Question 1

Two months ago, Dawes Inc. broke a multi-year lease on office space that it had occupied for four years. Three years ago, Dawes paid $85,300 to install carpeting and new electrical fixtures throughout the office. Accumulated depreciation through the date that Dawes vacated the office was $51,000. What is the tax consequence of Dawes' abandonment of the carpeting and fixtures?

Accepted Answer

A)  Dawes has no tax consequence because it did not sell or exchange these assets. 
B)  $34,300 capital loss. 
C)  $34,300 ordinary loss. 
D)  $34,300 Section 1231 loss.

Question 2

Brenda sold investment land for $200,000 in June. Her basis in the land was $75,000. The purchaser paid Brenda $40,000 cash and gave her his 5-year, interest-bearing note for the $160,000 remaining contract price. In December, Brenda received a $20,000 principle payment on the note. Brenda's recognized gain this year is:

Accepted Answer

A)  $125,000 
B)  $60,000 
C)  $37,500 
D)  $22,500

Question 3

Because land is nondepreciable, it is always a capital asset.

Accepted Answer

A) True 
 B)False

Question 4

CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Accepted Answer

A) True 
 B)False

Question 5

Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses the installment sale method, compute Dolzer's book and tax gain in the year of sale.

Accepted Answer

A)  Book gain $301,000; tax gain $100,000 
B)  Book and tax gain $38,839 
C)  Book gain $301,000; tax gain $38,839 
D)  None of these choices are correct

Question 6

Nancy owned business equipment with a $16,950 adjusted basis and a $7,500 FMV that was destroyed by a tornado. The equipment was uninsured. As a result of this casualty, Nancy:

Accepted Answer

A)  Recognizes a $7,500 Section 1231 loss 
B)  Recognizes a $16,950 Section 1231 loss 
C)  Is allowed to deduct a $16,950 ordinary loss 
D)  Is allowed to deduct a $7,500 ordinary loss

Question 7

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?

Accepted Answer

A)  $159,000 ordinary abandonment loss. 
B)  $159,000 capital loss. 
C)  $159,000 Section 1231 loss. 
D)  Y&S has no tax consequences because it did not sell or exchange the patent.

Question 8

Which of the following is a capital asset?

Accepted Answer

A)  Supplies used in a business 
B)  Business inventory 
C)  Land used in a business 
D)  None of these choices are correct

Question 9

The characterization of income as ordinary or capital gain has no relevance for financial reporting purposes.

Accepted Answer

A) True 
 B)False

Question 10

A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of the destruction, Della recognizes:

Accepted Answer

A)  $1 million ordinary loss 
B)  $748,200 ordinary loss 
C)  $748,200 Section 1231 loss 
D)  None of these choices are correct

Question 11

WQP Company generated $1,814,700 ordinary income from the sale of inventory to its customers. It also sold three noninventory assets during the year. Compute WQP's taxable income assuming that:
The first sale resulted in a $10,400 ordinary gain, the second sale resulted in a $23,900 capital loss, and the third sale resulted in a $44,000 capital gain.The first sale resulted in a $79,100 capital loss, the second sale resulted in a $35,200 ordinary loss, and the third sale resulted in a $16,000 capital gain.

Accepted Answer

The answer of WQP Company generated $1,814,700 ordinary income from...

Question 12

Every gain or loss realized on the disposition of property is ultimately characterized as either ordinary or capital for tax purposes.

Accepted Answer

A) True 
 B)False

Question 13

Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts and circumstances prove that the selling price was an arm's length market price, Sandy can recognize the loss.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following assets is not a Section 1231 asset?

Accepted Answer

A)  Business equipment held for four years 
B)  Office furniture held for eight months 
C)  Land used in a business and held for 16 years 
D)  All of these choices are Section 1231 assets

Question 15

The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section 1231 gain is treated as ordinary income.

Accepted Answer

A) True 
 B)False

Question 16

The installment sale method of accounting applies to which of the following?

Accepted Answer

A)  $89,300 gain realized on sale of business inventory. 
B)  $798,600 gain realized on sale of common stock in a publicly held corporation. 
C)  ($41,500) loss realized on sale of land used in a trade or business. 
D)  None of these choices are correct

Question 17

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?

Accepted Answer

A)  If the gain and loss were capital gain and loss, PRS's taxable income was $300,000. 
B)  If the gain was capital gain and the loss was ordinary, PRS's taxable income was $269,000. 
C)  If the gain and loss were ordinary, PRS's taxable income was $289,000. 
D)  If the gain was ordinary and the loss was a capital loss, PRS's taxable income was $320,000.

Question 18

Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of the current year, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize her $71,000 loss this year, even though she still owns the securities.

Accepted Answer

A) True 
 B)False

Question 19

Proctor Inc. was incorporated in 2014 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2019. $\begin{array}{llcc}
2014&2015&2016&2017&2018&2019 \
\$-0-&\$(3,800)&\$9,040&\$(15,900)&\$-0-&\$-0-
\end{array}$
 In 2020, 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 20

Which of the following results in a permanent book/tax difference for a corporate taxpayer?

Accepted Answer

A)  Loss realized on a related party sale 
B)  Sale of a depreciable asset with a $100,000 book basis and a $33,600 adjusted tax basis 
C)  Gain recognized under the installment method 
D)  Net capital loss

Exam 8: Property Dispositions

Because land is nondepreciable, it is always a capital asset.

CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Nancy owned business equipment with a $16,950 adjusted basis and a $7,500 FMV that was destroyed by a tornado. The equipment was uninsured. As a result of this casualty, Nancy:

Which of the following is a capital asset?

The characterization of income as ordinary or capital gain has no relevance for financial reporting purposes.

Every gain or loss realized on the disposition of property is ultimately characterized as either ordinary or capital for tax purposes.

Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts and circumstances prove that the selling price was an arm's length market price, Sandy can recognize the loss.

Which of the following assets is not a Section 1231 asset?

The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section 1231 gain is treated as ordinary income.

The installment sale method of accounting applies to which of the following?

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?

Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of the current year, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize her $71,000 loss this year, even though she still owns the securities.

Which of the following results in a permanent book/tax difference for a corporate taxpayer?