Property Dispositions Test Bank Answers Ch8

Principles of Taxation for Business and Investment Planning, 23e (Jones)

Chapter 8 Property Dispositions

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

Difficulty: 2 Medium

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

2) 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.

Difficulty: 2 Medium

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

3) The seller's amount realized on the sale of property equals any cash received plus the FMV of any property received plus any amount of debt relief to the seller.

Difficulty: 1 Easy

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

4) Mr. Hickem sold an investment asset worth $20,000. The purchaser paid Mr. Hickem by giving him $12,500 cash and an oil painting worth $7,500. Mr. Hickem's amount realized on sale is $12,500.

Difficulty: 1 Easy

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

5) N&B Inc. sold land worth $385,000. The purchaser paid $80,000 cash and assumed N&B's $305,000 mortgage on the land. N&B's amount realized on sale is $385,000.

Difficulty: 1 Easy

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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.

Difficulty: 2 Medium

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

8) Mrs. Lex realized a $78,400 gain on sale of investment land to S&T, which issued a 10-year note in full payment. Mrs. Lex must recognize the gain in the year of sale unless she elects to use the installment sale method to recognize gain over the term of the note.

Explanation: The installment sale method is the default - Mrs. Lex can elect not to use it.

Difficulty: 2 Medium

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

9) A taxpayer that is using the installment sale method to recognize gain must recompute the gross profit percentage every year during the term of the installment note.

Difficulty: 2 Medium

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

10) The use of the installment sale method can result in an unfavorable difference between book income and taxable income in the year of sale.

Explanation: Any book/tax difference in the year of sale is favorable because of the deferral of income recognition under the installment sale method.

Difficulty: 2 Medium

Topic: Installment Sale Method; Book/Tax Differences on Asset Dispositions

Learning Objective: 08-02 Apply the installment sale method of accounting.; 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

11) The installment sale method of accounting is not applicable to realized losses.

Difficulty: 1 Easy

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Installment Sale Method; Book/Tax Differences on Asset Dispositions

Learning Objective: 08-02 Apply the installment sale method of accounting.; 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

13) 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.

Explanation: The Plames would recognize gain on the sale; only losses on sales to related parties are disallowed.

Difficulty: 2 Medium

Topic: Disallowed Losses on Related Party Sales

Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

14) Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts and circumstances prove that the selling price was an arm's length market price, Sandy can recognize the loss.

Difficulty: 2 Medium

Topic: Disallowed Losses on Related Party Sales

Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Explanation: The disposition must be a sale or exchange to result in a capital gain or loss.

Difficulty: 3 Hard

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

16) The characterization of income as ordinary or capital gain has no relevance for financial reporting purposes.

Explanation: The characterization affects only the tax treatment of the income.

Difficulty: 3 Hard

Topic: Book/Tax Differences on Asset Dispositions; Tax Character of Gains and Losses

Learning Objective: 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.; 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

17) 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.

Difficulty: 2 Medium

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

19) For tax purposes, every asset is a capital asset unless it falls into one of eight categories of noncapital assets.

Difficulty: 2 Medium

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

20) Every gain or loss realized on the disposition of property is ultimately characterized as either ordinary or capital for tax purposes.

Difficulty: 2 Medium

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

21) Both corporate and individual taxpayers can deduct capital losses to the extent of capital gains.

Difficulty: 1 Easy

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

22) Both corporate and individual taxpayers can carry back a net capital loss to the three prior taxable years.

Explanation: Only corporate taxpayers can use a net capital loss as a carryback.

Difficulty: 2 Medium

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Explanation: Only individual taxpayers have preferential capital gain tax rates.

Difficulty: 2 Medium

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

24) Because land is nondepreciable, it is always a capital asset.

Explanation: Land held as inventory is an ordinary asset, and land used in a trade or business is a Section 1231 asset.

Difficulty: 2 Medium

Topic: Section 1231 Assets

Learning Objective: 08-06 Identify Section 1231 assets.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Explanation: The business equipment is not a capital asset or a Section 1231 asset (because Verno did not hold it for more than 12 months).

Difficulty: 3 Hard

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

27) A taxpayer cannot compute its net Section 1231 gain or loss for a taxable year until the year closes.

Difficulty: 1 Easy

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

28) 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.

Explanation: Just the opposite!

Difficulty: 1 Easy

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

29) JG Inc. recognized $690,000 ordinary income, $48,000 net Section 1231 gain, and $77,000 net capital loss this year. JG's taxable income is $690,000.

Difficulty: 2 Medium

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

30) 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.

Difficulty: 2 Medium

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

31) Tullia Inc. recognized $500,000 ordinary income, $22,600 net Section 1231 gain, and $6,000 net capital loss this year. Tullia's taxable income is $522,600.

