Question

In: Accounting

TPW, a calendar year taxpayer, sold land with a $539,000 tax basis for $770,000 in February....

TPW, a calendar year taxpayer, sold land with a $539,000 tax basis for $770,000 in February. The purchaser paid $79,000 cash at closing and gave TPW an interest-bearing note for the $691,000 remaining price. In August, TPW received a $57,250 payment from the purchaser consisting of a $34,550 principal payment and a $22,700 interest payment. Assume that TPW uses the installment sale method of accounting.

a. 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 30 percent tax rate, compute PTR’s deferred tax asset or liability (identify which) resulting from the book/tax difference.

Solutions

Expert Solution

Amount realized on sale:
Cash $          79,000
Purchaser’s note            691,000          770,000
Less: Adjusted Basis       (539,000)
Gain realized on sale $     231,000
Gain realized percentage 231000 ÷ 770000
30.00%
Cash received in year of sale:
Cash at closing              79,000
August principal payment              34,550          113,550
Gross profit % x 30%
Gain Recognized for tax purpose $        34,065
a Book gain $        231,000
Tax gain $          34,065
Book/tax difference $        196,935
b The excess of book gain over tax gain is a favorable difference.
c $196,935 × 30% = $59,080.50 deferred tax liability

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