TPW, a calendar year taxpayer, sold land with a $560,000 tax basis for $850,000 in February. The purchaser paid $85,000 cash at closing and gave TPW an interest-bearing note for the $765,000 remaining price. In August, TPW received a $61,250 payment from the purchaser consisting of a $38,250 principal payment and a $23,000 interest payment. In the first year after the year of sale, TPW received payments totaling $117,500 from the purchaser. The total consisted of $76,500 principal payments and $41,000 interest payments.   Required: For the first year after the year of sale, compute the difference between TPW’s book and tax income resulting from the installment sale method. Is this difference favorable or unfavorable? Using a 21 percent tax rate, determine the effect of the difference on the deferred tax asset or liability generated in the year of sale.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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TPW, a calendar year taxpayer, sold land with a $560,000 tax basis for $850,000 in February. The purchaser paid $85,000 cash at closing and gave TPW an interest-bearing note for the $765,000 remaining price. In August, TPW received a $61,250 payment from the purchaser consisting of a $38,250 principal payment and a $23,000 interest payment. In the first year after the year of sale, TPW received payments totaling $117,500 from the purchaser. The total consisted of $76,500 principal payments and $41,000 interest payments.

 

Required:

  1. For the first year after the year of sale, compute the difference between TPW’s book and tax income resulting from the installment sale method.
  2. Is this difference favorable or unfavorable?
  3. Using a 21 percent tax rate, determine the effect of the difference on the deferred tax asset or liability generated in the year of sale.
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