Question 1

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.

Question 2

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 when placed in service on July 1 will include the $500,000 cost plus the $200,000 of improvements and the $2,000 of construction period interest.

Question 3

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

Basis includes all costs associated with acquiring an asset and placing it in service. $33,000 + $5,000 + $2,400 + $1,500 + $4,200 = $46,100

Question 4

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

$45,000 + $4,000 + $600 + $3,000 = $52,600. Operating costs will be currently deducted.

Question 5

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

Sarah's basis in the property is the same as Dale's basis, which is $16,000. When she sells the property for $22,000, her recognized gain is the amount of the sale price that exceeds her basis, which is $22,000 - $16,000 = $6,000. Since the property was initially transferred as a gift, the $4,000 difference between the FMV and the basis is disregarded for taxation purposes. Therefore, the recognized gain is $6,000.

Question 6

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

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

Question 7

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

There is a dual basis when the FMV is below the adjusted basis as of the date of gift. The basis for gain is the adjusted basis; the basis for loss is FMV. $80,000 - $85,000 = ($5,000).

Question 8

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

Because the old shares and the new shares acquired through a nontaxable stock dividend are not the same type of stock, relative fair market values must be used for allocation of basis.

Question 9

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

The basis of inherited property is normally its FMV at date of death.

Question 10

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

Accepted Answer

Interest on debt paid or incurred during the construction, installation, manufacture, development, or improvement of real or tangible personal property must be capitalized.

Question 11

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

Accepted Answer

The regulations require the use of FIFO identification if the taxpayer does not specifically instruct the broker as to specific shares to be sold.

Question 12

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

Owners of mutual fund shares have a choice of FIFO ($9,000), specific identification ($9,500, assuming $150 shares chosen first with balance coming from $100 shares) or average cost ($9,409).

Question 13

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

Accepted Answer

In a basket purchase, the total cost is apportioned among the assets purchased according to the relative fair market value of the assets.

Question 14

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

Basis includes all costs associated with acquiring an asset and placing it in service. $50,000 + $10,000 + $3,000 + $500 + $800 = $64,300

Question 15

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

If the exact shares cannot be identified, the FIFO method must be used. The 80 shares sold are assumed to have come from the March purchase. $270/100 = $2.70 × 80 = $216.

Question 16

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 donee normally assumes the donor's basis in gifted property. $110,000 amount realized - $85,000 gift basis = $25,000 gain.

Question 17

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 18

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

Gift tax is only added to the asset's basis when the asset is appreciated as of the gift date, and the basis is only increased by the portion of the gift taxes paid by the donor allocable to the appreciation.

Question 19

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 initial cost plus the installation, testing and training costs must be capitalized and included in basis.

Question 20

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

Accepted Answer