Question 1

Mr.Beck sold real property with a $140,000 adjusted basis for $255,000.The buyer paid $148,000 cash and assumed Mr.Beck's $107,000 mortgage on the realty.Mr.Beck's realized gain or loss on sale is:

Accepted Answer

Mr. Beck's realized gain is calculated by subtracting the adjusted basis of the property ($140,000) from the selling price ($255,000). The selling price includes both the cash received ($148,000) and the mortgage assumed by the buyer ($107,000), totaling $255,000. Therefore, the realized gain is $255,000 - $140,000 = $115,000.

Question 2

Philp Inc.sold equipment with a $132,900 adjusted tax basis for $200,000.The purchaser paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset.Compute Philp's net cash flow from the sale assuming a 21% tax rate.

Accepted Answer

The answer of Philp Inc.sold equipment with a $132,900 adjusted...

Question 3

In 2018,TPC Inc.sold investment land with a $474,000 book and tax basis for $775,000.The purchaser paid $100,000 in cash and gave TPC a note for the $675,000 balance of the price.In 2019,TPC received a $105,500 payment on the note ($67,500 principal + $38,000 interest).Assuming that TPC is using the installment sale method,compute its gain recognized in 2019.

Accepted Answer

The gain recognized in 2019 is calculated by finding the gross profit percentage and applying it to the principal payment received. The gross profit is $301,000 ($775,000 - $474,000), and the gross profit percentage is 38.84% ($301,000 / $775,000). Applying this percentage to the $67,500 principal payment results in a recognized gain of $26,216.

Question 4

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

Accepted Answer

The installment sale method of accounting is generally used for sales where payments are received over time after the sale of property. However, it does not apply to sales of inventory or to sales of stocks and securities like U.S. Treasury notes. A real estate developer holding a 12-acre tract of land as inventory and the sale of U.S. Treasury notes both fall into these exceptions.

Question 5

Six years ago,Alejo Company purchased real property by paying $250,000 cash and giving the seller its $1 million note for the balance of the purchase price.This year,Alejo deducted $30,800 depreciation on the property and made a $125,000 principal payment on the note.Which of the following statements is false?

Accepted Answer

The principal payment reduces the balance due on the note but does not affect the tax basis in the real property. The tax basis is reduced by depreciation, not by principal payments.

Question 6

In 2018,TPC Inc.sold investment land with a $388,000 book and tax basis for $523,000.The purchaser paid $60,000 in cash and gave TPC a note for the $463,000 balance of the price.In 2019,TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest).In 2019,TPC's use of the installment sale method results in a:

Accepted Answer

The answer of In 2018,TPC Inc.sold investment land with a...

Question 7

Lenoci Inc.paid $310,000 for equipment three years ago.This year,it sold the equipment for $200,000.Through date of sale,accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327.Which of the following statements is true?

Accepted Answer

The answer of Lenoci Inc.paid $310,000 for equipment three years...

Question 8

Noble Inc.paid $310,000 for equipment three years ago.This year,it sold the equipment for $200,000.Through date of sale,accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327.Assuming a 21% tax rate,what is the effect of the sale on Noble's deferred tax accounts?

Accepted Answer

The effect of the sale on Noble's deferred tax accounts is a $11,232 decrease in deferred tax liabilities. This is calculated by finding the difference between the book and tax gain (or loss) on the sale and then applying the tax rate. The book value of the equipment at the time of sale is the original cost minus accumulated book depreciation ($310,000 - $93,840 = $216,160). The sale results in a book loss of $16,160 ($216,160 - $200,000). The tax basis of the equipment at the time of sale is the original cost minus accumulated tax depreciation ($310,000 - $147,327 = $162,673), resulting in a tax gain of $37,327 ($200,000 - $162,673). The difference between the book loss and tax gain is $53,487 ($37,327 - (-$16,160)). Applying the 21% tax rate to this difference results in a $11,232.27 decrease in deferred tax liabilities, rounded to $11,232.

Question 9

Dolzer Inc.sold a business asset with a $474,000 adjusted book and tax basis for $775,000.The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price.Dolzer will not receive a payment on the note until next year.Assuming that Dolzer uses the installment sale method,compute Dolzer's book and tax gain in the year of sale.

