Question

TPW, a calendar year taxpayer, sold land with a $574,000 tax basis for $780,000 in February. The purchaser paid $78,000 cash at closing and gave TPW an interest-bearing note for the $702,000 remaining price. In August, TPW received a $56,200 payment from the purchaser consisting of a $35,100 principal payment and a $21,100 interest payment. In the first year after the year of sale, TPW received payments totaling $107,400 from the purchaser. The total consisted of $70,200 principal payments and $37,200 interest payments.

A. 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.

B.Is this difference favorable or unfavorable?

C.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.

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. (Round gross profit percentage to 2 decimal places. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Required A   $176620 IS WRONG

Is this difference favorable or unfavorable?

Required B= unfavorable

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. (Round gross profit percentage to 2 decimal places. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Required C

	Reduction selected answer correct in deferred tax liability selected answer correct is $45,921 selected answer WRONG

Answer 1

1	Cash	$    78,000.00
2	Purchaser’s note	$ 702,000.00	$ 780,000.00
3	Adjusted Basis		$ 574,000.00
4=1+2-3	Gain realized on sale		$ 206,000.00
5=4/(1+2)	Gain realized % (206,000/780,000*100)		26.41%
	Cash received in the year of sale:
6	Cash paid at closing	$    78,000.00
7	Principal payment received in August	$    35,100.00	$ 113,100.00
8	Gross profit %		26.41%
9=(6+7)*8	Gain Recognized for tax purpose		$    29,870.00

(a) computation of the difference between TPW’s book and tax income resulting from the installment sale method:

10	TPW's Book income (4)	$ 206,000.00
11	TPW's Tax income (9)	$   29,870.00
12=10-11	Difference	$ 176,130.00

(b)

The Tax income of TPW is less than that of the book income and hence the difference is "Favourable"

(c) The effect of the difference on the deferred tax asset or liability generated in the year of sale

Since the tax income is less than that of the book income, TPW incurs less tax liability for the current year and the tax impact on the difference amount spreads across the years coming when the assessee liable discharge his liability.

So, the assessee (TPW) should recognize deferred tax liability to the extent of the following amount:

1	TPW's Book income(Realised gain)	$ 206,000.00
2	TPW's Tax income (Recognised gain)	$   29,870.00
3=1+2	Difference (Deferred gain)	$ 176,130.00
4	Tax rate	21%
5=3*4	Deferred tax liability	$   36,987.30