Verified Test Bank Chapter.9 Nontaxable Exchanges

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

Chapter 9 Nontaxable Exchanges

1) Tax neutrality for asset exchanges is the exception rather than the rule.

Difficulty: 1 Easy

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-01 Explain the underlying tax concepts of a nontaxable exchange transaction.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

2) When unrelated parties agree to an exchange of noncash properties, the economic presumption is that the properties are of equal value.

Difficulty: 1 Easy

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-01 Explain the underlying tax concepts of a nontaxable exchange transaction.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

3) When unrelated parties agree to an exchange of noncash properties, the economic presumption is that the properties have the same adjusted book basis.

Difficulty: 1 Easy

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-01 Explain the underlying tax concepts of a nontaxable exchange transaction.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

4) Gain realized on a property exchange that is not recognized is actually deferred rather than nontaxable.

Difficulty: 1 Easy

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

5) Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.

Explanation: Qualifying property takes a substituted basis.

Difficulty: 1 Easy

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

6) The substituted basis rule results in permanent nonrecognition of gains and losses realized in a nontaxable exchange.

Difficulty: 1 Easy

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

7) A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.

Explanation: Payment of boot does not trigger gain recognition.

Difficulty: 1 Easy

Topic: The Effect of Boot

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

8) A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized.

Difficulty: 2 Medium

Topic: The Effect of Boot

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

9) A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the basis of the qualifying property received.

Difficulty: 2 Medium

Topic: The Effect of Boot

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

10) Nontaxable exchanges typically cause a temporary difference between book income and taxable income.

Difficulty: 1 Easy

Topic: Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

11) Signo Inc.'s current year income statement includes a $21,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Signo has a $21,000 favorable permanent book/tax difference.

Explanation: The book/tax difference is temporary.

Difficulty: 2 Medium

Topic: Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

12) Tarletto Inc.'s current year income statement includes a $229,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Tarletto's book basis in the new asset is $229,000 greater than its tax basis.

Difficulty: 3 Hard

Topic: Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

13) Mr. Lexon owns investment property with a $719,000 basis. If the property is worth only $500,000, Mr. Lexon would prefer a taxable disposition of the property over a like-kind exchange.

Explanation: A like-kind exchange would result in deferral of Mr. Lexon's recognition (and deduction) of a loss.

Difficulty: 2 Medium

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-01 Explain the underlying tax concepts of a nontaxable exchange transaction.; 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

14) Muro Inc. exchanged an old inventory item for a new asset. If the new asset is also an inventory item, the exchange is nontaxable.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

15) Mrs. Cooley exchanged 400 shares of stock for corporate bonds. If the stock and bonds were issued by the same corporation, they are like-kind properties, and the exchange is nontaxable.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

16) Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla Partnership. This exchange is taxable.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

17) A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize the loss.

Explanation: The like-kind exchange rules defer both gain and loss recognition and are mandatory instead of elective.

Difficulty: 3 Hard

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

18) Yelano Inc. exchanged an old forklift used in its business for a new forklift. This exchange qualifies as a nontaxable like-kind exchange.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

19) Reiter Inc. exchanged an old forklift for new office furniture. This exchange qualifies as a nontaxable like-kind exchange.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

20) All types of business and investment real properties are like-kind.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

21) The goodwill of one business is never of a like-kind to the goodwill of a different business.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

22) Mrs. Volter exchanged residential real estate for a commercial office building. The residential real estate was subject to a $92,800 mortgage, which was assumed by the other party to the exchange. Mrs. Volter must treat the relief of the mortgage as $92,800 boot received.

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

23) Mr. Bentley exchanged investment land subject to a $300,000 mortgage for commercial real estate subject to a $188,000 mortgage. Mr. Bentley is treated as paying $112,000 boot in the exchange.

Explanation: Mr. Bentley's net $112,000 relief of debt is boot received.

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

24) Toffel Inc. exchanged investment land subject to a $240,000 mortgage for unencumbered farmland. If Toffel realized a $168,000 gain on the exchange, it must recognize the entire gain.

Explanation: Toffel's relief of debt is treated as $240,000 boot received.

Difficulty: 3 Hard

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

25) V&P Company exchanged unencumbered investment land for farmland subject to a $200,000 mortgage. If V&P realized a $168,000 gain on the exchange, it must recognize the entire gain.

Explanation: V&P is treated as paying $200,000 boot by assuming the mortgage. The payment of boot does not trigger gain recognition.

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

26) In a like-kind exchange in which both properties are subject to a mortgage, both parties to the exchange are treated as receiving boot equal to the relief of their respective mortgage.

Explanation: Only the amount of net debt relief is treated as boot received by the party with net debt relief.

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

27) A flood destroyed a business asset owned by Boochi Company. Boochi's adjusted tax basis in the asset was $87,100. Six months after the flood, Boochi used its $100,000 insurance settlement to replace the asset. Boochi can recognize a $12,900 gain or it can elect to defer gain recognition.

Difficulty: 1 Easy

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

28) On July 2, 2019, a tornado destroyed an asset owned by Leigh Inc., a calendar year taxpayer. Leigh's adjusted tax basis in the asset was $22,700, and the reimbursement from its property insurance company was $35,000. If Leigh wants to defer recognizing its $12,300 realized gain, it must replace the asset no later than December 31, 2020.

Explanation: Leigh has until December 31, 2021, to replace the asset.

Difficulty: 2 Medium

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

29) Vandals destroyed a business asset owned by L&L Company. L&L's adjusted tax basis in the asset was $60,800, and the reimbursement from its property insurance company was $90,000. L&L must pay at least $60,800 for a replacement asset in order to defer gain recognition on the involuntary conversion.

Explanation: L&L must pay at least $90,000 for replacement property, in order to obtain gain deferral for the entire $29,200.

