Question 1

Princetown Inc.has a $4.82 million basis in 88% of the outstanding stock of Merryvale Corporation.Merryvale manufactures Christmas decorations,cards,and wrapping paper.Princetown's board of directors recently learned that Merryvale is bankrupt.The board voted unanimously to dissolve the corporation and distribute all assets to Merryvale's creditors.What is the tax consequence to Princetown of the board's actions?

Accepted Answer

A) No loss recognition until Princetown actually disposes of the Merryvale stock. 
B) $4.82 million Section 1231 loss. 
C) $4.82 million capital loss. 
D) $4.82 million ordinary loss.

Question 2

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:

Accepted Answer

A) $20,700 ordinary loss 
B) $38,700 Section 1231 gain treated as capital gain and $59,400 ordinary loss 
C) $20,700 capital loss 
D) None of the above

Question 3

Proctor Inc.was incorporated in 2013 and adopted a calendar year.Here is a schedule of Proctor's net Section 1231 gains and (losses)reported on its tax returns through 2018.  In 2019,Proctor recognized a $25,000 gain on the sale of business land.How is this gain characterized on Proctor's tax return?

Accepted Answer

A) $25,000 Section 1231 gain. 
B) $19,700 ordinary gain and $5,300 Section 1231 gain. 
C) $15,900 ordinary gain and $9,100 Section 1231 gain. 
D) $25,000 ordinary gain.

Question 4

Milton Inc.recognized a $1,300 net Section 1231 loss in 2015.If Milton recognizes a $5,000 net Section 1231 gain in 2016,it must characterize $1,300 as ordinary income.

Accepted Answer

A) True 
 B)False

Question 5

Mrs.Stile owns investment land subject to a $600,000 nonrecourse mortgage.Her basis in the land is $212,000,and the land's appraised FMV is $575,000.Mrs.Stile is considering defaulting on the mortgage and allowing the creditor to foreclose.If Mrs.Stile disposes of the land through a foreclosure,she will recognize:

Accepted Answer

A) $212,000 capital loss 
B) $212,000 ordinary abandonment loss 
C) $363,000 capital gain 
D) $388,000 capital gain

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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 1999 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:

Accepted Answer

A) Ordinary gain 
B) Capital gain 
C) $538,000 ordinary gain and $100,000 Section 1231 gain 
D) Section 1231 gain

Question 8

Winslow Company sold investment land to an unrelated purchaser.The purchaser paid $250,000 cash,assumed Winslow's $600,000 mortgage on the land,and gave Winslow its $580,000 ten-year,interest-bearing note.Compute Winslow's amount realized on sale.

Accepted Answer

A) $250,000 
B) $830,000 
C) $850,000 
D) $1,430,000

Question 9

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:

Accepted Answer

A) $3,400 Section 1231 loss 
B) $65,000 Section 1231 loss 
C) $65,000 ordinary loss 
D) None of the above

Question 10

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 21% tax rate,what is the effect of the sale on Noble's deferred tax accounts?

Accepted Answer

A) $11,232 increase in deferred tax assets 
B) $11,232 increase in deferred tax liabilities 
C) $11,232 decrease in deferred tax liabilities 
D) No effect on deferred tax accounts

Question 11

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.

Accepted Answer

The answer of McOwen Inc.reported $6,029,400 net income before tax...

Question 12

Ficia Inc.owned investment land subject to a $294,500 recourse mortgage.Ficia failed to make timely mortgage payments,so the creditor foreclosed.At date of foreclosure,Ficia's basis in the land was $300,000,and the land's appraised FMV was $260,000.The creditor informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage.Which of the following statements is true?

Accepted Answer

A) Ficia recognizes $34,500 ordinary income and a $40,000 capital loss. 
B) Ficia recognizes only a $40,000 capital loss. 
C) Ficia recognizes only a $5,500 capital loss. 
D) None of the above

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

Mr.Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash.Which of the following statements is true?

Accepted Answer

A) If Mr.Quick can offer evidence that the FMV of the securities is $95,000,he can recognize his $17,900 realized loss. 
B) If Mr.Quick and his corporation negotiated the terms of the sale at arm's length,Mr.Quick can recognize his $17,900 realized loss. 
C) The corporation's tax basis in the securities is $112,900. 
D) None of the above is true.

Question 15

B&I Inc.sold a commercial office building used in the corporate business for $862,000.B&I purchased the building in 2009 for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale.B&I should characterize the $329,200 gain recognized on sale as:

Accepted Answer

A) $167,200 ordinary gain and $162,000 Section 1231 gain 
B) Section 1231 gain 
C) Capital gain 
D) None of the above

Question 16

Mr.and Mrs.Plame sold an investment asset to their grandson Leonard.Because Leonard is a related party,the Plames do not recognize any gain or loss realized on sale.

Accepted Answer

A) True 
 B)False

Question 17

If a taxpayer sells business realty that was depreciated using the straightline method,the entire gain is characterized as Section 1231 gain.

Accepted Answer

A) True 
 B)False

Question 18

Ms.Cregg has a $43,790 basis in 2,460 shares of ABD Inc.common stock.ABD recently declared bankruptcy and announced that its common stock is worthless.As a result,Ms.Cregg can recognize a $43,790 ordinary loss.

Accepted Answer

A) True 
 B)False

Question 19

Mrs.Lex realized a $78,400 gain on sale of investment land to S&T,which issued a 10-year note in full payment.Mrs.Lex must recognize the gain in the year of sale unless she elects to use the installment sale method to recognize gain over the term of the note.

Accepted Answer

A) True 
 B)False

Question 20

In 2018,TPC Inc.sold investment land with a $474,000 book and tax basis for $775,000.The purchaser paid $100,000 in cash and gave TPC a note for the $675,000 balance of the price.In 2019,TPC received a $105,500 payment on the note ($67,500 principal + $38,000 interest).Assuming that TPC is using the installment sale method,compute its gain recognized in 2019.

Accepted Answer

A) $26,216 
B) $40,976 
C) $67,500 
D) None of the above

Exam 8: Property Dispositions

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:

Milton Inc.recognized a $1,300 net Section 1231 loss in 2015.If Milton recognizes a $5,000 net Section 1231 gain in 2016,it must characterize $1,300 as ordinary income.

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.

Winslow Company sold investment land to an unrelated purchaser.The purchaser paid $250,000 cash,assumed Winslow's $600,000 mortgage on the land,and gave Winslow its $580,000 ten-year,interest-bearing note.Compute Winslow's amount realized on sale.

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:

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 21% tax rate,what is the effect of the sale on Noble's deferred tax accounts?

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.

Mr.Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash.Which of the following statements is true?

B&I Inc.sold a commercial office building used in the corporate business for $862,000.B&I purchased the building in 2009 for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale.B&I should characterize the $329,200 gain recognized on sale as:

Mr.and Mrs.Plame sold an investment asset to their grandson Leonard.Because Leonard is a related party,the Plames do not recognize any gain or loss realized on sale.

If a taxpayer sells business realty that was depreciated using the straightline method,the entire gain is characterized as Section 1231 gain.

Ms.Cregg has a $43,790 basis in 2,460 shares of ABD Inc.common stock.ABD recently declared bankruptcy and announced that its common stock is worthless.As a result,Ms.Cregg can recognize a $43,790 ordinary loss.

Mrs.Lex realized a $78,400 gain on sale of investment land to S&T,which issued a 10-year note in full payment.Mrs.Lex must recognize the gain in the year of sale unless she elects to use the installment sale method to recognize gain over the term of the note.