St. George, Incorporated
St. George, Incorporated reported $711,800 net income before tax on this year’s
financial statement prepared in accordance with GAAP. The corporation’s records
reveal the following information:
Four years ago, St. George realized a $283,400 gain on the sale of investment
property and elected the installment sale method to report the sale for tax
purposes. Its gross profit percentage is 50.12, and it collected $62,000 principal
and $14,680 interest on the installment note this year.
Five years ago, St. George purchased investment property for $465,000 cash from
an LLC. Because St. George and the LLC were related parties, the LLC’s $12,700
realized loss on the sale was disallowed for tax purposes. This year, St. George sold
the property to an unrelated purchaser for $500,000.
A flood destroyed several antique carpets that decorated the floors of corporate
headquarters. Unfortunately, St. George’s property insurance does not cover
damage caused by rising water, so the loss was uninsured. The carpets’ adjusted
book basis was $36,000, and their adjusted tax basis was $28,400.
Required:
Compute St. George’s taxable income.
St. Georges net book income before tax $711,800
Installment sale gain (50.12% × $62,000) 31,074
Deduction for disallowed loss of related seller (12,700)
Excess of book casualty loss over tax casualty loss 7,600
St. Georges taxable income $737,774
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