Question 1

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:

Accepted Answer

A)  $324,900 ordinary gain. 
B)  $104,800 ordinary gain and $220,100 capital gain. 
C)  $51,000 ordinary gain and $273,900 Section 1231 gain. 
D)  None of the choices are correct.

Question 2

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 3

Benlow Company, a calendar year taxpayer, sold two operating assets this year. The first sale generated a $19,200 Section 1231 loss, and the second sale generated a $33,600 Section 1231 gain. As a result of these sales, Benlow should recognize:

Accepted Answer

A)  $19,200 ordinary loss and $33,600 gain treated as capital gain. 
B)  $14,400 gain treated as capital gain. 
C)  $14,400 ordinary income. 
D)  None of the above

Question 4

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 5

In 2018, Mary recognized a $45,000 gain on the sale of Section 1231 property. Over the previous five-year period, Mary recognized the following net Section 1231 gains and (losses):
2017 ($28,000)
2016 $16,000
2015 ($30,000)
Mary's 2018 gain is characterized as

Accepted Answer

A)  $45,000 ordinary gain 
B)  $42,000 ordinary gain and $3,000 capital gain 
C)  $28,000 ordinary gain and $17,000 capital gain 
D)  $45,000 capital gain

Question 6

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 7

Thieves stole computer equipment owned by Eaton Company and used for three years in its consulting business. Eaton's adjusted basis in equipment was $23,200, and its replacement value was $50,000. Eaton's insurance company paid only $15,000 on Eaton's claim for the theft loss. As a result, Eaton recognizes:

Accepted Answer

A)  $35,000 ordinary loss 
B)  $8,200 Section 1231 loss 
C)  $8,200 ordinary loss 
D)  None of the above

Question 8

A fire destroyed business equipment that was worth $160,000 and had a $118,100 adjusted tax basis. The equipment was uninsured. The owner can recognize a $160,000 ordinary casualty loss.

Accepted Answer

A) True 
 B)False

Question 9

Gain or loss realized on the disposition of property is recognized unless the tax law provides a nonrecognition exception.

Accepted Answer

A) True 
 B)False

Question 10

The sale of business inventory always generates ordinary income or loss.

Accepted Answer

A) True 
 B)False

Question 11

B&I Inc. sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 2008 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 12

Gupta Company made the following sales of capital assets this year.
What is the effect of the three sales on Gupta's taxable income?

Accepted Answer

A)  $700 increase 
B)  $12,900 increase 
C)  No effect 
D)  None of the choices are correct

Question 13

DiLamer Inc. paid $300,000 to purchase 30-year bonds issued by a publicly held foreign corporation. The foreign government recently privatized the corporation and declared that all outstanding corporate debt obligations would not be honored. What is the tax consequence to DiLamer of this bad news?

Accepted Answer

A)  No loss recognition until DiLamer actually disposes of the bonds. 
B)  $300,000 Section 1231 loss. 
C)  $300,000 capital loss. 
D)  $300,000 ordinary abandonment loss.

Question 14

Inventory, accounts receivable, and machinery used in a business are examples of capital assets.

Accepted Answer

A) True 
 B)False

Question 15

"Tiny Dancer" is the name of a bronze figurine created by artist Diego Ossa. The owner recently recognized a $43,500 gain on sale of the figurine. Which of the following statements is false?

Accepted Answer

A)  If Diego Ossa was the seller, the gain is ordinary. 
B)  If a commercial art gallery that had held Tiny Dancer in its inventory was the seller, the gain is ordinary. 
C)  If a private collector who purchased Tiny Dancer from an art gallery was the seller, the gain is capital gain. 
D)  None of the above is false.

Question 16

Mr Beck sold real property with a $140,000 adjusted basis for $255,000. The buyer paid $148,000 cash and assumed Mr Beck's $107,000 mortgage on the realty. Mr Beck's realized gain or loss on sale is:

Accepted Answer

A)  $115,000 gain 
B)  $8,000 gain 
C)  $33,000 loss 
D)  $0 gain or loss

Question 17

Kuong Inc. sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 2000 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain recognized on sale as:

Accepted Answer

A)  $127,600 ordinary gain and $510,400 Section 1231 gain 
B)  $107,600 ordinary gain and $530,400 Section 1231 gain 
C)  $538,000 ordinary gain and $100,000 Section 1231 gain 
D)  Section 1231 gain

Question 18

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 2004 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:

Accepted Answer

A)  Capital gain 
B)  Section 1231 gain 
C)  $300,000 ordinary gain and $200,000 Section 1231 gain 
D)  None of the above

Question 19

O&V sold a business asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and gave O&V a note for the $70,000 balance of the price. O&V will not receive a payment on the note until next year. Compute O&V's gain recognized under the installment sale method.

Accepted Answer

A)  $7,690 
B)  $6,510 
C)  $4,920 
D)  None of the above

Question 20

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

Exam 8: Property Dispositions

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:

Benlow Company, a calendar year taxpayer, sold two operating assets this year. The first sale generated a $19,200 Section 1231 loss, and the second sale generated a $33,600 Section 1231 gain. As a result of these sales, Benlow should recognize:

In 2018, Mary recognized a $45,000 gain on the sale of Section 1231 property. Over the previous five-year period, Mary recognized the following net Section 1231 gains and (losses) : 2017 ($28,000) 2016 $16,000 2015 ($30,000) Mary's 2018 gain is characterized 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.

A fire destroyed business equipment that was worth $160,000 and had a $118,100 adjusted tax basis. The equipment was uninsured. The owner can recognize a $160,000 ordinary casualty loss.

Gain or loss realized on the disposition of property is recognized unless the tax law provides a nonrecognition exception.

The sale of business inventory always generates ordinary income or loss.

B&I Inc. sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 2008 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:

Gupta Company made the following sales of capital assets this year. What is the effect of the three sales on Gupta's taxable income?

DiLamer Inc. paid $300,000 to purchase 30-year bonds issued by a publicly held foreign corporation. The foreign government recently privatized the corporation and declared that all outstanding corporate debt obligations would not be honored. What is the tax consequence to DiLamer of this bad news?

Inventory, accounts receivable, and machinery used in a business are examples of capital assets.

"Tiny Dancer" is the name of a bronze figurine created by artist Diego Ossa. The owner recently recognized a $43,500 gain on sale of the figurine. Which of the following statements is false?

Mr Beck sold real property with a $140,000 adjusted basis for $255,000. The buyer paid $148,000 cash and assumed Mr Beck's $107,000 mortgage on the realty. Mr Beck's realized gain or loss on sale is:

Kuong Inc. sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 2000 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain recognized on sale as:

O&V sold a business asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and gave O&V a note for the $70,000 balance of the price. O&V will not receive a payment on the note until next year. Compute O&V's gain recognized under the installment sale method.

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.