Exam 8: Property Dispositions

Mr. and Mrs. Churchill operate a small business. This year, the Churchills sold a commercial office building used in their business for $1.5 million. They purchased the building in 1997 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. The Churchills should characterize the $638,000 gain recognized on sale as:

McOwen Inc. reported $6,029,400 net income before tax on this year's financial statements prepared in accordance with GAAP. The corporation's records reveal the following information. • A tornado destroyed an office building and its contents. McOwen's book basis in the building and contents was $4,100,000 and its tax basis in the building and contents was $1,539,000. McOwen's reimbursement from its insurance company was $1 million. • Four years ago, McOwen realized a $90,000 gain on the sale of investment property and elected the installment sale method to report the gain for tax purposes. Its gross profit percentage is 37.45%, and it received a $40,000 principal payment on its installment note this year. • Net income per books includes a $13,670 net capital gain. McOwen has a $63,000 capital loss carryforward into the current year. • Depreciation expense per books was $111,400, and MACRS depreciation was $398,100. Compute McOwen's taxable income.

The gain or loss recognized on any disposition of a capital asset is characterized as capital gain or loss.

In its current tax year, PRS Corporation generated $300,000 ordinary income from the performance of consulting services for its clients. PRS sold two assets, recognizing a $20,000 gain on the first sale and a $31,000 loss on the second sale. Which of the following statements is false?

Mr. and Mrs. Marley operate a small business. This year, the Marleys sold a commercial office building used in their business for $1.1 million. They purchased the building in 1999 for a cost of $900,000 and have deducted $300,000 MACRS depreciation through date of sale. The Marleys should characterize the $500,000 gain recognized on sale as:

Noble Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Assuming a 35% tax rate, what is the effect of the sale on Noble's deferred tax accounts?

R&T Inc. made the following sales of capital assets this year. What is the effect of the three sales on R&T's taxable income this year?

Twelve years ago, Mr. and Mrs. Bathgate purchased a business. This year, they sold the business for $750,000 lump-sum payment. The business had the following balance sheet assets. As a result of the sale, the Bathgates should recognize:

A tornado demolished several delivery vans owned for three years by Wadham Company. Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase new vans. Wadham received a $25,000 settlement from its casualty insurance company. Consequently, Wadham recognizes:

Zeron Inc. generated $1,349,600 ordinary income from operations this year. It also recognized $29,200 recaptured ordinary income, $21,000 net Section 1231 gain, and $14,900 net capital loss on the sale of assets. Compute Zeron's taxable income.

Several years ago, Y&S Inc. purchased a patent on a production process for $250,000 and has amortized $91,000 of the cost. Y&S has learned that a rival company recently developed a new process that renders the patent worthless. Consequently, Y&S made a public announcement that it would no longer enforce the patent. What is the tax consequence to Y&S of this unfortunate situation?

Hugo Inc., a calendar year taxpayer, sold two operating assets this year. The first sale generated a $38,700 Section 1231 gain, and the second sale generated a $59,400 Section 1231 loss. As a result of these sales, Hugo should recognize:

Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the land. Netelli must recognize a $53,500 gain on the disposition of the land.

Which of the following is a capital asset?

The use of the installment sale method can result in an unfavorable difference between book income and taxable income in the year of sale.

Milton Inc. recognized a $1,300 net Section 1231 loss in 2012. If Milton recognizes a $5,000 net Section 1231 gain in 2013, it must characterize $1,300 as ordinary income.

Which of the following is a Section 1231 asset?

Blitza Inc. owned real property used for 12 years in its business that was subject to a $294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the property's appraised FMV was $260,000. Which of the following statements is true?

According to the realization principle, an increase in the value of an asset is not accounted for as income unless the amount of the increase can be accurately measured.

A taxpayer that is using the installment sale method to recognize gain must recompute the gross profit percentage every year during the term of the installment note.