Difficulty: 1 Easy

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

30) If a taxpayer elected to defer a $13,000 gain realized on an involuntary conversion, the tax basis of the taxpayer's replacement property equals the cost of the property less $13,000.

Difficulty: 1 Easy

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

31) A taxpayer who exchanges property for an interest in a partnership never recognizes gain or loss on the exchange.

Difficulty: 1 Easy

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

32) A taxpayer who transfers property for corporate stock can defer gain recognition only if the taxpayer owns at least 50% of the corporation's outstanding stock immediately after the exchange.

Difficulty: 1 Easy

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

33) A corporation's tax basis in property received in exchange for corporate stock depends on whether the exchange was taxable or nontaxable to the transferors of the property.

Explanation: The corporation's basis is a cost basis if the exchange was taxable to the transferors and a carryover basis if it was nontaxable.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

34) A partnership always takes a carryover basis in property received from a partner in exchange for an equity interest in the partnership.

Difficulty: 1 Easy

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

35) The wash sale rule can result in the nonrecognition of both gains and losses.

Explanation: The wash sale rule is inapplicable to realized gains.

Difficulty: 1 Easy

Topic: Wash Sales

Learning Objective: 09-09 Describe the tax consequences of a wash sale.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

36) A taxpayer who realizes a loss on the sale of marketable securities and reacquires substantially the same securities within the 30 day period before the sale cannot recognize the loss.

Difficulty: 2 Medium

Topic: Wash Sales

Learning Objective: 09-09 Describe the tax consequences of a wash sale.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

37) The tax basis in property received in a like-kind exchange in which no gain or loss is recognized is a:

A) FMV basis

B) Cost basis

C) Substituted basis

D) Carryover basis

Difficulty: 1 Easy

Topic: The Substituted Basis Rule

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

38) Which of the following statements about the inclusion of boot in a nontaxable exchange is false?

A) The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged.

B) The receipt of boot can trigger gain recognition but not loss recognition.

C) The party paying the boot includes the FMV of the boot in the tax basis of the property received.

D) None of the above is false.

Explanation: The purpose of including boot is to equalize the FMV of the properties exchanged.

Difficulty: 2 Medium

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-01 Explain the underlying tax concepts of a nontaxable exchange transaction.; 09-03 Compute gain recognized when boot is received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

39) Hank exchanged an old asset with a $12,000 adjusted basis for a new asset with a $32,000 FMV plus $2,000 cash. Compute Hank's realized and recognized gain if the new and old assets are like-kind properties.

A) $20,000 realized gain; $0 recognized gain

B) $22,000 realized gain; $0 recognized gain

C) $22,000 realized gain; $2,000 recognized gain

D) $2,000 realized gain; $2,000 recognized gain

Difficulty: 2 Medium

Topic: Tax Neutrality for Asset Exchanges

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

40) Kimbo Inc. exchanged an old asset ($180,000 FMV and $145,000 adjusted basis) plus $10,000 cash for a new asset with a $190,000 FMV. What is Kimbo's basis in the new asset if the transaction qualifies as a like-kind exchange?

A) $145,000

B) $155,000

C) $135,000

D) $190,000

Explanation: Basis of new asset equals basis of old asset plus boot given.

Difficulty: 1 Easy

Topic: The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

41) Denali, Inc. exchanged realty with a $230,000 adjusted basis for like-kind realty with a $200,000 FMV and $5,000 cash. How much loss may Denali recognize?

A) $5,000

B) $25,000

C) $30,000

D) $0

Explanation: Loss is never recognized in a qualifying nontaxable exchange.

Difficulty: 1 Easy

Topic: The Effect of Boot

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

42) Which of the following statements about nontaxable exchanges is true?

A) The parties to the exchange agree that the properties exchanged are of equal value.

B) The parties to the exchange both realize gain on the exchange.

C) No cash can change hands in a nontaxable exchange.

D) Any gain realized on the exchange is not included in financial statement income.

Difficulty: 1 Easy

Topic: The Effect of Boot; Book/Tax Difference from Nontaxable Exchange; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-04 Explain book/tax differences related to nontaxable exchanges.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

43) Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a new asset worth $20,000. Which of the following statements is false?

A) The old asset's FMV is $20,000.

B) If the exchange is nontaxable, Berly's tax basis in the new asset is $12,300.

C) If the exchange is taxable, Berly's recognized gain is $7,700.

D) None of the statements is false.

Difficulty: 1 Easy

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

44) Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for a new asset worth $90,000 and $10,000 cash. Which of the following statements is false?

A) The old asset's FMV is $100,000.

B) If the exchange is nontaxable, Doppia's recognized gain is $10,000.

C) If the exchange is nontaxable, Doppia's tax basis in the new asset is $78,750.

D) None of the statements is false.

Explanation: Doppia's tax basis in the new asset is $68,750.

Difficulty: 1 Easy

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

45) Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000. Which of the following statements is false?

A) The old asset's FMV is $70,000.

B) If the exchange is nontaxable, Eliot's recognized gain is $5,000.

C) If the exchange is nontaxable, Eliot's tax basis in the new asset is $58,100.

D) None of the statements is false.

Explanation: Eliot recognizes no gain on the nontaxable exchange.

Difficulty: 2 Medium

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

46) G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false?

A) The old asset's FMV is $150,000.

B) If the exchange is nontaxable, G&G's recognized gain is -0-.

C) If the exchange is nontaxable, G&G's tax basis in the new asset is $130,300.

D) None of the statements is false.

Explanation: The old asset's FMV is $130,000.

Difficulty: 2 Medium

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

47) Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash. Which of the following statements is false?

A) If the exchange is taxable, Itak recognizes a $6,700 gain.

B) If the exchange is nontaxable, Itak recognizes a $3,000 gain.

