Question

Ms. Drake sold a business that she had operated as a sole proprietorship for 18 years. On date of sale, the business balance sheet showed the following assets:

	Tax Basis
Accounts receivable	$	42,250
Inventory		149,600
Furniture and equipment:
Cost		63,750
Accumulated depreciation		(51,000	)
Leasehold improvements:
Cost		23,000
Accumulated amortization		(4,600	)

Required:
The purchaser paid a lump-sum price of $316,500 cash for the business. The sales contract stipulates that the FMV of the business inventory is $154,000, and the FMV of the remaining balance sheet assets equals adjusted tax basis. Assuming that Ms. Drake’s marginal tax rate on ordinary income is 35 percent and her rate on capital gain is 15 percent, compute the net cash flow from the sale of her business.

Answer 1

Calculation of net cash flow

Particulars	Amount
Amount Reeceived	316500
less: Market value of inventory	(154000)
less: Accounts receivables(42250)/65%	(65000)
Less: lease hold improvement (23000-4600)/85%	(21647)
less:furniture and equipment (63750-51000)/85%	(15000)
Net gain received	60853
less: tax on capital gain	(9128)
Add: post tax profit on sale of inventory (154000-149600)*0.65	2860
Net cash inflow	54585