land- Adjusted tax basis in land

= $ 865,000 - $578,000

= $ 287,000

Ampount realized on sale of land :- $ 86,500 + $ 778,500 = $ 865,000

Adjusted Tax basis in land :- $ 578,000 ( Above information)

Tax income = $*125,425 x **33.18 % = 41,616.015

Working Notes

a) Cash received on sale of land = $86,500 + $38,925 = $*125,425

b)Gross Profit Percent = $ 287,000 / $865,000 x 100 = ** 33. 18 %

2) Ans:- Difference between book income & Tax Income = $ 287,000 - $ 41,616 = $245,384

The difference between book income and tax income is favourable.

3) Deffered Tax liability $ 245,384 x 21% = 51530.64 or $ 51,531 (Approx)

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