C) If the exchange is nontaxable, Itak's tax basis in the new asset is $44,300.

D) None of the statements is false.

Difficulty: 1 Easy

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

48) Kornek Inc. transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in exchange for a new asset worth $260,000. Which of the following statements is false?

A) If the exchange is taxable, Kornek recognizes a $48,000 gain.

B) If the exchange is nontaxable, Kornek recognizes a $12,000 gain.

C) If the exchange is nontaxable, Kornek's tax basis in the new asset is $212,000.

D) None of the statements is false.

Explanation: If the exchange is nontaxable, Kornek recognizes no gain.

Difficulty: 2 Medium

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

49) LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash. Which of the following statements is false? 

A) If the exchange is taxable, LiO recognizes an $1,100 loss.

B) If the exchange is nontaxable, LiO recognizes no loss.

C) If the exchange is nontaxable, LiO's tax basis in the new asset is $12,100.

D) None of the statements is false.

Explanation: LiO's tax basis in the new asset equals the $13,600 basis in the old asset − $1,500 boot.

Difficulty: 2 Medium

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

50) Which of the following statements about boot included in a nontaxable exchange is false?

A) The purpose of boot is to equalize the values of the exchanged properties.

B) The payment of boot triggers recognition of realized gain to the payer.

C) The receipt of boot triggers recognition of realized gain to the recipient.

D) The receipt of boot does not trigger recognition of realized loss to the recipient.

Explanation: Only the receipt of boot triggers gain recognition.

Difficulty: 2 Medium

Topic: The Effect of Boot

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

51) Nagin Inc. transferred an old asset in exchange for a new asset worth $84,000 and $6,000 cash. The old asset and new asset were like-kind properties. Which of the following statements is true?

A) If Nagin's basis in the old asset was $95,000, Nagin can recognize a $5,000 loss.

B) If Nagin's basis in the old asset was $85,000, Nagin must recognize a $6,000 gain.

C) If Nagin's basis in the old asset was $79,200, Nagin must recognize a $6,000 gain.

D) None of the above is true.

Difficulty: 1 Easy

Topic: The Effect of Boot

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

52) Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no cash was included in the exchange). The assets were like-kind properties. Oxono reported the gain as revenue on its financial statements. Which of the following is true?

A) The exchange resulted in a favorable temporary book/tax difference.

B) The exchange resulted in a favorable permanent book/tax difference.

C) The exchange resulted in an unfavorable temporary book/tax difference.

D) The exchange resulted in an unfavorable permanent book/tax difference.

Difficulty: 1 Easy

Topic: Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

53) Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for $533,000 cash. Compute Q&J's book and tax gain on sale.

A) $188,000 book and tax gain

B) $188,000 book gain and $61,000 tax gain

C) $61,000 book and tax gain

D) None of the above

Explanation: Book gain is $61,000 ($533,000 − $472,000 cost basis), and tax gain is $188,000 ($533,000 − $345,000 substituted basis).

Difficulty: 3 Hard

Topic: The Effect of Boot; Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

54) Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for $533,000 cash. Which of the following statements is true?

A) The nontaxable exchange had no effect on Q&J's deferred tax accounts.

B) The nontaxable exchange resulted in a deferred tax liability that reversed this year.

C) The nontaxable exchange resulted in a deferred tax asset that reversed this year.

D) The sale of the parcel of land had no effect on Q&J's deferred tax accounts.

Explanation: The nontaxable exchange caused a $127,000 temporary favorable excess of book income over tax income. The sale reversed the difference by causing a $127,000 unfavorable excess of tax income over book income.

Difficulty: 2 Medium

Topic: Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

55) Thirty years ago, Prescott Inc. realized a $16,200 gain on the exchange of an old building for a new building. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new building for $250,000. At date of sale, the new building's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?

A) The nontaxable exchange had no effect on Prescott's deferred tax accounts.

B) The nontaxable exchange resulted in a deferred tax asset.

C) The sale of the new building had no effect on Prescott's deferred tax accounts.

D) None of the above is true.

Explanation: The deferred tax liability resulting from the nontaxable exchange reversed completely as a result of excess book over tax depreciation. Prescott's $2,500 book gain on sale was also its tax gain.

Difficulty: 3 Hard

Topic: Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

56) Luce Company exchanged investment land for a building to be used in its business. Luce's gain on the exchange was nontaxable (because the assets were like-kind) but was included in financial statement income. Which of the following statements is false?

A) Luce's book basis in the building received is the building's cost (FMV).

B) Luce's tax basis in the building received equals its tax basis in the land surrendered.

C) Luce's future depreciation deductions with respect to its tax basis in the building will be different from future depreciation expense for financial statement purposes.

D) None of the statements is false.

Difficulty: 1 Easy

Topic: Book/Tax Difference from Nontaxable Exchange

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

57) Which of the following statements about like-kind exchanges is false?

A) Like-kind property must be held for either business or investment use.

B) Businesses cannot engage in like-kind exchanges of inventory.

C) Businesses cannot engage in like-kind exchanges of intangible assets.

D) Business cannot exchange undeveloped land for developed real estate.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

58) Rydell Company exchanged business realty (initial cost $55,250; accumulated depreciation $25,450) for like-kind realty worth $44,000 and $2,000 cash. Assume that depreciation on the realty exchanged was computed using the straight-line method and that Rydell Company is not a corporation. As a result, Rydell must recognize:

A) $2,000 ordinary gain

B) $2,000 Section 1231 gain

C) No gain or loss

D) None of the above

Difficulty: 2 Medium

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

59) Teco Inc. and MW Company exchanged like-kind assets. Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the following statements is false?

A) Teco's realized gain is $26,100 and recognized gain is -0-.

B) MW's realized gain is $59,400 and recognized gain is $7,500.

