Question 1

Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?
A) $493,783.
B) $496,825.
C) $496,958.
D) $500,000.
E) None of the above.

Accepted Answer

The answer of Steve purchased his home for $500,000. As...

Question 2

Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1993 when he acquired 30 shares for $20 a share. In 1998, Alfred bought 150 shares at $10 a share. In 2013, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year (2014). If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold, what is his recognized gain?
A) $1,250.
B) $3,520.
C) $5,950.
D) $6,250.
E) None of the above.

Accepted Answer

To minimize gain, Alfred should sell the shares with the highest cost basis. The 200 shares purchased in 2013 at $50 each have the highest cost basis. Selling 125 of these shares at $60 each results in a gain of ($60 - $50) * 125 = $1,250.

Question 3

Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. Real estate taxes are $9,000 per calendar year and are payable on December 31. On April 1, 2014, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?
A) $1,370,000.
B) $1,372,219.
C) $1,720,000.
D) $1,722,219.
E) None of the above.

Accepted Answer

The answer of Alice owns land with an adjusted basis...

Question 4

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?
A) $0.
B) $12,000.
C) ($13,000).
D) ($25,000).
E) None of the above.

Accepted Answer

The answer of Katie sells her personal use automobile for...

Question 5

Elvis owns all of the stock of White Corporation. The accumulated earnings and profits of White Corporation at the beginning of the year are a deficit of $20,000. The current earnings and profits are $30,000. Elvis' basis for his stock is $250,000. He receives a distribution of $300,000 on the last day of the tax year. How much dividend income and/or capital gain should Elvis report?
A) $0.
B) Dividend income of $30,000 and capital gain of $20,000.
C) Dividend income of $30,000 and capital gain of $0.
D) Dividend income of $10,000 and capital gain of $20,000.
E) None of the above.

Accepted Answer

The distribution is first applied against current earnings and profits ($30,000), resulting in dividend income. The remaining $270,000 reduces Elvis' stock basis to $0, and the excess $20,000 is a capital gain.

Question 6

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?
A) $0.
B) $38,000.
C) $70,000.
D) $110,000.
E) None of the above.

Accepted Answer

S1U1B1

Question 7

Sandra's automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra's adjusted basis for the automobile after the casualty?
A) $0.
B) $7,000.
C) $7,800.
D) $10,200.
E) None of the above.

Accepted Answer

The answer of Sandra's automobile, which is used exclusively in...

Question 8

A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?
A) Joy must include the $7,500 in gross income.
B) Joy must reduce the basis of the land by $7,500.
C) Joy must include the $7,500 in the gross income and increase the basis of the land by $7,500.
D) Only a. and c. are correct.
E) a., b., and c. are correct.

Accepted Answer

When a strip of land is condemned and the owner receives compensation, the owner reduces the basis of their land by the amount of compensation received. Therefore, Joy must reduce the basis of her land by $7,500, and this is the only correct option. Option A is incorrect because the payment is not considered gross income since it is compensation for lost property. Option C is incorrect because the payment does not increase the basis of the land. Option D and E are incorrect because only option B is correct.

Question 9

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2014, for $11,000. The maturity date is December 31, 2023. The annual interest rate is 8%. What is the amount of taxable interest income that Karen should report for 2014, and the adjusted basis for the bonds at the end of 2014, assuming straight-line amortization is appropriate?
A) $0 and $11,000.
B) $0 and $10,900.
C) $100 and $11,000.
D)
$100 and $10,900.
E) None of the above.

Accepted Answer

The answer of Karen owns City of Richmond bonds with...

Question 10

Which of the following statements is false?
A) A realized gain that is never recognized results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
B) A realized gain on which recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis for tax purposes.
C) A realized loss that is never recognized results in the permanent recovery of less than the taxpayer's cost or other basis for tax purposes.
D) A realized loss on which recognition is postponed results in the temporary recovery of less than the taxpayer's cost or other basis for tax purposes.
E) All of the above.

Accepted Answer

The answer of Which of the following statements is false?
A)...

Question 11

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.
A) $0.
B) $3,000.
C) $17,000.
D) $20,000.
E) None of the above.

Accepted Answer

Mary's recognized gain is calculated by subtracting the cost basis (the amount she paid for the car) from the selling price. Therefore, her recognized gain is $20,000 - $17,000 = $3,000. Option A is incorrect because there is a recognized gain. Options C and D are incorrect because they do not take into account the recognized gain. Option E is incorrect because there is a recognized gain.

