Exam 9: Nontaxable Exchanges

Tauber Inc. and J&I Company exchanged like-kind assets. Tauber's asset had a $17,500 FMV and $3,000 adjusted tax basis, and J&I's asset had a $19,000 FMV and a $9,000 adjusted tax basis. Tauber paid $1,500 cash to J&I as part of the exchange. Which of the following statements is false?

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Perry Dally FMV \ 500,000 \ 530,000 Adjusted tax basis 410,000 283,000 Mortgage 70,000 100,000 Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for $533,000 cash. Compute Q&J's book and tax gain on sale.

Vandals destroyed a business asset owned by L&L Company. L&L's adjusted tax basis in the asset was $60,800, and the reimbursement from its property insurance company was $90,000. L&L must pay at least $60,800 for a replacement asset in order to defer gain recognition on the involuntary conversion.

Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no cash was included in the exchange). The assets were like-kind properties. Oxono reported the gain as revenue on its financial statements. Which of the following is true?

Nontaxable exchanges typically cause a temporary difference between book income and taxable income.

A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.

The substituted basis rule results in permanent nonrecognition of gains and losses realized in a nontaxable exchange.

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Johnson C \& K FMV \ 900,000 \ 675,000 Adjusted tax basis 593,000 462,000 Mortgage 200,000 -0-0-1 Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash. Which of the following statements is false?

In June, a fire completely destroyed office furniture owned by W&S Inc. W&S's adjusted tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its property insurance company, and on August 8, it paid $16,000 to replace the furniture. Compute W&S's recognized gain on loss on the involuntary conversion and its tax basis in the new furniture.

On May 13, 2020, a flood destroyed the building in which SDF Inc. manufactured its product. SDF's adjusted tax basis in the building was $984,000. On November 29, 2020, SDF received a $1.2 million reimbursement from its casualty insurance company. In each of the following cases, compute SDF's recognized gain on this involuntary conversion and its initial basis in the replacement property. On June 2, 2021, SDF completed construction of a replacement building for $1.3 million.On February 18, 2023, SDF paid $1.3 million to purchase a replacement building.On August 30, 2022, SDF paid $1.1 million to purchase a replacement building.

Tarletto Inc.'s current year income statement includes a $229,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Tarletto's book basis in the new asset is $229,000 greater than its tax basis.

Kimbo Inc. exchanged an old asset ($180,000 FMV and $145,000 adjusted basis) plus $10,000 cash for a new asset with a $190,000 FMV. What is Kimbo's basis in the new asset if the transaction qualifies as a like-kind exchange?

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Perry Dally FMV \ 500,000 \ 530,000 Adjusted tax basis 410,000 283,000 Mortgage 70,000 100,000 Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Perry's gain recognized on the exchange and its tax basis in the property received from Dally.

Mr. Weller and the Olson Partnership entered into an exchange of investment real property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of the following statements is true?

Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had 7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and recognized gain on the exchange and the tax basis in her 4,200 M&W shares.

Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for 148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the transferred assets, each Triple share is worth $125. Which of the following is false?

A fire destroyed equipment used by BLP Inc. in its manufacturing business. BLP's adjusted tax basis in the equipment was $24,000. Three weeks after the fire, BLP paid $40,000 for replacement equipment. Which of the following statements is false?

Hank exchanged an old asset with a $12,000 adjusted basis for a new asset with a $32,000 FMV plus $2,000 cash. Compute Hank's realized and recognized gain if the new and old assets are like-kind properties.