C) Teco's basis in its newly acquired asset is $61,400.

D) MW's basis in its newly acquired asset is $35,600.

Explanation: MW's basis is $28,100.

Difficulty: 2 Medium

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

60) Acme Inc. and Beamer Company exchanged like-kind assets. Acme's asset had a $240,000 FMV and $117,300 adjusted tax basis, and Beamer's asset had a $225,000 FMV and a $168,200 adjusted tax basis. Beamer paid $15,000 cash to Acme as part of the exchange. Which of the following statements is true?

A) Acme's realized gain is $122,700 and recognized gain is -0-.

B) Beamer's realized gain is $56,800 and recognized gain is $15,000.

C) Acme's basis in its newly acquired asset is $117,300.

D) Beamer's basis in its newly acquired asset is $168,200.

Explanation: Acme recognizes $15,000 gain, and Beamer recognizes no gain. Beamer's basis is $183,200.

Difficulty: 2 Medium

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

61) Tauber Inc. and J&I Company exchanged like-kind assets. Tauber's asset had a $17,500 FMV and $3,000 adjusted tax basis, and J&I's asset had a $19,000 FMV and a $9,000 adjusted tax basis. Tauber paid $1,500 cash to J&I as part of the exchange. Which of the following statements is false?

A) Tauber's realized gain is $14,500 and recognized gain is -0-.

B) J&I's realized gain is $10,000 and recognized gain is -0-.

C) Tauber's basis in its newly acquired asset is $4,500.

D) J&I's basis in its newly acquired asset is $9,000.

Explanation: J&I recognizes $1,500 gain.

Difficulty: 2 Medium

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

62) Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?

A) If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a $400,000 basis in Asset Z.

B) If Asset A and Asset Z are not like-kind property, Nixon recognizes a $110,000 gain and takes a $510,000 basis in Asset Z.

C) If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a $415,750 basis in Asset Z.If Asset A and Asset Z are like-kind property, Nixon recognizes no gain and takes a $400,000 basis in Asset Z.

D) If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a $415,750 basis in Asset Z.

Explanation: If the exchange is nontaxable, Nixon recognizes $15,750 of its $125,750 realized gain and takes a $400,000 substituted basis in Asset Z.

Difficulty: 3 Hard

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

63) Mr. and Mrs. Eyre own residential rental property that they would like to dispose of in a nontaxable exchange. Which of the following would not qualify as like-kind property?

A) Commercial office building

B) Undeveloped land

C) Warehouse used to store transportation equipment

D) All of the above qualify as like-kind property.

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

64) Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange. Which of the following properties will qualify for like-kind exchange treatment?

A) New York office building

B) Tractor

C) 35 hogs raised for slaughter

D) Personal residence in Des Moines which Carman would use as her personal residence

Difficulty: 1 Easy

Topic: Like-Kind Exchanges

Learning Objective: 09-05 Identify properties that qualify for like-kind exchange treatment.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

65) Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged.

Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG.

A) $175,000 gain recognized; $768,000 basis in OMG property.

B) No gain recognized; $768,000 basis in OMG property.

C) $175,000 gain recognized; $943,000 basis in OMG property.

D) None of the choices are correct.

Explanation: Babex treats the $175,000 relief of debt as boot received.

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

66) Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged.

Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex.

A) $175,000 gain recognized; $514,500 basis in Babex property.

B) No gain recognized; $689,500 basis in Babex property.

C) No gain recognized; $514,500 basis in Babex property.

D) None of the choices are correct.

Explanation: OMG treats the $175,000 assumption of debt as boot paid. Therefore, its basis in the Babex property is $689,500 ($514,500 substituted basis + $175,000 boot).

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

67) Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged.

Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

A) $25,000 gain recognized; $593,000 basis in C&K property.

B) $25,000 gain recognized; $793,000 basis in C&K property.

C) $225,000 gain recognized; $593,000 basis in C&K property.

D) None of the choices are correct.

Explanation: Johnson treats the $25,000 cash and the $200,000 relief of debt as boot received.

Difficulty: 3 Hard

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

68) Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged.

Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the property received from Johnson.

A) $200,000 gain recognized; $662,000 basis in Johnson property.

B) No gain recognized; $462,000 basis in Johnson property.

C) No gain recognized; $487,000 basis in Johnson property.

D) None of the choices are correct.

Explanation: C&K paid $225,000 boot ($25,000 cash + $200,000 assumption of debt) to acquire the Johnson property. Therefore, its basis in the property is $687,000 ($462,000 substituted basis + $225,000 boot).

Difficulty: 3 Hard

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

69) Which of the following statements about the transfer of debt in a like-kind exchange is false?

A) The party relieved of debt treats the relief as boot received.

B) The party assuming debt treats the assumption as boot paid.

C) If both properties in the exchange are subject to debt, both parties will be treated as receiving boot.

D) None of the above is false.

Explanation: If both properties are subject to debt, only the party with net relief of debt is treated as receiving boot.

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

70) Mr. Weller and the Olson Partnership entered into an exchange of investment real property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of the following statements is true?

A) Mr. Weller received $193,000 boot; Olson paid $193,000 boot.

B) Mr. Weller paid $193,000 boot; Olson received $193,000 boot.

C) Mr. Weller received $428,000 boot; Olson received $235,000 boot.

D) Mr. Weller paid $428,000 boot; Olson paid $235,000 boot.

Difficulty: 2 Medium

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

71) Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged.

Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Perry's gain recognized on the exchange and its tax basis in the property received from Dally.

A) No gain recognized; $410,000 basis in the Dally property.

B) No gain recognized; $440,000 basis in the Dally property.

C) $100,000 gain recognized; $410,000 basis in the Dally property.

D) None of the choices are correct.