Explanation: Tullia can deduct the capital loss against the Section 1231 gain for taxable income of $516,600.

Difficulty: 2 Medium

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

32) Milton Inc. recognized a $1,300 net Section 1231 loss in 2015. If Milton recognizes a $5,000 net Section 1231 gain in 2016, it must characterize $1,300 as ordinary income.

Difficulty: 2 Medium

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

33) If a taxpayer sells business realty that was depreciated using the straightline method, the entire gain is characterized as Section 1231 gain.

Explanation: If the taxpayer is a corporation, 20% recapture will treat part of the gain as ordinary.

Difficulty: 2 Medium

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

34) Milton Inc. recognized a $16,900 gain on sale of depreciable equipment held for three years. If Milton's accumulated MACRS depreciation on the equipment is $16,900 or more, the entire gain is ordinary income.

Difficulty: 2 Medium

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

35) Stone Company recognized a $7,700 loss on sale of depreciable equipment held for three years. If Stone's accumulated MACRS depreciation on the equipment is $7,700 or more, the entire loss is ordinary.

Explanation: The loss is a Section 1231 loss. Depreciation recapture only applies to gains.

Difficulty: 3 Hard

Topic: Section 1231 Assets; Recapture of Prior Year Ordinary Losses

Learning Objective: 08-06 Identify Section 1231 assets.; 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

36) Mr. Jason realized a gain on sale of a residential apartment complex that he had placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Explanation: The post-1986 tax depreciation was computed under the straight-line method, so there is no Section 1250 recapture.

Difficulty: 2 Medium

Topic: Section 1231 Assets; Recapture of Prior Year Ordinary Losses

Learning Objective: 08-06 Identify Section 1231 assets.; 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

37) CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Explanation: CBM must recapture $62,360 ($311,800 × 20%) as ordinary income.

Difficulty: 3 Hard

Topic: Section 1231 Assets; Recapture of Prior Year Ordinary Losses

Learning Objective: 08-06 Identify Section 1231 assets.; 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

38) The abandonment of business equipment with a $6,019 adjusted basis results in a $6,019 Section 1231 loss.

Explanation: Because an abandonment loss is not a sale or exchange, any realized loss is ordinary.

Difficulty: 3 Hard

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

39) Ms. 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.

Explanation: Ms. Cregg can recognize a $43,790 capital loss under the tax rule for worthless securities.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

40) 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.

Explanation: AbWest Inc. is an affiliated corporation of Abada Inc., and as such, the stock being deemed worthless is an ordinary loss.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

41) Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the land. Netelli must recognize a $53,500 gain on the disposition of the land.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

43) 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.

Explanation: The loss equals the adjusted basis of the equipment.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

44) A loss from an involuntary conversion of depreciable business property is characterized as a Section 1231 loss.

Explanation: Because the disposition was not a sale or exchange, the casualty loss is ordinary.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

45) 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?

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.

Difficulty: 2 Medium

Topic: Computation of Gain or Loss Recognized; Book/Tax Differences on Asset Dispositions

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.; 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

46) 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?

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

Difficulty: 1 Easy

Topic: Computation of Gain or Loss Recognized; Book/Tax Differences on Asset Dispositions

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.; 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

47) 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?

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

Explanation: The $53,487 excess of tax depreciation over book depreciation resulted in an $11,232 deferred tax liability on Noble's balance sheet. The excess depreciation reversed as $53,487 excess tax gain on sale of the asset, which resulted in a reduction of the deferred tax liability to zero.

Difficulty: 3 Hard

Topic: Book/Tax Differences on Asset Dispositions

Learning Objective: 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

48) 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?

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.

Explanation: The principal payment had no effect on the tax basis in the real property.

Difficulty: 1 Easy

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

49) 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.

A) $25,443

B) $17,143

C) $23,700

D) None of the above

Explanation: $30,000 cash payment − $4,557 tax ($21,700 gain × 21%).

Difficulty: 2 Medium

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

50) This year, Ms. Lucas sold investment land for $125,000 cash plus the purchaser's assumption of a $50,000 mortgage on the land. Ms. Lucas's tax basis in the land was $93,000. If any recognized gain is taxed at 15 percent, compute the after-tax cash flow from the sale.

A) $62,300

B) $69,700

C) $112,700

D) $162,700

Explanation: $125,000 cash payment − $12,300 tax ($82,000 gain × 15%).

Difficulty: 2 Medium

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

51) 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 21% tax rate.

A) $15,800

B) $20,000

C) -0-

D) None of the above

Explanation: $20,000 cash payment − $14,091 tax ($67,100 gain × 21%) = $5,909 net cash flow.