Question 12

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?
A) $0.
B) $45,000.
C) $163,000.
D) $208,000.
E) None of the above.

Accepted Answer

S1U1B1

Question 13

The bank forecloses on Lisa's apartment complex. The property had been pledged as security on a nonrecourse mortgage, whose principal amount at the date of foreclosure is $750,000. The adjusted basis of the property is $480,000, and the fair market value is $750,000. What is Lisa's recognized gain or loss?
A) $270,000.
B) ($750,000).
C) $0.
D) ($480,000).
E) None of the above.

Accepted Answer

S1U1B1

Question 14

On February 2, 2014, Karin purchases real estate for $375,000. The annual property taxes of $5,000 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,575 to the seller at closing. Karin's adjusted basis for the real estate is:
A) $374,575.
B) $375,000.
C) $375,425.
D) $379,575.
E) None of the above.

Accepted Answer

Karin's adjusted basis for the real estate is the purchase price of $375,000, as the property taxes are not included in the basis calculation.

Question 15

Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?
A) $0.
B) $10,000 loss.
C) $10,000 gain.
D) $40,000 gain.
E) None of the above.

Accepted Answer

Joyce's recognized gain or loss is calculated by comparing the insurance proceeds received to the adjusted basis of the property. In this case, the insurance proceeds received ($360,000) are greater than the adjusted basis of the property ($350,000), resulting in a gain. The amount of the gain is calculated by taking the insurance proceeds received ($360,000) and subtracting the amount used to purchase additional inventory ($310,000), leaving $50,000. Since Joyce invests this remaining amount in short-term certificates of deposit, it is considered to be "boot" and will be treated as cash received in the transaction. Therefore, Joyce's recognized gain is $50,000.

Note: The co-insurance clause in Joyce's insurance policy is not relevant to the calculation of recognized gain or loss. It only affects the amount of insurance proceeds received.

Question 16

Noelle owns an automobile which she uses for personal use. Her adjusted basis is $45,000 (i.e., the original cost). The car is worth $22,000. Which of the following statements is correct?
A) If Noelle sells the car for $22,000, her realized loss of $23,000 is not recognized.
B) If Noelle exchanges the car for another car worth $22,000, her realized loss of $23,000 is not recognized.
C) If the car is stolen and it is uninsured, Noelle may be able to recognize part of her realized loss of $23,000.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

Accepted Answer

The answer of Noelle owns an automobile which she uses...

Question 17

Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?
A) $1,350,000.
B) $1,378,000.
C) $1,385,000.
D) $1,413,000.
E) None of the above.

Accepted Answer

The answer of Carlton purchases land for $550,000. He incurs...

Question 18

Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000.
What is Nat's recognized gain and his basis for the lot?
Recognized gain Basis
A)$\begin{array}{ll}
\$ 0 &&& \$ 75,000 \\end{array}$
B)$\begin{array}{ll}\$ 0 &&& \$ 90,000 \\end{array}$
C)$\begin{array}{ll}\$ 15,000 & \$ 75,000 \\end{array}$
D)$\begin{array}{ll}\$ 15,000 & \$ 90,000 \\end{array}$
E)$\begin{array}{ll}\$ 30,000 & \$ 105,000
\end{array}$

Accepted Answer

The answer of Nat is a salesman for a real...

Question 19

Capital recoveries include:
A) The cost of capital improvements.
B) Ordinary repair and maintenance expenditures.
C) Payments made on the principal of a mortgage on taxpayer's building.
D) Amortization of bond premium.
E) All of the above.

Accepted Answer

The answer of Capital recoveries include:
A) The cost of capital...

Question 20

Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2014, for $11,000. The bonds have an annual interest rate of 8% and a maturity date of December 31, 2023. If Jason elects to amortize the bond premium, what is his taxable interest income for 2014 and the adjusted basis for the bonds at the end of 2014 (assuming straight-line amortization is appropriate)?
A) $800 and $11,000.
B) $800 and $10,900.
C) $700 and $11,000.
D)
$700 and $10,900.
E) None of the above.

Accepted Answer

S1U1B1

Quiz 13: Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?

A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?

Which of the following statements is false?

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.

On February 2, 2014, Karin purchases real estate for $375,000. The annual property taxes of $5,000 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,575 to the seller at closing. Karin's adjusted basis for the real estate is:

Noelle owns an automobile which she uses for personal use. Her adjusted basis is $45,000 (i.e., the original cost) . The car is worth $22,000. Which of the following statements is correct?

Capital recoveries include: