ork Mrs. O is negotiating to purchase a tract of land from DC Company, a calenda
ID: 2329208 • Letter: O
Question
ork Mrs. O is negotiating to purchase a tract of land from DC Company, a calendar year taxpayer. DC bought this land six years ago for $480,000. According to a recent appraisal, the land is worth $800.000 in the current real estate market According to DC's director of tax, the company's profit on the sale will be taxed at 35 percent if the sale occurs this year. However, this tax rate will definitely decrease to 21 percent if the sale occurs next year. Mrs. O is aware that DC would prefer the sale close next year needs the land immediately to begin construction of a new retail outlet. She offers to pay $875,000 for the land with the stipulation that the sale close by December 31 However, Mrs. O a. Calculate the amount of after-tax cash for the each of the following alternatives. Should DC accept Mrs. O's offer? Complete this question by entering your answers in the tabs below. Required A Required B Calculate the amount of after-tax cash for the each of the following alternatives. Alternative 1: If DC solls the land to Mrs. O this year Profit on sale Tax cost Cash proceeds from sale Tax cost After-tax cash Alternative 2: If DC sels the land to Mrs. O next year Profit on sale Tay rnst K Prev 5 of7S Next>Explanation / Answer
a) If the sale is done this year
Profit on Sale =($875000-$480000)=$395000
Tax Cost @35% =$138250
After Tax Cash =$256750
Cash Proceeds from Sale =$480000
b) If the sale is done next year
Profit on Sale ($800000-$480000)=$320000
Tax Cost @21% =$67200
After Tax Cash =$252800
Cash Proceeds from Sale =$480000
b.Since the net gain from cash flow is more if the sale is done this year and it is beneficial to accept the offer of Mrs O.
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