Explanation: Perry treats its $30,000 net assumption of debt as boot paid in the exchange. Its basis in the Dally property is $440,000 ($410,000 substituted basis + $30,000 boot paid).

Difficulty: 3 Hard

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

72) Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged.

Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

A) $30,000 gain recognized; $313,000 basis in the Perry property.

B) 100,000 gain recognized; $383,000 basis in the Perry property.

C) $30,000 gain recognized; $283,000 basis in the Perry property.

D) None of the choices are correct.

Explanation: Dally treats its $30,000 net relief of debt as boot received.

Difficulty: 3 Hard

Topic: Exchanges of Mortgaged Properties

Learning Objective: 09-06 Describe the effect of the relief and assumption of debt in a like-kind exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

73) In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its property insurance company, and on August 8, it paid $60,000 to replace the signage. Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the new signage.

A) No recognized gain or loss; $50,000 basis in the signage

B) No recognized gain or loss; $60,000 basis in the signage

C) $18,700 recognized gain; $60,000 basis in the signage

D) None of the above

Explanation: Renfru's basis in the new signage is $41,300 ($60,000 cost − $18,700 deferred gain).

Difficulty: 2 Medium

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

74) In March, a flood completely destroyed three delivery vans owned by Totle Inc. Totle's adjusted tax basis in the vans was $48,900. Totle received a $90,000 reimbursement from its property insurance company, and on September 8, it purchased one new delivery van for $70,000. Compute Totle's recognized gain on loss on the involuntary conversion and its tax basis in the new van.

A) No recognized gain or loss; $48,900 basis in the van

B) $20,000 recognized gain; $70,000 basis in the van

C) $20,000 recognized gain; $48,900 basis in the van

D) None of the above

Explanation: Totle's basis in the new van is $48,900 ($70,000 cost − $21,100 deferred gain).

Difficulty: 1 Easy

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

75) In June, a fire completely destroyed office furniture owned by W&S Inc. W&S's adjusted tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its property insurance company, and on August 8, it paid $16,000 to replace the furniture. Compute W&S's recognized gain on loss on the involuntary conversion and its tax basis in the new furniture.

A) No recognized gain or loss; $18,040 basis in the furniture

B) $2,040 recognized loss; $16,000 basis in the furniture

C) No recognized gain or loss; $13,960 basis in the furniture

D) None of the above

Explanation: W&S realizes and recognizes a loss on the involuntary conversion.

Difficulty: 2 Medium

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

76) Grantly Seafood is a calendar year taxpayer. In 2019, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2019, Grantly received a $1.2 million reimbursement from its insurance company. What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion?

A) December 31, 2019

B) December 31, 2020

C) December 31, 2021

D) October 11, 2021

Difficulty: 1 Easy

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

77) Grantly Seafood is a calendar year taxpayer. In 2019, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2019, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2020, Grantly purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in the new boat.

A) $215,500 recognized gain; $750,000 basis in the boat

B) $250,000 recognized gain; $750,000 basis in the boat

C) $250,000 recognized gain; $784,500 basis in the boat

D) None of the above

Explanation: Grantly's realized gain is $215,500 ($1,000,000 − $784,500 adjusted basis). Because Grantly failed to reinvest $250,000 of the reimbursement in replacement property, it must recognize the entire gain.

Difficulty: 3 Hard

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

78) Thieves stole computer equipment used by Ms. James in her small business. Ms. James' tax basis in the equipment was zero. One month after the theft, she received a $17,600 reimbursement from her casualty insurance company and used $14,850 to replace the computer equipment. She used the $2,750 remaining reimbursement to purchase a new desk for her office. Which of the following statements is false?

A) Ms. James must recognize a $2,750 gain on the involuntary conversion.

B) Ms. James's basis in her new computer equipment is -0-.

C) Ms. James's basis in her new desk is $2,750.

D) None of the above is false.

Difficulty: 1 Easy

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

79) A fire destroyed equipment used by BLP Inc. in its manufacturing business. BLP's adjusted tax basis in the equipment was $24,000. Three weeks after the fire, BLP paid $40,000 for replacement equipment. Which of the following statements is false?

A) If the destroyed equipment was uninsured, BLP recognizes a $24,000 ordinary loss and takes a $40,000 basis in the new equipment.

B) If BLP received a $20,000 insurance reimbursement, it recognizes a $4,000 ordinary loss and takes a $40,000 basis in the new equipment.

C) If BLP received a $30,000 insurance reimbursement, it recognizes no gain and takes a $34,000 basis in the new equipment.

D) If BLP received a $42,500 insurance reimbursement, it recognizes no gain and takes a $24,000 basis in the new equipment.

Explanation: If BLP receives a $42,500 insurance reimbursement, it recognizes a $2,500 gain on the involuntary conversion.

Difficulty: 1 Easy

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

80) A fire destroyed furniture and fixtures used in Jock's business. Jock's adjusted basis in the furniture and fixtures was $81,300. Jock received a $100,000 reimbursement from his insurance company and immediately spent $93,000 to purchase new furniture and fixtures. How much gain or loss must Jock recognize on this involuntary conversion?

A) $18,700

B) $11,700

C) $7,000

D) $0

Explanation: Jock's recognized gain equals the lesser of the realized gain ($18,700) or the amount of insurance reimbursement not reinvested in replacement property ($7,000).

Difficulty: 2 Medium

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

81) Gem Company's manufacturing facility was destroyed by a flood. The facility's adjusted basis was $665,000, and Gem received an $850,000 insurance reimbursement. Within 18 months of the flood, Gem rebuilt the facility at a total cost of $975,000. Which is Gem's basis in the new facility?

A) $790,000

B) $850,000

C) $1,160,000

D) $665,000

Explanation: The basis of the new facility equals its cost of $975,000 minus gain deferred on the involuntary conversion ($185,000 = $850,000 − $665,000).

