Question 1

Each of the following is true except for:

Accepted Answer

A)  A direct involuntary conversion occurs when property taken under imminent domain is replaced with other property. 
B)  Qualified replacement property rules are more restrictive than the like-kind property rules. 
C)  An indirect involuntary conversion occurs when property is destroyed and insurance proceeds are used to purchase qualified replacement property. 
D) Losses realized in involuntary conversions are deferred. 
E) All of these are true

Question 2

The gain or loss realized on the sale of an asset is always recognized for tax purposes.

Accepted Answer

A) True 
 B)False

Question 3

What is the character of land used in an active trade or business for two years?

Accepted Answer

A)  Capital. 
B)  Ordinary. 
C)  §1231. 
D) Investment. 
E) None of these

Question 4

Losses on sales between related parties are realized but not recognized.

Accepted Answer

A) True 
 B)False

Question 5

Mary traded furniture used in her business to a furniture dealer for some new furniture. Mary originally purchased the furniture for $45,000 and it had an adjusted basis of $20,000 at the time of the exchange. The new furniture had a fair market value of $40,000. Mary also gave $4,000 to the dealer in the transaction. What is Mary's adjusted basis in the new furniture after the exchange?

Accepted Answer

A)  $20,000. 
B)  $24,000. 
C)  $36,000. 
D) $40,000. 
E) None of these

Question 6

Which of the following is not true regarding §1239?

Accepted Answer

A)  It only applies to related taxpayers. 
B)  It only applies to gains on sales of depreciable property. 
C)  It only applies to gains on sales of non-residential real property. 
D) It does not apply to losses. 
E) None of these

Question 7

Generally, the amount realized is everything of value received in a sale less selling expenses.

Accepted Answer

A) True 
 B)False

Question 8

In a deferred like-kind exchange the like-kind property to be received must be identified within 45 days and acquired within 180 days from the initial exchange.

Accepted Answer

A) True 
 B)False

Question 9

Brandy sold a rental house that she owned for $150,000. Brandy bought the house four years ago for $140,000 and has claimed $25,000 of depreciation expense. What is the amount and character of Brandy's gain or loss? If this is the only asset Brandy sells during the year and her ordinary tax rate is 35 percent, how much tax would she owe on the sale of the rental house?

Accepted Answer

The answer of Brandy sold a rental house that she...

Question 10

Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

Accepted Answer

A)  $40,000 ordinary and $360,000 §1231 gain. 
B)  $200,000 ordinary and $200,000 §1231 gain. 
C)  $400,000 ordinary gain. 
D) $400,000 capital gain. 
E) None of these

Question 11

Which of the following does not ultimately result in a capital gain or loss?

Accepted Answer

A)  Sale of a personal use asset. 
B)  Sale of inventory. 
C)  Gain on equipment used in a trade or business held for more than one year, if it is the only asset sale during the year. 
D) Sale of capital stock in another company. 
E) None of these

Question 12

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

Accepted Answer

A)  $20,000 ordinary income under §1239. 
B)  $10,000 ordinary gain and $10,000 §1231 gain. 
C)  $20,000 ordinary gain. 
D) $20,000 capital gain. 
E) None of these

Question 13

Taxpayers can recognize a taxable gain even though an asset's real economic value has declined.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is true regarding depreciation recapture?

Accepted Answer

A)  Changes the character of a loss. 
B)  Changes the character of a gain. 
C)  Changes the amount of a gain. 
D) Only applies to ordinary assets. 
E) None of these

Question 15

Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

Accepted Answer

A)  $7,500 §1231 loss. 
B)  $5,000 §1231 loss. 
C)  $7,500 ordinary gain. 
D) $7,500 capital gain. 
E) None of these

Question 16

In the current year, Raven sold machinery with a fair market value of $200,000. The machinery's original basis was $190,000 and Raven's accumulated depreciation on the machinery was $40,000, so its adjusted basis to Raven was $150,000. Raven received $50,000 in the current year and a note paying Raven $75,000 a year for two years beginning in next year. What is the amount and character of the gain that Raven will recognize in the current year?

Accepted Answer

The answer of In the current year, Raven sold machinery...

Question 17

Which one of the following is not true regarding a like-kind exchange?

Accepted Answer

A)  Loss on like-kind property is not recognized. 
B)  Gains on boot given are deferred. 
C)  Losses on boot given are not recognized. 
D) Securities can be like-kind with any other securities. 
E) All of these

Question 18

Silver sold machinery to Gold, a related entity, which it used in its business for $55,000. Silver bought the equipment a few years ago for $50,000 and has claimed $15,000 of depreciation expense. What is the amount and character of Silver's gain?

Accepted Answer

The answer of Silver sold machinery to Gold, a related...

Question 19

Bull Run sold a computer for $1,200 on November 10^th of the current year. The computer was purchased for $2,800. Bull Run had taken $1,000 of depreciation deductions. What is Bull Run's gain or loss realized on the computer?

Accepted Answer

The answer of Bull Run sold a computer for $1,200...

Question 20

Andrew, an individual, began business four years ago and has never sold a §1231 asset. Andrew owned each of the assets for several years. In the current year, Andrew sold the following business assets:
Assuming Andrew's marginal ordinary income tax rate is 30 percent, what is the character of the gains and losses and what affect do they have on Andrew's tax liability?
 $$\begin{array} { | l | r | r | r | } 
\hline \text { Asset } & \begin{array} { r } 
\text { Original } \
\text { Cost }
\end{array} & \begin{array} { r } 
\text { Accumulated } \
\text { Depreciation }
\end{array} & \text { Gain/Loss } \
\hline \text { Machinery } & \$ 12,000 & \$ 7,000 & \$ 6,000 \
\hline \text { Furniture } & 10,000 & 2,000 & 3,000 \
\hline \text { Building } & 90,000 & 20,000 & ( 5,000 ) \
\hline
\end{array}$$

Accepted Answer

The answer of Andrew, an individual, began business four years...

Exam 3: Property Dispositions

Each of the following is true except for:

The gain or loss realized on the sale of an asset is always recognized for tax purposes.

What is the character of land used in an active trade or business for two years?

Losses on sales between related parties are realized but not recognized.

Which of the following is not true regarding §1239?

Generally, the amount realized is everything of value received in a sale less selling expenses.

In a deferred like-kind exchange the like-kind property to be received must be identified within 45 days and acquired within 180 days from the initial exchange.

Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

Which of the following does not ultimately result in a capital gain or loss?

Alpha sold machinery, which it used in its business, to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?

Taxpayers can recognize a taxable gain even though an asset's real economic value has declined.

Which of the following is true regarding depreciation recapture?

Butte sold a machine to a machine dealer for $50,000. Butte bought the machine for $55,000 several years ago and has claimed $12,500 of depreciation expense on the machine. What is the amount and character of Butte's gain or loss?

Which one of the following is not true regarding a like-kind exchange?

Silver sold machinery to Gold, a related entity, which it used in its business for $55,000. Silver bought the equipment a few years ago for $50,000 and has claimed $15,000 of depreciation expense. What is the amount and character of Silver's gain?

Bull Run sold a computer for $1,200 on November 10th of the current year. The computer was purchased for $2,800. Bull Run had taken $1,000 of depreciation deductions. What is Bull Run's gain or loss realized on the computer?

Bull Run sold a computer for $1,200 on November 10^th of the current year. The computer was purchased for $2,800. Bull Run had taken $1,000 of depreciation deductions. What is Bull Run's gain or loss realized on the computer?