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

In 2007, 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 3

In 2011, 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 2012, 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 2011.

Accepted Answer

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

Question 4

"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 5

Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of 2011, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize her $71,000 loss in 2011, even though she still owns the securities.

Accepted Answer

A) True 
 B)False

Question 6

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 1996 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 7

The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in the hands of a different taxpayer.

Accepted Answer

A) True 
 B)False

Question 8

Mrs. Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2004. This year, HiFli declared bankruptcy and announced that its stock has no value. What is the tax consequence to Mrs. Tinker of this bad news?

Accepted Answer

A)  $78,400 ordinary abandonment loss 
B)  $78,400 capital loss 
C)  No loss recognition until Mrs. Tinker actually disposes of the stock 
D)  None of the above

Question 9

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 in 1994. 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 10

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 11

In 2011, TPC Inc. sold investment land with a $388,000 book and tax basis for $523,000. The purchaser paid $60,000 in cash and gave TPC a note for the $463,000 balance of the price. In 2012, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2012, TPC's use of the installment sale method results in a:

Accepted Answer

A)  $10,325 favorable permanent book/tax difference 
B)  $17,496 unfavorable temporary difference 
C)  $17,496 favorable temporary difference 
D)  None of the above

Question 12

Dender Company sold business equipment with a $386,000 initial cost basis and $171,000 accumulated tax depreciation. Compute Dender's recaptured ordinary income and Section 1231 gain or loss recognized if the amount realized on sale was:
a. $200,000
b. $300,000
c. $400,000

Accepted Answer

The answer of Dender Company sold business equipment with a...

Question 13

CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1993. 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 14

Abada Inc. has a $925,000 basis in 100% of the stock of AbWest Inc., which derives all its income from a manufacturing activity. If Abada determines that the AbWest stock is worthless, it can recognize a $925,000 ordinary loss.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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...

Question 17

Which of the following is a capital asset?

Accepted Answer

A)  Accounts receivable of an accrual basis business 
B)  Business equipment 
C)  Self-created goodwill 
D)  Purchased goodwill

Question 18

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:
a. 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.
b. 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 19

Mr. Jason realized a gain on sale of a residential apartment complex that he had placed in service in 1993. 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 20

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

Exam 8: Property Dispositions

"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?

Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of 2011, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize her $71,000 loss in 2011, even though she still owns the securities.

The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in the hands of a different taxpayer.

Mrs. Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2004. This year, HiFli declared bankruptcy and announced that its stock has no value. What is the tax consequence to Mrs. Tinker of this bad news?

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 in 1994. Which of the following statements is true?

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.

Dender Company sold business equipment with a $386,000 initial cost basis and $171,000 accumulated tax depreciation. Compute Dender's recaptured ordinary income and Section 1231 gain or loss recognized if the amount realized on sale was: a. $200,000 b. $300,000 c. $400,000

CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1993. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Abada Inc. has a $925,000 basis in 100% of the stock of AbWest Inc., which derives all its income from a manufacturing activity. If Abada determines that the AbWest stock is worthless, it can recognize a $925,000 ordinary loss.

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.

Which of the following is a capital asset?

Mr. Jason realized a gain on sale of a residential apartment complex that he had placed in service in 1993. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

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.