Question 1

Terra Corp.purchased a new enterprise software system and incurred the following costs:  What is Terra Corp.'s basis in the software system?

Accepted Answer

The answer of Terra Corp.purchased a new enterprise software system...

Question 2

Dale gave property with a basis of $16,000 to Sarah when it had a FMV of $12,000.No gift taxes were due.Sarah later sold the property for $22,000 resulting in a recognized gain of

Accepted Answer

Since Dale gave the property to Sarah as a gift, Sarah's basis in the property is the same as Dale's basis, which is $16,000. When Sarah sold the property for $22,000, she had a realized gain of $6,000 ($22,000 - $16,000). This gain is recognized for tax purposes, so Sarah would have to pay taxes on it. Therefore, the correct answer is C.

Question 3

Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.

Accepted Answer

Funds borrowed and used to pay for an asset are included in the cost of the asset because they are used to acquire the asset, even if the borrowed funds are not yet repaid. Once the borrowed funds are repaid, the cost of the asset remains the same.

Question 4

Dennis purchased a machine for use in his business.Mr.Dennis' costs in connection with this purchase were as follows:  What is the amount of Mr.Dennis' basis in the machine?

Accepted Answer

The answer of Dennis purchased a machine for use in...

Question 5

An uncle gifts a parcel of land to his niece,and he has to pay $25,000 of gift taxes.The land has appreciated substantially since he purchased it 20 year ago.The niece's basis in the land will be the uncle's cost plus the full $25,000 of gift taxes paid by the uncle.

Accepted Answer

A donee's basis in gifted property generally starts with the donor's basis.In the case of appreciated gifted property,the law does allow the donee to increase the basis of the asset by gift taxes,but only by the portion of the gift taxes paid by the donor allocable to the appreciation.

Question 6

If stock sold or exchanged is not specifically identified,the FIFO (first-in,first-out)method of identification must be used.

Accepted Answer

This is true according to the IRS guidelines. If the stock sold or exchanged is not specifically identified, the default method for identification is FIFO (first-in, first-out).

Question 7

Rachel holds 110 shares of Argon Mutual Fund.She is planning to sell 90 shares.Her record of the share purchases is noted below.What could be her basis for the 90 shares to be sold for purposes of determining gain?

Accepted Answer

The answer of Rachel holds 110 shares of Argon Mutual...

Question 8

Edward purchased stock last year as follows:  In April of this year,Edward sells 80 shares for $250.Edward cannot specifically identify the stock sold.The basis for the 80 shares sold is

Accepted Answer

Since Edward cannot specifically identify the stock sold, he must use the First-In First-Out (FIFO) method to determine the basis of the shares sold. 
According to the FIFO method, the first 80 shares purchased are considered sold first. 
Therefore, the basis for the 80 shares sold is calculated as follows: 
- Edward purchased 11 shares at a cost of $6 each, for a total of 11 x $6 = $66. 
- Edward purchased 5 shares at a cost of $8 each, for a total of 5 x $8 = $40. 
- Edward purchased 6 shares at a cost of $12 each, for a total of 6 x $12 = $72. 
- Edward purchased 58 shares at a cost of $10 each, for a total of 58 x $10 = $580. 
The total cost of all shares purchased is $66 + $40 + $72 + $580 = $758. 
Since Edward sold 80 shares, the portion of the total cost allocated to those shares is: 
- ($758 / 80 shares) x 80 shares sold = $758. 
Therefore, the basis for the 80 shares sold is $758, which is $9.475 per share. 
When Edward sells the 80 shares for $250, he has a realized gain of $250 - ($9.475 x 80) = $250 - $758 = -$508. 
Since the realized gain is negative, Edward has a realized loss on the sale of these shares.

Question 9

In a basket purchase,the total cost is apportioned among the assets purchased according to the relative adjusted basis of the assets.

Accepted Answer

The answer of In a basket purchase,the total cost is...

Question 10

Interest incurred during the development and manufacture of a machine must be capitalized.

Accepted Answer

According to generally accepted accounting principles (GAAP), interest incurred during the development and manufacture of a machine should be included as part of the cost of the asset and therefore capitalized. This is because the interest expense is directly related to the acquisition and production of the asset and is necessary to get the asset ready for its intended use.