Difficulty: 2 Medium

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

82) Bill contributed business realty ($375,000 FMV and $113,000 adjusted basis) to Zeta Inc. in exchange for Zeta common stock. Immediately after the exchange, Bill owned 53% of Zeta's outstanding stock. Compute gain recognized by Bill and by Zeta on this exchange.

A) Bill $0; Zeta $0

B) Bill $262,000; Zeta $0

C) Bill $262,000; Zeta $375,000

D) Bill $0; Zeta $375,000

Difficulty: 1 Easy

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

83) Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Inc. in exchange for J&K common stock. Which of the following statements is true?

A) If Mr. Jamail owns 14% of J&K's outstanding stock immediately after the exchange, he must recognize a $157,100 gain.

B) If Mr. Jamail owns 74% of J&K's outstanding stock immediately after the exchange, he must recognize a $157,100 gain.

C) If Mr. Jamail owns 81% of J&K's outstanding stock immediately after the exchange, he must recognize a $157,100 gain.

D) Statements A and B are true.

Difficulty: 1 Easy

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

84) Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Partnership in exchange for a partnership interest. Which of the following statements is true?

A) If Mr. Jamail owns a 14% partnership interest immediately after the exchange, he must recognize a $157,100 gain.

B) If Mr. Jamail owns 34% partnership interest immediately after the exchange, he recognizes no gain on the exchange.

C) If Mr. Jamail owns a 14% partnership interest immediately after the exchange, his tax basis in the interest is $187,000.

D) Statements A and C are true.

Explanation: Regardless of his ownership percentage, Mr. Jamail recognizes no gain on the exchange of property for an equity interest in a partnership and takes a $29,900 substituted basis in the interest.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

85) Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to Massur Inc. in exchange for Massur common stock. Which of the following statements is false?

A) If Vincent does not recognize gain on its exchange of property for stock, Vincent's tax basis in its Massur stock is $973,000.

B) If Vincent recognizes gain on its exchange of property for stock, Vincent's tax basis in its Massur stock is $2.3 million.

C) If Vincent is not in control of Massur immediately after the exchange, both Vincent and Massur must recognize a $1,327,000 gain.

D) If Vincent is in control of Massur immediately after the exchange, Massur's tax basis in the transferred realty is $973,000.

Explanation: Corporations never recognize gain on loss on the exchange of their stock for property.

Difficulty: 3 Hard

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

86) IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a $283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000 FMV and a $98,000 adjusted tax basis and received 400 shares. Compute IPM and Zeta's realized and recognized gain on the exchange.

A) IPM realized $392,000 gain and recognized no gain. Zeta realized $352,000 gain and recognized no gain

B) IPM realized and recognized $392,000 gain. Zeta realized and recognized $352,000 gain.

C) IPM realized $392,000 gain and recognized no gain. Zeta realized and recognized $352,000 gain.

D) There is not enough information to compute realized and recognized gain.

Explanation: Because IPM Inc. and Zeta Company in the aggregate own 100 percent of Ipeta's stock immediately after the exchange, they are in control of Ipeta Inc., neither recognizes any gain.

Difficulty: 1 Easy

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

87) IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a $283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000 FMV and a $98,000 adjusted tax basis and received 400 shares. Determine IPM and Zeta's tax basis in their IPeta stock and IPeta's aggregate tax basis in the transferred assets.

A) IPM's basis $283,000; Zeta's basis $450,000; IPeta's basis $733,000

B) IPM's basis $283,000; Zeta's basis $98,000; IPeta's basis $381,000

C) IPM's basis $675,000; Zeta's basis $450,000; IPeta's basis $1,125,000

D) None of the above

Explanation: The shareholders have a substituted basis in the stock, and the corporation has a carryover basis in the assets.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

88) IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a $283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000 FMV and a $98,000 adjusted tax basis and received 400 shares. Which of the following statements is false?

A) IPM's 600 shares of stock are worth $675,000.

B) Zeta's gain realized on the exchange is $392,000.

C) The exchange of stock for assets is nontaxable to IPeta.

D) None of the above is false.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

89) Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Compute Loonis and Rhea's realized and recognized gain on the exchange.

A) Loonis realized and recognized $376,000 gain. Rhea realized and recognized $105,000 gain.

B) Loonis realized $376,000 gain and recognized no gain. Rhea realized and recognized $105,000 gain.

C) Loonis realized $376,000 gain and recognized no gain. Rhea realized $105,000 gain and recognized no gain.

D) There is not enough information to compute realized and recognized gain.

Explanation: The exchange is nontaxable to both shareholders because in the aggregate they own 80% or more (100%) of LooNR's stock immediately after the exchange.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

90) Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Determine Loonis and Rhea's tax basis in their LooNR stock and LooNR's aggregate tax basis in the transferred assets.

A) Loonis' basis is $444,000; Rhea's basis is $75,000; LooNR's basis is $1 million.

B) Loonis' basis is $444,000; Rhea's basis is $180,000; LooNR's basis is $1 million.

C) Loonis' basis is $444,000; Rhea's basis is $180,000; LooNR's basis is $624,000.

D) None of the above

Explanation: Loonis's stock has a $444,000 substituted basis; Rhea's stock has a $75,000 substituted basis; LooNR's assets have a $519,000 carryover basis.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

91) Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Which of the following statements is true?

A) The FMV of Rhea's 180 shares is $180,000.

B) Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR immediately after the exchange.

C) LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets.

D) None of the above is true.

Explanation: The exchange is nontaxable to both shareholders because in the aggregate they own 80% or more (100%) of LooNR's stock immediately after the exchange.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

92) Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had 7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and recognized gain on the exchange and the tax basis in her 4,200 M&W shares.

