Question

TPW, a calendar year taxpayer, sold land with a $549,000 tax basis for $820,000 in February. The purchaser paid $89,000 cash at closing and gave TPW an interest-bearing note for the $731,000 remaining price. In August, TPW received a $60,550 payment from the purchaser consisting of a $36,550 principal payment and a $24,000 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 21 percent tax rate, compute PTR's deferred tax asset or liability (identify which) resulting from the book/tax difference.
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Compute the difference between TPW's book and tax income resulting from the installment sale method. (Round gross profit percentage to 2 decimal places, and intermediate calculations to the nearest whole dollar amount.)
Book/tax difference

Answer 1

a. Difference between book income and tax income = $229,505.73

b. The difference between book income and tax income is favorable.

c. Deferred tax liability = $48,196.20

Step-by-step explanation:

a. Compute the difference between TPW's book and tax income resulting from the installment sale method.

This can be computed as follows:

Amount realized on sale of land = Cash paid by purchaser + Value of interest- bearing note given by the purchaser = $89,000 + $731,000 = $820,000

Adjusted tax basis in land = $549,000

Book income = Amount realized on sale of land - adjusted tax basis in hand = $820,000 - $549,000 = $271,000

Gross profit percent = Book income / Amount realized on sale of land = $271,000 / $820,000 = 0.3305, or 33.05%

Cash received on sale of land = Cash paid by purchaser + Principal payment received in August = $89,000 + $36,550 = $125,550

Tax income =Cash received on sale of land * Gross profit percent = $125,550 * 33.05% = $41,494.28

Difference between book income and tax income = Book income - Tax income = $271,000 - $41,494.28 = $229,505.73

b. Is this difference favorable or unfavorable?

Since the book income greater than the tax income, this implies that the difference between book income and tax income is favorable.

c. Using a 21 percent tax rate, compute PTR's deferred tax asset or liability (identify which) resulting from the book/tax difference.

Deferred tax liability = Difference between book income and tax income * 21% = $229,505.73 * 21% = $48,196.20