Question 1

Skeen Company paid $90,000 for tangible personalty three years ago and elected to expense and deduct the cost under Section 179. This year, Skeen sold the personalty for $52,700. Accumulated book depreciation through date of sale was $31,000. What is the effect of the sale on Skeen's book income and taxable income?

Accepted Answer

A)  $6,300 book loss: $52,700 tax gain 
B)  $6,300 book loss; -0- tax gain 
C)  $6,300 book and tax gain 
D)  None of the above

Question 2

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?

Accepted Answer

A)  Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage. 
B)  Blitza recognizes a $40,000 Section 1231 loss. 
C)  Blitza recognizes a $5,500 Section 1231 loss. 
D)  Both Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage and Blitza recognizes a $5,500 Section 1231 loss is true.

Question 3

Both corporate and individual taxpayers may be taxed at a preferential rate on net capital gain.

Accepted Answer

A) True 
 B)False

Question 4

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 5

Mr and Mrs Sykes operate a very profitable small business. This year, the Sykes recognized a $100,000 gain on sale of a trade name they had created and copyrighted for use in their business. Which of the following statements is true?

Accepted Answer

A)  The $100,000 gain is capital gain eligible for a preferential tax rate. 
B)  The $100,000 gain is capital gain against which the Sykes can deduct any capital losses recognized this year. 
C)  The $100,000 gain is ordinary business income. 
D)  Statements a. and b. are true.

Question 6

A corporation can use the installment sale method of accounting for both book and tax purposes.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of sale was $18,000. Determine the amount and character of Nipher's gain recognized.

Accepted Answer

A)  $24,500 ordinary gain 
B)  $24,500 Section 1231 gain 
C)  $18,000 ordinary gain and $6,500 capital gain 
D)  $18,000 ordinary gain and $6,500 Section 1231 gain

Question 9

Three years ago, ChaGo Inc. sold a business asset with a $39,400 adjusted tax basis for $130,000. The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of the price. ChaGo is using the installment sale method to recognize its gain on sale. This year, ChaGo sold the note to a financial institution for the note's $55,000 face value (ChaGo had received a total of $25,000 principal payments on the note.) Compute ChaGo's gain recognized on sale of the installment note.

Accepted Answer

A)  -0- 
B)  $38,332 
C)  $52,268 
D)  $55,000

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Proctor Inc. was incorporated in 2012 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2017.
In 2018, 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 12

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 13

O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash flow from the sale assuming a 21% tax rate.

Accepted Answer

A)  $25,443 
B)  $17,143 
C)  $23,700 
D)  None of the above

Question 14

Mrs Beld sold marketable securities with a $79,600 tax basis to her daughter for $60,000 cash. Two years later, the daughter sold the securities through her broker for $93,000. Compute the daughter's gain recognized on sale.

Accepted Answer

A)  $13,400 
B)  $19,600 
C)  $33,000 
D)  None of the above

Question 15

In 2017, 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 2018, 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 2018.

Accepted Answer

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

Question 16

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 17

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.

Accepted Answer

A)  $1,349,000 
B)  $1,378,800 
C)  $1,384,900 
D)  $1,399,800

Question 18

The installment sale method of accounting does not apply to which of the following sales?

Accepted Answer

A)  Sale of 12-acre tract of land held as inventory by a real estate developer 
B)  Sale of business equipment 
C)  Sale of U.S. Treasury notes 
D)  The method does not apply to the sale of 12-acre tract of land held as inventory by a real estate developer or to the sale of U.S. Treasury.

Question 19

Which of the following statements about Section 1250 recapture rule is false?

Accepted Answer

A)  The rule applies to sales of depreciable realty by noncorporate taxpayers but not to sales by corporate taxpayers. 
B)  The rule applies only to sales of depreciable realty placed in service before 1987. 
C)  The rule applies only to sales of depreciable realty for which an accelerated tax depreciation method was used. 
D)  The rule has no effect on the characterization of gain recognized on sale of any realty with a zero tax basis.

Question 20

Andrew sold IBM stock to his sister Susan for $6,000. Andrew purchased the stock two years ago for $8,000. Susan sold the stock through her broker for $7,300. How much gain or loss did Susan recognize on the sale?

Accepted Answer

A)  $700 loss 
B)  No gain or loss 
C)  $1,300 gain 
D)  None of the above

Exam 8: Property Dispositions

Both corporate and individual taxpayers may be taxed at a preferential rate on net capital gain.

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:

Mr and Mrs Sykes operate a very profitable small business. This year, the Sykes recognized a $100,000 gain on sale of a trade name they had created and copyrighted for use in their business. Which of the following statements is true?

A corporation can use the installment sale method of accounting for both book and tax purposes.

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.

Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of sale was $18,000. Determine the amount and character of Nipher's gain recognized.

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

O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash flow from the sale assuming a 21% tax rate.

Mrs Beld sold marketable securities with a $79,600 tax basis to her daughter for $60,000 cash. Two years later, the daughter sold the securities through her broker for $93,000. Compute the daughter's gain recognized on sale.

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.

The installment sale method of accounting does not apply to which of the following sales?

Which of the following statements about Section 1250 recapture rule is false?

Andrew sold IBM stock to his sister Susan for $6,000. Andrew purchased the stock two years ago for $8,000. Susan sold the stock through her broker for $7,300. How much gain or loss did Susan recognize on the sale?