Accepted Answer

The book gain is the difference between the selling price and the adjusted book basis: $775,000 - $474,000 = $301,000. The tax gain is the difference between the selling price and the adjusted tax basis: $775,000 - $474,000 = $301,000. However, since Dolzer will not receive a payment on the note until next year, only a portion of the gain is recognized in the year of sale. The portion of the gain recognized is equal to the cash received divided by the total selling price: $100,000 / $775,000 = 12.9%. Therefore, the book gain recognized in the year of sale is $301,000 x 12.9% = $38,839, and the tax gain recognized in the year of sale is also $38,839.

Question 10

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

Accepted Answer

The installment sale method applies to gains from sales of property where at least one payment is received after the tax year of the sale. It does not apply to inventory, publicly traded stock, or losses.

Question 11

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

Accepted Answer

When a nonrecourse mortgage is foreclosed, the difference between the outstanding debt and the adjusted basis of the property is treated as a gain. In this case, the outstanding debt is $228,500 and the adjusted basis is $175,000, resulting in a gain of $53,500. As a result, Netelli must recognize this gain on the disposition of the land.

Question 12

O&V sold an asset with a $78,300 adjusted tax basis for $100,000.The purchaser paid $30,000 in cash and assumed O&V's $70,000 mortgage on the asset.Compute O&V's net cash flow from the sale assuming a 21% tax rate.

Accepted Answer

The net cash flow from the sale is $25,443. This is calculated as follows:Sale price: $100,000Less: Adjusted tax basis: $78,300Gain: $21,700Less: Tax on gain (21% x $21,700): $4,557Net cash flow: $25,443

Question 13

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

Accepted Answer

The answer of A loss from an involuntary conversion of...

Question 14

O&V sold a business asset with a $78,300 adjusted tax basis for $100,000.The purchaser paid $30,000 in cash and gave O&V a note for the $70,000 balance of the price.O&V will not receive a payment on the note until next year.Compute O&V's gain recognized under the installment sale method.

Accepted Answer

The answer of O&V sold a business asset with a...

Question 15

A fire destroyed business equipment that was worth $160,000 and had a $118,100 adjusted tax basis.The equipment was uninsured.The owner can recognize a $160,000 ordinary casualty loss.

Accepted Answer

The recognized loss is the difference between the adjusted tax basis of the equipment ($118,100) and its fair market value after the casualty (which is $0 since it was destroyed), not the original worth of the equipment. Therefore, the loss is $118,100, not $160,000.

Question 16

Skeen Company paid $90,000 for tangible personalty three years ago and elected to expense and deduct the cost under Section 179.This year,Skeen sold the personalty for $52,700.Accumulated book depreciation through date of sale was $31,000.What is the effect of the sale on Skeen's book income and taxable income?

Accepted Answer

The book loss is calculated as the sale price ($52,700) minus the book value ($90,000 - $31,000 = $59,000), resulting in a $6,300 loss. For tax purposes, the entire cost was expensed under Section 179, so the basis is $0, resulting in a $52,700 gain.

Question 17

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

Accepted Answer

Since the equipment was uninsured, the owner can recognize a casualty loss for the adjusted tax basis of the equipment which is $118,100.

Question 18

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

Accepted Answer

The answer of This year,Ms.Lucas sold investment land for $125,000...

Question 19

Brenda sold investment land for $200,000 in June.Her basis in the land was $75,000.The purchaser paid Brenda $40,000 cash and gave her his 5-year,interest-bearing note for the $160,000 remaining contract price.In December,Brenda received a $20,000 principle payment on the note.Brenda's recognized gain this year is:

Accepted Answer

Brenda's recognized gain is determined by subtracting her basis from the amount realized, which is $200,000 - $75,000 = $125,000. However, she only received $40,000 in cash this year, so that is the only amount that is recognized as gain for tax purposes. Therefore, her recognized gain is $40,000. The $20,000 principle payment on the note is considered a return of capital and doesn't impact her recognized gain this year. The remaining $120,000 of the contract price will be recognized as gain in the years in which she receives principle payments on the note. The recognized gain for those payments will be calculated by dividing the remaining gain ($125,000 - $40,000 = $85,000) by the total contract price ($160,000) and multiplying by the amount of each principle payment.

Question 20

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

Accepted Answer

The amount realized on the sale includes the cash received, the mortgage assumed by the purchaser, and the value of the note received. Therefore, it's $250,000 (cash) + $600,000 (mortgage assumed) + $580,000 (note) = $1,430,000.

Quiz 8: Property Dispositions