Problem $16-48($LO$.4,7)$

Floyd, a cash basis taxpayer, has received an offer to purchase his land. The cash basis buyer will pay him either $$100,000$ at closing or $$50,000$ at closing and $$56,000$ two years after the date of closing. If Floyd recognizes the entire gain in the current year, his marginal tax rate will be $25\%($combined Federal and state rates$).$ However, if he spreads the gain over the two years, his combined marginal tax rate on the gain will be only $20\%.$ Floyd does not consider the buyer a credit risk, and he understands that shifting the gain to next year with an installment sale will save taxes.

Still, he realizes that the deferred payment will, in effect, earn only $$6,000$ for waiting two years for the other $$50,000.$ Floyd believes he can earn a $10\%$ before$-$tax rate of return on his after$-$tax cash. Floyd's adjusted basis for the land is $$25,000,$ the buyer also is a cash basis taxpayer, and the short$-$term Federal rate is $4\%.$

Floyd has asked you to evaluate the two alternatives on an after$-$tax basis.

Round computations to the nearest cent and use in subsequent computations. When required, round final answers to the nearest dollar.

a$.$ For Option $1$ determine the following:

Recognized gain: $$

After$-$tax cash proceeds: $

After$-$tax cash proceeds compounded for $2$ years: $

b$.$ For Option $z$ determine the following:

Imputed interest on the $$56,000$ for two years at $4\%$ : $ $$

Total selling price under Option $2$:$

Round the gross profit to $4$ decimal places and enter as a percentage. $($For example: $.53379$ would be rounded to $\mathrm{.}5338$ and entered as $53\mathrm{.}38).$

Gross profit percentage: $\%$

Year $1$

Cash received: $$

Recognized gain: $$

After$-$tax cash proceeds: $ $$

Cash proceeds compounded for $2$ years: $1$

Year $2$

Cash received: s $$