A) $228,500 gain realized and recognized; $340,200 basis in M&W shares

B) $228,500 gain realized and recognized; $111,700 basis in M&W shares

C) $228,500 gain realized and no gain recognized; $111,700 basis in M&W shares

D) None of the above

Explanation: Because Mrs. Brinkley does not own at least 80% of the outstanding Brinkley stock immediately after the exchange, her exchange of property for stock is taxable, and she has a cost basis in her Brinkley shares.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

93) Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had 7,800 shares of outstanding stock. Compute M&W's recognized gain on its exchange of stock for property and determine M&W's tax basis in the property received from Mrs. Brinkley.

A) No gain recognized; $111,700 tax basis in property

B) No gain recognized; $340,200 tax basis in property

C) $340,200 gain recognized; $111,700 tax basis in property

D) $111,700 gain recognized; $111,700 tax basis in property

Explanation: A corporation never recognizes gain or loss on the issuance of stock in exchange for property. The exchange was taxable to Mrs. Brinkley, so M&W's tax basis in the property is its $340,200 FMV.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

94) Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for a 36% interest in M&W Partnership. Determine Mrs. Brinkley's realized and recognized gain on the exchange and the tax basis in her partnership interest.

A) $228,500 gain realized and recognized; $340,200 basis in M&W interest

B) $228,500 gain realized and recognized; $111,700 basis in M&W interest

C) $228,500 gain realized and no gain recognized; $111,700 basis in M&W interest

D) None of the above

Explanation: The exchange of property for a partnership equity interest is nontaxable.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

95) Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for a 36% interest in M&W Partnership. Compute M&W's recognized gain on its exchange of an equity interest for property and determine M&W's tax basis in the property received from Mrs. Brinkley.

A) No gain recognized; $340,200 tax basis in property

B) No gain recognized; $111,700 tax basis in property

C) $340,200 gain recognized; $111,700 tax basis in property

D) $111,700 gain recognized; $111,700 tax basis in property

Explanation: A partnership never recognized gain or loss on the exchange of an equity interest for property. M&W has a $111,700 carryover basis in the property received from Mrs. Brinkley.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

96) Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for 148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the transferred assets, each Triple share is worth $125. Which of the following is false?

A) Mr. Albert's tax basis in his 820 shares is $50,000.

B) Triple Inc.'s tax basis in the assets transferred by Mrs. Billig is $9,000.

C) Mrs. Crisp's tax basis in her 32 shares is $4,000.

D) None of the above is false.

Explanation: Mr. Albert's and Mrs. Billig's exchanges are nontaxable because the three transferors in the aggregate own 80% or more (100%) of Triple's outstanding stock immediately after the exchange.

Difficulty: 2 Medium

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

97) Mr. Slake sold 1,580 shares of publicly traded DDL stock (tax basis $49,240) for $40,000 cash on February 13. He paid $43,000 cash to purchase 1,600 DDL shares on March 2. Compute Mr. Slake's loss recognized on the February 13 sale and determine his tax basis in the 1,600 shares.

A) No loss recognized; $40,000 basis

B) $9,240 loss recognized; $43,000 basis

C) No loss recognized; $52,240 basis

D) No loss recognized; $49,240 basis

Difficulty: 1 Easy

Topic: Wash Sales

Learning Objective: 09-09 Describe the tax consequences of a wash sale.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

98) Ms. Ellis sold 889 shares of publicly traded Omer stock (tax basis $161,400) for $125,000 cash on July 2. She paid $136,200 cash to purchase 900 Omer shares on August 8. Compute Ms. Ellis' loss recognized on the July 2 sale and determine her tax basis in the 1,000 shares.

A) $36,400 loss recognized; $136,200 basis

B) No loss recognized; $136,200 basis

C) No loss recognized; $76,200 basis

D) $36,400 loss recognized; $125,000 basis

Explanation: The wash sale rule does not apply because Ms. Ellis waited for more than 30 days to repurchase her Omer stock.

Difficulty: 2 Medium

Topic: Wash Sales

Learning Objective: 09-09 Describe the tax consequences of a wash sale.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

99) On January 21, 2008, Andy purchased 350 shares of Baker common stock for $24,500. On November 13, 2019, he sold the 350 shares for $7,250. On December 1, 2019, Andy purchased 350 shares of Baker common stock for $8,000. What is Andy's basis in these shares?

A) $8,000

B) $25,250

C) $24,500

D) $17,250

Explanation: Andy's basis in the new shares equals their cost of $8,000 plus the deferred loss from the wash sale ($17,250 = $7,250 − $24,500).

Difficulty: 2 Medium

Topic: Wash Sales

Learning Objective: 09-09 Describe the tax consequences of a wash sale.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

100) Which of the following statements about the wash sale rule is false?

A) The rule disallows loss recognition but not gain recognition.

B) The rule applies to both individual and corporate taxpayers.

C) The rule applies only to sales of marketable securities and not to sales of other types of investment assets.

D) None of the above is false.

Difficulty: 1 Easy

Topic: Wash Sales

Learning Objective: 09-09 Describe the tax consequences of a wash sale.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

101) Lorch Company exchanged an old asset with a $120,700 tax basis and a $155,000 FMV for a new asset with a $142,250 FMV and $12,750 cash.

a. If the old asset and the new asset are like-kind properties, compute Lorch's realized and recognized gain and Lorch's tax basis in the new asset.

b. How would your answers change if the new asset is worth only $116,000, and Lorch received $39,000 cash in the exchange?

a. Lorch's realized gain is $34,300 ($155,000 amount realized − $120,700 basis), its recognized gain is $12,750 (boot received), and its basis in the new asset is $120,700 ($120,700 basis of old asset + $12,750 gain recognized − $12,750 boot received).

b. Lorch would recognize the entire $34,300 gain realized, and its basis in the new asset would be $116,000 ($120,700 basis of old asset + $34,300 gain recognized − $39,000 boot received).

