TPW, a calendar year taxpayer, sold land with a $536,000 tax basis for $755,000
ID: 2336518 • Letter: T
Question
TPW, a calendar year taxpayer, sold land with a $536,000 tax basis for $755,000 in February. The purchaser paid $76,000 cash at closing and gave TPW an interest-bearing note for the $679,000 remaining price. In August, TPW received a $56,250 payment from the purchaser consisting of a $33,950 principal payment and a $22,300 interest payment. Assume that TPW uses the installment sale method of accounting.
Compute the difference between TPW’s book and tax income resulting from the installment sale method.
Explanation / Answer
Solution:
Calculation of the difference between Book income and Tax income:
First we calculate Amount realized on sale of land:
= $76,000 + $679,000
= $755,000
And,
Adjusted tax basis in land = $536,000 (given)
Now,
Book income = (Amount realized on sale of land - Adjusted tax basis in land)
= $755,000 - $536,000
Book income = $219,000
Tax income = $109,950 (note) * 29% (note)
= $31,885 (approx)
Now,
Difference between Book income and Tax income:
= $219,000 - $31,885
= $187,115
Working notes:
Cash received on sale of land = $76000 + $33,950 = $109,950
Gross profit percent = $219,000 / $755,000 * 100 = 29% (approx)
Difference between book income and tax income = $187,115Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.