Question

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.

Answer 1

	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