Difficulty: 3 Hard

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

52) 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:

A) $115,000 gain

B) $8,000 gain

C) $33,000 loss

D) $0 gain or loss

Difficulty: 2 Medium

Topic: Computation of Gain or Loss Recognized

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

53) 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:

A) $125,000

B) $60,000

C) $37,500

D) $22,500

Explanation: Brenda's gross profit percentage is 62.5% = ($200,000 − $75,000) ÷ $200,000. Gain recognized this year is $37,500 ($60,000 total payments received × 62.5%).

Difficulty: 2 Medium

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

54) Winslow Company sold investment land to an unrelated purchaser. The purchaser paid $250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow its $580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on sale.

A) $250,000

B) $830,000

C) $850,000

D) $1,430,000

Difficulty: 1 Easy

Topic: Computation of Gain or Loss Recognized; Installment Sale Method

Learning Objective: 08-01 Calculate and distinguish between gain or loss realization and recognition.; 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

55) The installment sale method of accounting applies to which of the following?

A) $89,300 gain realized on sale of business inventory.

B) $798,600 gain realized on sale of common stock in a publicly held corporation.

C) ($41,500) loss realized on sale of land used in a trade or business.

D) None of the above

Difficulty: 1 Easy

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

56) 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.

A) $7,690

B) $6,510

C) $4,920

D) None of the above

Explanation: $30,000 cash payment × ($21,700 gain/$100,000 contract price).

Difficulty: 1 Easy

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

57) 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.

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

Explanation: $100,000 cash payment × ($301,000 gain/$775,000 contract price) = $38,839 tax gain.

Difficulty: 2 Medium

Topic: Installment Sale Method; Book/Tax Differences on Asset Dispositions

Learning Objective: 08-02 Apply the installment sale method of accounting.; 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

58) In 2018, 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 2019, 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 2019.

A) $26,216

B) $40,976

C) $67,500

D) None of the above

Explanation: $67,500 principal payment × ($301,000 gain/$775,000 contract price) = $26,216 recognized gain.

Difficulty: 2 Medium

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

59) In 2018, 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 2019, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2019, TPC's use of the installment sale method results in a:

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

Explanation: $40,000 principal payment × ($135,000 gain/$523,000 contract price) = $10,325 recognized gain in excess of -0- book gain. The difference is a reversal of the favorable book/tax difference in the year of sale.

Difficulty: 3 Hard

Topic: Installment Sale Method; Book/Tax Differences on Asset Dispositions

Learning Objective: 08-02 Apply the installment sale method of accounting.; 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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 notes.

Difficulty: 2 Medium

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

61) 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.

A) -0-

B) $38,332

C) $52,268

D) $55,000

Explanation: ChaGo's gross profit percentage is 69.69% ($90,600 gain/$130,000). It has received $75,000 cash and recognized $52,268 gain ($75,000 × 69.69%). It must recognize its remaining $38,332 deferred gain when it sells the note.

Difficulty: 3 Hard

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

62) 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?

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.

Explanation: The corporation's tax basis in the securities is $95,000.

Difficulty: 2 Medium

Topic: Disallowed Losses on Related Party Sales

Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

63) 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.

A) $13,400

B) $19,600

C) $33,000

D) None of the above

Explanation: Mrs. Beld's $19,600 disallowed loss on the related party sale to her daughter can be used by the daughter to reduce her $33,000 realized gain on sale.

Difficulty: 2 Medium

Topic: Disallowed Losses on Related Party Sales

Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

64) 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.

A) -0-

B) $5,000

C) $22,900

D) None of the above

Explanation: Mr. Quick's $17,900 disallowed loss on the related party sale to his son can be used by the son only to reduce future gain on sale.

Difficulty: 2 Medium

Topic: Disallowed Losses on Related Party Sales

Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

65) Warsham Inc. sold land with a $300,000 basis to Sara Phillips for $117,000 cash. Sara owns 68 percent of Warsham's outstanding stock. Which of the following statements is true?

A) Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return.

B) Warsham does not report the $183,000 realized loss on its current year financial statements.

C) The $183,000 loss is an unfavorable temporary difference between Warsham's book and tax income.

D) Both Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return and the $183,000 loss is an unfavorable temporary difference between Warsham's book and tax income is true.

Explanation: The $183,000 nondeductible loss is an unfavorable permanent book/tax difference.

Difficulty: 2 Medium

Topic: Book/Tax Differences on Asset Dispositions; Disallowed Losses on Related Party Sales

Learning Objective: 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.; 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

66) 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?