Difficulty: 2 Medium

Topic: The Effect of Boot; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-05 Identify properties that qualify for like-kind exchange treatment.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

102) Sissoon Inc. exchanged a business asset for an investment asset. Both assets had a $620,000 appraised FMV. Sissoon's book basis in the business asset was $518,900, and its tax basis was $443,400.

a. Compute Sissoon's book and tax gain if the business asset and investment asset were like-kind properties for tax purposes.

b. Determine Sissoon's book and tax basis of the investment asset acquired in the nontaxable exchange properties for tax purposes.

c. Compute Sissoon's book and tax gain if the business asset and investment asset were not like-kind properties for tax purposes.

d. Determine Sissoon's book and tax basis of the investment asset acquired in the taxable exchange.

a. Sissoon's book gain is $101,100 ($620,000 amount realized − $518,900 book basis). Sissoon's realized tax gain is $176,600 ($620,000 amount realized − $443,400 tax basis), but because the exchange is a nontaxable like-kind exchange, Sissoon's recognized gain is zero.

b. Sissoon's book basis in the investment asset is $620,000 (cost), and its tax basis is $443,400 (substituted basis of business asset).

c. Sissoon's book gain is $101,100 ($620,000 amount realized − $518,900 book basis). Sissoon's tax gain is $176,600 ($620,000 amount realized − $443,400 tax basis).

d. Sissoon's book basis and tax basis in the investment asset is $620,000 (cost).

Difficulty: 3 Hard

Topic: The Effect of Boot; Book/Tax Difference from Nontaxable Exchange; The Substituted Basis Rule

Learning Objective: 09-03 Compute gain recognized when boot is received in a nontaxable exchange.; 09-04 Explain book/tax differences related to nontaxable exchanges.; 09-02 Compute the substituted basis of property received in a nontaxable exchange.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

103) On May 13, 2019, a flood destroyed the building in which SDF Inc. manufactured its product. SDF's adjusted tax basis in the building was $984,000. On November 29, 2019, SDF received a $1.2 million reimbursement from its casualty insurance company. In each of the following cases, compute SDF's recognized gain on this involuntary conversion and its initial basis in the replacement property.

a. On June 2, 2020, SDF completed construction of a replacement building for $1.3 million.

b. On February 18, 2022, SDF paid $1.3 million to purchase a replacement building.

c. On August 30, 2021, SDF paid $1.1 million to purchase a replacement building.

a. SDF realized a $216,000 gain on the involuntary conversion ($1.2 million insurance reimbursement - $984,000 adjusted basis). Because it expended more than $1.2 million to replace the building within the two taxable years following the year of the involuntary conversion, it did not recognize any gain in 2019. SDF's initial basis in the replacement building is $1,084,000 ($1.3 million cost − $216,000 deferred gain).

b. Because the replacement did not occur within the two taxable years following the year of the involuntary conversion, SDF must recognize its $216,000 gain in 2019. Its initial basis in the replacement building is the building's $1.3 million cost.

c. SDF must recognize $100,000 of the $216,000 gain realized ($1.2 million insurance reimbursement − $1.1 million cost of replacement building). SDF's initial basis in the replacement building is $984,000 ($1.1 million cost − $116,000 deferred gain).

Difficulty: 3 Hard

Topic: Involuntary Conversions

Learning Objective: 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

104) Mr. and Mrs. Meredith own a sole proprietorship consisting of business assets with a $649,000 aggregated adjusted tax basis. According to an independent appraisal, the business is worth $2 million. The Merediths are planning to transfer the entire business to Molleri Inc. in exchange for 20,000 shares of Molleri stock. How much gain will the Merediths recognize on the exchange of business assets for stock and what basis will they take in the stock if:

a. Molleri has 23,000 shares of outstanding stock immediately after the exchange?

b. Molleri has 500,000 shares of outstanding stock immediately after the exchange?

a. The Merediths will own 87% of Molleri's outstanding stock (20,000 shares/23,000 shares) immediately after the exchange and therefore will satisfy the 80% control requirement for a nontaxable exchange of property for stock. They will not recognize any of their $1,351,000 realized gain ($2 million amount realized − $649,000 adjusted basis), and will take a $649,000 substituted basis in their Molleri stock.

b. The Merediths will own 4% of Molleri's outstanding stock (20,000 shares/500,000 shares) immediately after the exchange and will not satisfy the 80% control requirement. They will recognize their $1,351,000 realized gain and will take a $2 million cost basis in their Molleri stock.

Difficulty: 1 Easy

Topic: Formations of Business Entities

Learning Objective: 09-08 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

105) Texark Inc., a calendar year taxpayer, reported $5,210,300 net income before tax on its financial statements prepared in accordance with GAAP. The corporation's records reveal the following information.

• Depreciation expense per books was $713,700, and MACRS depreciation was $662,000.

• Texark exchanged old realty (-0- tax basis; $44,200 book basis) for new realty (FMV $50,000). Book gain was included in book income, although the exchange was nontaxable for tax purposes.

• Texark received a $100,000 insurance reimbursement for the destruction of machinery with a $29,000 tax basis and a $70,000 book basis. Texark spent $110,000 to replace the machinery before year-end.

Compute Texark's taxable income.

Difficulty: 2 Medium

Topic: Book/Tax Difference from Nontaxable Exchange; Like-Kind Exchanges; Involuntary Conversions

Learning Objective: 09-04 Explain book/tax differences related to nontaxable exchanges.; 09-05 Identify properties that qualify for like-kind exchange treatment.; 09-07 Compute gain recognized and the basis of replacement property in an involuntary conversion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual