Question

TPW, a calendar year taxpayer, sold land with a $535,000 tax basis for $750,000 in February. The purchaser paid $75,000 cash at closing and gave TPW an interest-bearing note for the $675,000 remaining price. In August, TPW received a $55,950 payment from the purchaser consisting of a $33,750 principal payment and a $22,200 interest payment. In the first year after the year of the sale, TPW received payments totaling $106,900 from the purchaser. The total consisted of $67,500 principal payments and $39,400 interest payments.

a. For the first year after the year of the sale, compute the difference between TPW’s book and tax income resulting from the installment sale method.
b. Using a 35 percent tax rate, determine the effect of the difference on the deferred tax asset or liability generated in the year of sale.

Answer 1

Step-by-step explanation:

Amount realized on sale:

Cash $75,000

Purchaser’s note 675,000

$750,000

Adjusted basis (535,000)

Gain realized on sale $215,000

b. $215,000 gain realized ÷ $750,000 contract price = 28.67% gross profit percentage.

Cash received in year of sale:

Cash at closing $75,000

August principal payment 33,750

$108,750

Gain recognized (108750*28.67%) $31,179

A. Book gain $215,000

Tax gain (31,179)

Book/tax difference $183,821

B. $183,821 × 35% = $64,338 deferred tax liability

The excess of book gain over tax gain is a favorable difference.