A) $700 loss

B) No gain or loss

C) $1,300 gain

D) None of the above

Explanation: Susan's realized gain on the sale is $1,300. However, she can reduce her gain by Andrew's disallowed loss of $2,000 of the original transfer. However, she cannot reduce her gain below zero. Therefore, Susan recognized no gain or loss.

Difficulty: 2 Medium

Topic: Disallowed Losses on Related Party Sales

Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

67) Which of the following is a capital asset?

A) Accounts receivable of an accrual basis business

B) Business equipment

C) Self-created goodwill

D) Purchased goodwill

Difficulty: 3 Hard

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

68) Which of the following is a capital asset?

A) Supplies used in a business

B) Business inventory

C) Land used in a business

D) None of the above

Difficulty: 2 Medium

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

69) "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?

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.

Difficulty: 1 Easy

Topic: Tax Character of Gains and Losses

Learning Objective: 08-04 Identify the two components of the capital gain or loss definition.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

70) Gupta Company made the following sales of capital assets this year.

What is the effect of the three sales on Gupta's taxable income?

A) $700 increase

B) $12,900 increase

C) No effect

D) None of the choices are correct

Explanation: Gupta can deduct its $12,200 capital loss on the sale of asset 1 against the $12,900 total capital gain on the sales of assets 2 and 3.

Difficulty: 1 Easy

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

71) R&T Inc. made the following sales of capital assets this year.

What is the effect of the three sales on R&T's taxable income this year?

A) $21,600 increase

B) $12,900 increase

C) No effect

D) None of the choices are correct

Explanation: Because R&T recognized $21,600 total capital gain on the sales of assets 1 and 2, it can deduct $21,600 of its $27,600 capital loss on the sale of asset 3.

Difficulty: 2 Medium

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

72) Rizzi Corporation sold a capital asset with a $692,000 book and tax basis for $650,000 cash. This was Rizzi's only asset sale during the year. The sale results in:

A) $42,000 unfavorable permanent book/tax difference

B) $42,000 unfavorable temporary book/tax difference

C) $42,000 favorable permanent book/tax difference

D) No book/tax difference

Explanation: The $42,000 nondeductible capital loss results in a temporary difference because Rizzi can carry the loss back and forward to other tax years.

Difficulty: 2 Medium

Topic: Book/Tax Differences on Asset Dispositions; Capital Loss Limitation

Learning Objective: 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.; 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

73) Fantino Inc. was incorporated in 2018 and adopted a calendar year for tax purposes. Here is a schedule of Fantino's taxable income for 2018 and (tax rate is 21% for 2019).

In 2020, Fantino generated $297,300 ordinary income and recognized a $14,000 net capital loss. Which of the following statements is true? 

A) Fantino can deduct its $14,000 net capital loss only on a carryforward basis.

B) Fantino can carry the net capital loss back to 2018 and receive a $2,940 refund of 2018 tax.

C) Fantino can deduct the capital loss against its 2020 ordinary income, producing $2,940 of tax savings.

D) Fantino can carry the net capital loss back to 2019 and receive a $1,218 refund of 2019 tax.

Explanation: The capital loss carryback can be deducted against Fantino's $5,800 capital gain for a $1,218 refund ($5,800 × 21%).

Difficulty: 3 Hard

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

74) 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) 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.

Difficulty: 2 Medium

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

75) Schatz Corporation generated $8,083,000 ordinary business income and recognized a $73,900 net capital gain on the sale of assets. Which of the following statements is true?

A) Schatz must pay tax at the regular corporate rate on $8,156,900 taxable income.

B) Schatz must pay tax at the regular corporate rate on $8,083,000 taxable income. The $73,900 capital gain is eligible for a preferential tax rate.

C) Schatz's net capital gain results in a permanent book/tax difference.

D) None of the above is true.

Difficulty: 2 Medium

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

76) Norbett Inc. generated $15,230,000 ordinary taxable income and realized a $238,000 net capital loss on the sale of marketable securities this year. Which of the following statements is false?

A) Norbett's net income per books includes the $238,000 net capital loss.

B) Norbett's taxable income is $15,230,000.

C) The $238,000 net capital loss is a favorable book/tax difference.

D) The $238,000 net capital loss is a temporary book/tax difference.

Explanation: The nondeductible net capital loss is an unfavorable book/tax difference.

Difficulty: 2 Medium

Topic: Book/Tax Differences on Asset Dispositions; Capital Loss Limitation

Learning Objective: 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.; 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

77) Acme Inc. sold three capital assets this year. The corporation realized an $18,900 gain on the first sale, a $93,000 loss on the second sale, and a $40,000 gain on the third sale. If Acme's ordinary taxable income from operations was $250,000, compute Acme's taxable income.