Question 11

Kathleen received land as a gift from her grandfather.At the time of the gift,the land had a FMV of $85,000 and an adjusted basis of $110,000 to Kathleen's grandfather.One year later,Kathleen sold the land for $80,000.What was her gain or (loss)on this transaction?

Accepted Answer

Since Kathleen sold the land for less than its adjusted basis at the time of the gift, she has a loss. The loss is calculated by subtracting the sale price of $80,000 from the adjusted basis of $110,000, which equals ($30,000). However, the loss is limited to the FMV of the land at the time of the gift, which was $85,000. Therefore, Kathleen's loss on this transaction is limited to ($85,000 - $80,000) = ($5,000).

Question 12

With regard to taxable gifts after 1976,no gift tax is added to the basis of the property if the donor's basis is greater than the FMV of the property.

Accepted Answer

This statement is true. If the donor's basis is greater than the FMV of the property, no gift tax is added to the basis of the property.

Question 13

Capitalization of interest is required if debt is incurred to construct real property.

Accepted Answer

According to generally accepted accounting principles (GAAP), interest incurred during the construction period must be capitalized as part of the cost of the asset (real property). This means that the interest is added to the cost of the property and depreciated over time instead of being expensed in the current period.

Question 14

Unless the alternate valuation date is elected,the basis of property received from a decedent is generally the property's fair market value at the date of decedent's death.

Accepted Answer

Unless the alternate valuation date is elected, the basis of property received from a decedent is generally the property's fair market value at the date of the decedent's death.

Question 15

Kathleen received land as a gift from her grandfather.At the time of the gift,the land had a FMV of $105,000 and an adjusted basis of $85,000 to Kathleen's grandfather.The grandfather did not have any gift taxes due.One year later,Kathleen sold the land for $110,000.What was her gain or (loss)on this transaction?

Accepted Answer

The answer of Kathleen received land as a gift from...

Question 16

For purposes of calculating depreciation,property converted from personal use to business use will take on a basis equal to the greater of its FMV or its adjusted basis on the date of the conversion.

Accepted Answer

The answer of For purposes of calculating depreciation,property converted from...

Question 17

During the current year,Tony purchased new car wash equipment for use in his service station business.Tony's costs in connection with the new equipment this year were as follows:  What is Tony's basis in the car wash equipment?

Accepted Answer

Tony's basis in the car wash equipment is the sum of all costs needed to acquire and place the equipment in service. This includes the purchase price, sales tax, delivery charges, and installation costs.

Therefore, Tony's basis in the car wash equipment is:
$48,000 (purchase price) + $1,000 (sales tax) + $1,000 (delivery charges) + $2,600 (installation costs) = $52,600

So, the correct choice is C.

Question 18

Empire Corporation purchased an office building for $500,000 cash on April 1.Prior to renting it out to tenants on July 1,Empire spent $200,000 on materials and labor to renovate the property.It funded $50,000 of the renovation cost with its own funds and borrowed the remaining $150,000.As of July 1,$2,000 of interest had been paid to the bank,but none of the principal had been repaid.The basis of the building on July 1 is

Accepted Answer

The basis of the building on July 1 includes the initial purchase price of $500,000 and the renovation costs that have been incurred up to that point, which are $200,000. The amount funded with Empire's own funds is irrelevant for calculating the basis.
The $150,000 borrowed for the renovation cost has not yet been repaid as of July 1, but the $2,000 of interest paid should be included in the basis. Therefore, the basis of the building on July 1 is $500,000 + $200,000 + $150,000 + $2,000 = $702,000.

Question 19

Allison buys equipment and pays cash of $50,000,signs a note of $10,000 and assumes a liability on the property for $3,000.In addition,Allison pays an installation cost of $500 and a delivery cost of $800.Allison's basis in the asset is

Accepted Answer

The answer of Allison buys equipment and pays cash of...

Question 20

If the stock received as a nontaxable stock dividend is not the same type as the stock owned prior to the dividend,the allocation of basis is based on relative fair market values of the stock.

Accepted Answer

This is true according to the IRS rules. When a stock dividend is received and it is not the same type as the stock owned prior to the dividend, then the allocation of basis is based on the relative fair market values of the stock. This is to determine the proportion of cost or other basis that is allocated to the new stock.

Quiz 10: Property Transactions: Capital Gains and Losses

Terra Corp.purchased a new enterprise software system and incurred the following costs: What is Terra Corp.'s basis in the software system?