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TPW, a calendar year taxpayer, sold land with a $585,000 tax basis for $815,000 in February. The purchaser paid $81,500 cash at closing and gave
TPW, a calendar year taxpayer, sold land with a $585,000 tax basis for $815,000 in February. The purchaser paid $81,500 cash at closing and gave TPW an interest-bearing note for the $733,500 remaining price. In August, TPW received a $58,675 payment from the purchaser consisting of a $36,675 principal payment and a $22,000 interest payment. In the first year after the year of sale, TPW received payments totaling $112,350 from the purchaser. The total consisted of $73,350 principal payments and $39,000 interest payments.
Required:
- For the first year after the year of sale, compute the difference between TPWs 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.
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