A) $308,900

B) $215,900

C) $250,000

D) None of the above

Difficulty: 2 Medium

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

78) In 2019, 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):

2018 ($28,000)

2017 $16,000

2016 ($30,000)

Mary's 2019 gain is characterized as

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

Explanation: $16,000 of the 2016 loss was recaptured against the 2017 gain. The remaining $14,000 2016 loss and the 2018 loss of $28,000 must be recaptured against the 2019 gain, producing $42,000 of ordinary income. The remaining $3,000 2019 gain will be treated as a capital gain.

Difficulty: 3 Hard

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

79) Nilex Company sold three operating assets this year. Nilex recognized a $14,100 Section 1231 loss on the first sale, a $20,000 Section 1231 loss on the second sale, and a $19,600 Section 1231 gain on the third sale. Which of the following statements is true?

A) Nilex can deduct its $14,500 net Section 1231 loss.

B) Nilex can deduct its $34,100 net Section 1231 loss and can treat its $19,600 Section 1231 gain as a capital gain.

C) Nilex must treat its $14,500 net Section 1231 loss as a capital loss.

D) None of the above statements is true.

Difficulty: 2 Medium

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

80) 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:

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

Difficulty: 1 Easy

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

81) In its current tax year, PRS Corporation generated $300,000 ordinary income from the performance of consulting services for its clients. PRS sold two assets, recognizing a $20,000 gain on the first sale and a $31,000 loss on the second sale. Which of the following statements is false?

A) If the gain and loss were capital gain and loss, PRS's taxable income was $300,000.

B) If the gain was capital gain and the loss was ordinary, PRS's taxable income was $269,000.

C) If the gain and loss were ordinary, PRS's taxable income was $289,000.

D) If the gain was ordinary and the loss was a capital loss, PRS's taxable income was $320,000.

Explanation: If the gain was capital gain and the loss was ordinary, PRS's taxable income was $289,000 ($300,000 + $20,000 − $31,000).

Difficulty: 3 Hard

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

82) Benlow Company, a calendar year taxpayer, sold two operating assets this year (each held for over a 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:

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

Difficulty: 1 Easy

Topic: Section 1231 Assets

Learning Objective: 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

83) Which of the following is a Section 1231 asset?

A) Business inventory

B) Business accounts receivable

C) Supplies used in a business

D) None of the above is a Section 1231 asset

Difficulty: 1 Easy

Topic: Section 1231 Assets

Learning Objective: 08-06 Identify Section 1231 assets.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

84) Which of the following assets is not a Section 1231 asset?

A) Business equipment held for four years

B) Office furniture held for eight months

C) Land used in a business and held for 16 years

D) All of the above are Section 1231 assets

Explanation: The office furniture is not a Section 1231 asset because it was held for less than 12 months.

Difficulty: 2 Medium

Topic: Section 1231 Assets

Learning Objective: 08-06 Identify Section 1231 assets.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

85) Proctor Inc. was incorporated in 2013 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2018.

In 2019, Proctor recognized a $25,000 gain on the sale of business land. How is this gain characterized on Proctor's tax return?

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.

Explanation: The 2014 Section 1231 loss was recaptured in 2015, so only the 2016 Section 1231 loss must be recaptured in 2019.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

86) Delour Inc. was incorporated in 2013 and adopted a calendar year. Here is a schedule of Delour's net Section 1231 gains and (losses) reported on its tax returns through 2018.

In 2019, Delour recognized a $50,000 gain on the sale of business land. How is this gain characterized on Delour's tax return?

A) $50,000 Section 1231 gain.

B) $12,000 ordinary gain and $38,000 Section 1231 gain.

C) $16,900 ordinary gain and $33,100 Section 1231 gain.

D) $50,000 ordinary gain.

Explanation: Delour had $12,000 of unrecaptured Section 1231 losses in the previous five years.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

87) Irby Inc. was incorporated in 2013 and adopted a calendar year. Here is a schedule of Irby's net Section 1231 gains and (losses) reported on its tax returns through 2018.

In 2019, Irby recognized a $14,750 gain on the sale of business land. How is this gain characterized on Irby's tax return?

A) $14,750 Section 1231 gain.

B) $10,890 ordinary gain and $9,415 Section 1231 gain.

C) $14,750 ordinary gain.

D) None of the choices are correct.

Explanation: Irby's Section 1231 losses in 2014 and 2015 were recaptured in 2016 and are not recaptured again in 2019.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

88) This year, Adula Company sold equipment purchased in 2014 at a cost of $117,200. Accumulated depreciation through date of sale was $33,000. Which of the following statements is false?

A) If the sale price was $90,000, Adula recognized $5,800 ordinary gain.

B) If the sale price was $120,000 Adula recognized $33,000 ordinary gain and $2,800 Section 1231 gain.

