Question

Company L sold an inventory item to Firm M for $40,000. Company L’s marginal tax rate is 21 percent. In each of the following cases.

Required:

Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $10,000 cash and its note for $30,000. The note is payable two years from the date of sale. Company L’s basis in the inventory item was $15,700.

Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $5,000 cash and its note for $35,000. The note is payable two years from the date of sale. Company L’s basis in the inventory item was $47,000.

Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $40,000 cash. Company L’s basis in the inventory item was $18,000.

Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $40,000 cash. Company L’s basis in the inventory item was $44,000.

Please show your work. Every other answer on here that is the same as this one is incorrect.

Answer 1

Ans:

1. Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $10,000 cash and its note for $30,000. The note is payable two years from the date of sale. Company L’s basis in the inventory item was $15,700.

Cash Received	$10000
Gain on sale
Sales price: $40000
Less: cost price: ($15700) $24300
Less: Tax on Gain @21% ($24300 * 21%)	($5103)
Net cash flow	$4897

2. Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $5,000 cash and its note for $35,000. The note is payable two years from the date of sale. Company L’s basis in the inventory item was $47,000.

Cash Received	$5000
Loss on sale
Sales price: $40000
Less: cost price: ($47000) ($7000)
Add: Tax saving on loss ($7000 * 21%)	$1470
Net cash flow	$6470

3.  Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $40,000 cash. Company L’s basis in the inventory item was $18,000.

Cash Received	$40000
Gain on sale
Sales price: $40000
Less: cost price: ($18000) $22000
Less: Tax on Gain @21% ($22000 * 21%)	($4620)
Net cash flow	$35380

4. Compute Company L’s after-tax cash flow from the sale when Firm M’s payment consisted of $40,000 cash. Company L’s basis in the inventory item was $44,000.

Cash Received	$40000
Loss on sale
Sales price: $40000
Less: cost price: ($44000) ($4000)
Add: Tax saving on loss ($4000 * 21%)	$840
Net cash flow	$40840

Points to be noted:

1. It is assumed that tax savings on loss is a cash inflow as the sale of inventory is only one of the transactions and the tax saving on loss may reduce the tax liability on other income. So it will be cash inflow

2. Note is payable two years after the date of sale that means cash inflow will occur after two years. The notes payable will be shown as asset in the balance sheet of Company L and after two years the amount realised on notes payable will be a cash inflow under financing activities and the interest received on notes payable will be a cash flow under operating activities. Interest rate is not given in the .question.