Question 1

Delta Inc. generated $668,200 ordinary income from operations this year. It also recognized $3,910 recaptured ordinary income, $5,000 net Section 1231 gain, and $14,600 net capital loss on the sale of assets. Compute Delta's taxable income.

Accepted Answer

A) $672,100 
B) $677,100 
C) $668,200 
D) $697,700

Question 2

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 the above

Question 3

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 4

Langtry Corporation recognized $798,000 ordinary income, $13,000 net Section 1231 loss, and $6,000 net capital loss this year. Langtry's taxable income is $785,000.

Accepted Answer

A) True 
 B)False

Question 5

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 6

In 2012, 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 2013, 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 2013.

Accepted Answer

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

Question 7

Kopel Company transferred an inventory asset to Cassim LLC in exchange for Cassim's $230,000 interest-bearing note. Kopel's tax basis in the note is its $230,000 face value.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Mr. Quick sold marketable securities with a $112,900 tax basis to his son for $95,000 cash. Two years later, the son sold the securities through his broker for $90,000. Compute the son's loss recognized on sale.

Accepted Answer

A) -0- 
B) $5,000 
C) $22,900 
D) None of the above

Question 10

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 11

Proctor Inc. was incorporated in 2004 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2009.  In 2010, 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

Lenoci 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. Which of the following statements is true?

Accepted Answer

A) The sale results in a $53,487 favorable temporary book/tax difference. 
B) The sale results in a $53,487 unfavorable temporary book/tax difference. 
C) The sale results in a $53,487 unfavorable permanent book/tax difference. 
D) None of the above is true.

Question 13

Six years ago, Alejo Company purchased real property by paying $250,000 cash and giving the seller its $1 million note for the balance of the purchase price. This year, Alejo deducted $30,800 depreciation on the property and made a $125,000 principal payment on the note. Which of the following statements is false?

Accepted Answer

A) The depreciation deduction reduced Alejo's adjusted tax basis in the real property. 
B) The principal payment increased Alejo's equity in the real property. 
C) The principal payment reduced Alejo's tax basis in the real property and the balance due on the note. 
D) None of the above statements is false.

Question 14

Verno Inc. purchased business equipment in March and sold it in November. Verno's gain or loss recognized on the sale is ordinary.

Accepted Answer

A) True 
 B)False

Question 15

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 16

Philp Inc. sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset. Compute Philp's net cash flow from the sale assuming a 35% tax rate.

Accepted Answer

A) $23,485 
B) $20,000 
C) -0- 
D) None of the above

Question 17

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 18

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 19

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 20

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.

Exam 8: Property Dispositions

Delta Inc. generated $668,200 ordinary income from operations this year. It also recognized $3,910 recaptured ordinary income, $5,000 net Section 1231 gain, and $14,600 net capital loss on the sale of assets. Compute Delta's taxable income.

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.

Langtry Corporation recognized $798,000 ordinary income, $13,000 net Section 1231 loss, and $6,000 net capital loss this year. Langtry's taxable income is $785,000.

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.

Kopel Company transferred an inventory asset to Cassim LLC in exchange for Cassim's $230,000 interest-bearing note. Kopel's tax basis in the note is its $230,000 face value.

Which of the following is a capital asset?

Mr. Quick sold marketable securities with a $112,900 tax basis to his son for $95,000 cash. Two years later, the son sold the securities through his broker for $90,000. Compute the son's loss recognized on sale.

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.

Lenoci 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. Which of the following statements is true?

Verno Inc. purchased business equipment in March and sold it in November. Verno's gain or loss recognized on the sale is ordinary.

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.

Philp Inc. sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset. Compute Philp's net cash flow from the sale assuming a 35% tax rate.

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.

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.

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?