C) If the sale price was $80,000, Adula recognized $4,200 ordinary loss.

D) None of the above is false.

Explanation: If the sale price was $80,000, Adula recognized $4,200 Section 1231 loss.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

89) This year, Izard Company sold equipment purchased several years ago at a cost of $48,500. Accumulated depreciation through date of sale was $12,900. Which of the following statements is false?

A) If the sale price was $25,000, Izard recognized $4,600 Section 1231 loss.

B) If the sale price was $42,500, Izard recognized $12,900 Section 1231 gain.

C) If the sale price was $50,000, Izard recognized $18,900 ordinary gain and $1,500 Section 1231 gain.

D) None of the above is false.

Explanation: If the sale price was $42,500, Izard recognized $12,900 ordinary gain.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

90) 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.

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

Difficulty: 1 Easy

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

91) 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 1999 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:

A) Ordinary gain

B) Capital gain

C) $538,000 ordinary gain and $100,000 Section 1231 gain

D) Section 1231 gain

Explanation: None of the gain is recaptured under Section 1250 because the building was depreciated under the straight-line method.

Difficulty: 1 Easy

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

92) Kuong Inc. sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 2001 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:

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

Explanation: Kuong must recapture $107,600 ($538,000 × 20%) of the gain under the 20% recapture rule for corporations.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

93) 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 2005 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:

A) Capital gain

B) Section 1231 gain

C) $300,000 ordinary gain and $200,000 Section 1231 gain

D) None of the above

Explanation: None of the gain is recaptured under Section 1250 because the building was depreciated under the straight-line method.

Difficulty: 1 Easy

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

94) B&I Inc. sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 2009 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:

A) $167,200 ordinary gain and $162,000 Section 1231 gain

B) Section 1231 gain

C) Capital gain

D) None of the above

Explanation: B&I must recapture $33,440 ($167,200 × 20%) of the gain as ordinary, under the 20% recapture rule for corporations. The $295,760 remaining gain is Section 1231 gain.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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.

Explanation: The rule applies to sales by both noncorporate and corporate taxpayers.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

96) Firm F purchased a commercial office building for business use in 2008 for $965,000. This year, the firm sold the building for $1 million. Accumulated MACRS depreciation through date of sale was $275,000. Which of the following statements is true?

A) If Firm F is a corporation, it recognizes $55,000 ordinary income and $255,000 Section 1231 gain.

B) If Firm F is a corporation, it recognizes $62,000 ordinary income and $248,000 Section 1231 gain.

C) If Firm F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain.

D) Both if Firm F is a corporation, it recognizes $55,000 ordinary income and $255,000 Section 1231 gain and if Firm F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain are true.

Explanation: A corporation must recapture 20% of the gain that would be recaptured under a full recapture rule. So Corporation F would recapture $55,000 ($275,000 * 20%) as ordinary income and recognize the $255,000 remaining gain as Section 1231 gain. The 20% rule does not apply to noncorporate taxpayers.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

97) 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.

A) $1,349,000

B) $1,378,800

C) $1,384,900

D) $1,399,800

Explanation: The net capital loss is deductible against the net Section 1231 gain.

Difficulty: 2 Medium

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

98) Lettuca Inc. generated a $77,050 ordinary loss from operations this year. It also recognized $5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss on the sale of assets. Compute Lettuca's net operating loss.

A) ($77,050)

B) ($126,130)

C) ($132,050)

D) ($133,970)

Explanation: The Section 1231 loss is deductible, but the net capital loss is not deductible.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

99) 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.

A) $672,110

B) $677,100

C) $668,200

D) $697,700

Explanation: Only $5,000 of the net capital loss is deductible against the net Section 1231 gain.

Difficulty: 2 Medium

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

100) Bastrop Inc. generated a $169,000 ordinary loss from operations this year. It also recognized $35,920 recaptured ordinary income, $18,000 net Section 1231 loss, and $125,750 net capital gain on the sale of assets. Compute Bastrop's net operating loss.

A) ($169,000)

B) ($133,080)

C) ($151,080)

D) ($25,330)

Explanation: The Section 1231 loss is deductible.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

101) 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:

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.

Explanation: Gain on sale of the inventory is ordinary. Gain on sale of the furniture and fixtures and purchased goodwill does not exceed the accumulated depreciation and amortization on those Section 1231 assets. Consequently, the entire gain is recaptured as ordinary gain.

Difficulty: 3 Hard

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

102) Michael sold machinery used in his business for $50,000. He purchased the equipment three years ago for $55,000 and deducted $22,800 MACRS depreciation through the date of sale. Compute and characterize Michael's gain on sale.

