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TPW, a calendar year taxpayer, sold land with a $597,000 tax basis for $825,000 in...

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Accounting

TPW, a calendar year taxpayer, sold land with a $597,000 tax basis for $825,000 in February. The purchaser paid $82,500 cash at closing and gave TPW an interest-bearing note for the $742,500 remaining price. In August, TPW received a $59,425 payment from the purchaser consisting of a $37,125 principal payment and a $22,300 interest payment. In the first year after the year of sale, TPW received payments totaling $113,850 from the purchaser. The total consisted of $74,250 principal payments and $39,600 interest payments.

Required:

  1. For the first year after the year of sale, compute the difference between TPWs 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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