TPW, a calendar year taxpayer, sold land with a $539,000 tax basis for $770,000
ID: 2411086 • Letter: T
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.
Explanation / Answer
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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