A) $17,800 Section 1231 gain

B) $22,800 ordinary gain and $45,000 Section 1231 loss

C) $17,800 ordinary gain

D) $17,800 capital gain

Difficulty: 1 Easy

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

103) Nancy owned business equipment with a $16,950 adjusted basis and a $7,500 FMV that was destroyed by a tornado. The equipment was uninsured. As a result of this casualty, Nancy:

A) Recognizes a $7,500 Section 1231 loss

B) Recognizes a $16,950 Section 1231 loss

C) Is allowed to deduct a $16,950 ordinary loss

D) Is allowed to deduct a $7,500 ordinary loss

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

104) Which of the following results in a permanent book/tax difference for a corporate taxpayer?

A) Loss realized on a related party sale

B) Sale of a depreciable asset with a $100,000 book basis and a $33,600 adjusted tax basis

C) Gain recognized under the installment method

D) Net capital loss

Difficulty: 1 Easy

Topic: Book/Tax Differences on Asset Dispositions

Learning Objective: 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

105) 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?

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.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

106) 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?

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.

Explanation: Y&S is allowed an abandonment loss when it relinquishes the legal monopoly represented by the patent.

Difficulty: 3 Hard

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

107) Mrs. Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2009. 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?

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

Difficulty: 1 Easy

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

108) 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?

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.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

109) 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?

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.

Explanation: Merryvale is an affiliated corporation, so Princetown is allowed an ordinary loss on the worthlessness of the stock.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

110) Mrs. Stile owns investment land subject to a $600,000 nonrecourse mortgage. Her basis in the land is $212,000, and the land's appraised FMV is $575,000. Mrs. Stile is considering defaulting on the mortgage and allowing the creditor to foreclose. If Mrs. Stile disposes of the land through a foreclosure, she will recognize:

A) $212,000 capital loss

B) $212,000 ordinary abandonment loss

C) $363,000 capital gain

D) $388,000 capital gain

Explanation: The foreclosure is treated as a sale of the land for an amount realized equal to the $600,000 nonrecourse mortgage.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

111) Steiger Company owned investment land subject to a $715,000 recourse mortgage. Steiger failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Steiger's basis in the land was $587,300, and the land's appraised FMV was $690,000. Steiger completely settled its recourse debt by paying $25,000 cash to the creditor. As a result of the foreclosure, Steiger recognizes:

A) $102,700 capital gain and $25,000 ordinary loss

B) $612,300 ordinary loss

C) $102,700 capital gain

D) None of the above

Explanation: Steiger recognizes a $102,700 capital gain ($690,000 relief of debt equal to the land's FMV − $587,300 basis).

Difficulty: 3 Hard

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

112) Ficia Inc. owned investment land subject to a $294,500 recourse mortgage. Ficia failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's basis in the land was $300,000, and the land's appraised FMV was $260,000. The creditor informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage. Which of the following statements is true?

A) Ficia recognizes $34,500 ordinary income and a $40,000 capital loss.

B) Ficia recognizes only a $40,000 capital loss.

C) Ficia recognizes only a $5,500 capital loss.

D) None of the above

Explanation: Ficia recognizes $34,500 cancellation-of-debt income. It is treated as selling the land for $260,000 relief of debt equal to the land's FMV.

Difficulty: 3 Hard

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

113) 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?

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.

Explanation: Blitza is treated as selling the Section 1231 asset for an amount realized of $294,500. Blitza has no legal obligation to make any additional payment to the creditor because its debt was nonrecourse.

Difficulty: 3 Hard

Topic: Section 1231 Assets; Other Property Dispositions

Learning Objective: 08-06 Identify Section 1231 assets.; 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

114) A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of the destruction, Della recognizes:

A) $1 million ordinary loss

B) $748,200 ordinary loss

C) $748,200 Section 1231 loss

D) None of the above

Explanation: Della did not sell or exchange the Section 1231 asset so its $748,200 loss (adjusted basis) is ordinary.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

115) 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:

A) $35,000 ordinary loss

B) $8,200 Section 1231 loss

C) $8,200 ordinary loss

D) None of the above

Explanation: Eaton did not sell or exchange the Section 1231 asset, so its $8,200 realized loss ($15,000 insurance payment − $23,200 basis) is ordinary.

Difficulty: 2 Medium

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

116) A tornado demolished several delivery vans owned for three years by Wadham Company. Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase new vans. Wadham received a $25,000 settlement from its casualty insurance company. Consequently, Wadham recognizes:

A) $3,400 Section 1231 loss

B) $65,000 Section 1231 loss

C) $65,000 ordinary loss

D) None of the above

Explanation: Wadham recognizes a $3,400 ordinary casualty loss.

Difficulty: 3 Hard

Topic: Other Property Dispositions

Learning Objective: 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

117) Oslego Company, a calendar year taxpayer, sold land with a $400,000 tax basis for $635,000 in March 2019. The purchaser paid $50,000 cash at closing and gave Oslego an interest-bearing note for the $585,000 remaining price. In September, Oslego received $50,450 cash from the purchaser consisting of a $29,250 principal payment and a $21,200 interest payment. Assuming that Oslego does not elect out of the installment sale method, compute the company's 2019 gain recognized on sale and its tax basis in the note receivable on December 31.

Difficulty: 3 Hard

Topic: Installment Sale Method

Learning Objective: 08-02 Apply the installment sale method of accounting.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

118) Nolan Inc. sold marketable securities with a $223,000 basis to Totem Company. Compute Nolan's recognized gain or loss assuming that:

a. Nolan's amount realized on sale was $160,000, and Nolan and Totem are unrelated parties.

b. Nolan's amount realized on sale was $275,000, and Nolan and Totem are unrelated parties.

c. Nolan's amount realized on sale was $160,000, and Nolan and Totem are related parties.

d. Nolan's amount realized on sale was $275,000, and Nolan and Totem are related parties.

a. Nolan recognizes a $63,000 loss.

b. Nolan recognizes a $52,000 gain.

c. Nolan cannot recognize the loss realized on the related party sale.

d. Nolan recognizes a $52,000 gain.

Difficulty: 1 Easy

Topic: Disallowed Losses on Related Party Sales

Learning Objective: 08-03 Explain why the tax law disallows losses on related party sales.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

119) 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.

a. WQP's taxable income is $1,845,200 ($1,814,700 income from inventory sale + $10,400 ordinary gain + $44,000 capital gain − $23,900 capital loss [fully deductible]).

b. WQP's taxable income is $1,779,500 ($1,814,700 income from inventory sale − $35,200 ordinary loss + $16,000 capital gain − $16,000 capital loss [limited to capital gain]).

Difficulty: 2 Medium

Topic: Capital Loss Limitation

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

120) 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

a. Dender recognizes a $15,000 Section 1231 loss ($200,000 amount realized − $215,000 adjusted basis).

b. Dender recognizes $85,000 recaptured ordinary income ($300,000 amount realized − $215,000 adjusted basis).

c. Dender recognizes $171,000 recaptured ordinary income (equal to accumulated depreciation) and a $14,000 Section 1231 gain ($400,000 amount realized − $215,000 adjusted basis − $171,000 ordinary income).

Difficulty: 1 Easy

Topic: Recapture of Prior Year Ordinary Losses

Learning Objective: 08-08 Incorporate the recapture rules into the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

121) Murrow Corporation generated $285,700 income from the performance of services for its clients. Murrow also sold several operating assets during the year. Compute Murrow's taxable income under each of the following assumptions about the tax consequences of the asset sales.

a. Murrow recognized $6,800 recaptured ordinary income, a $23,200 net Section 1231 gain, and an $11,600 net capital loss.

b. Murrow recognized a $47,300 net Section 1231 loss and a $5,075 net capital loss.

c. Murrow recognized a $61,800 net Section 1231 gain and a $4,210 net capital gain.

d. Murrow recognized a $15,300 net Section 1231 loss and a $3,000 net capital gain.

a. Murrow's taxable income is $304,100 ($285,700 service income + $6,800 recaptured ordinary income + $23,200 Section 1231 gain − $11,600 capital loss [fully deductible against Section 1231 gain]).

b. Murrow's taxable income is $238,400 ($285,700 service income − $47,300 Section 1231 loss). The capital loss is nondeductible.

c. Murrow's taxable income is $351,710 ($285,700 service income + $61,800 Section 1231 gain + $4,210 capital gain).

d. Murrow's taxable income is $273,400 ($285,700 service income − $15,300 Section 1231 loss + $3,000 capital gain).

Difficulty: 3 Hard

Topic: Capital Loss Limitation; Section 1231 Assets

Learning Objective: 08-05 Apply the limitation on the deduction of capital losses.; 08-07 Apply the Section 1231 netting process.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

122) 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.

Difficulty: 3 Hard

Topic: Book/Tax Differences on Asset Dispositions; Disallowed Losses on Related Party Sales; Capital Loss Limitation; Other Property Dispositions

Learning Objective: 08-10 Explain disposition-related book/tax differences and their effect on GAAP financial statements.; 08-03 Explain why the tax law disallows losses on related party sales.; 08-05 Apply the limitation on the deduction of capital losses.; 08-09 Describe the tax consequences of dispositions other than sales or exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual