Question 1

Two months ago,Dawes Inc.broke a multi-year lease on office space that it had occupied for four years.Three years ago,Dawes paid $85,300 to install carpeting and new electrical fixtures throughout the office.Accumulated depreciation through the date that Dawes vacated the office was $51,000.What is the tax consequence of Dawes' abandonment of the carpeting and fixtures?

Accepted Answer

When an asset is abandoned, it is considered a loss, and the taxpayer can take a deduction for the lesser of the adjusted basis or the fair market value of the asset. In this case, the adjusted basis of the carpeting and fixtures is $34,300 ($85,300 - $51,000 depreciation). Therefore, Dawes can take a $34,300 ordinary loss deduction on its tax return. Option A is incorrect because an abandonment of assets can result in a tax consequence even if the assets are not sold or exchanged. Option B is incorrect because a capital loss deduction can only be taken if the asset is sold or exchanged. Option D is incorrect because Section 1231 applies to property used in a trade or business and held for more than one year, and the assets in question were not disposed of in a way that would trigger Section 1231 treatment.

Question 2

Oslego Company,a calendar year taxpayer,sold land with a $400,000 tax basis for $635,000 in March 2019.The purchaser paid $50,000 cash at closing and gave Oslego an interest-bearing note for the $585,000 remaining price.In September,Oslego received $50,450 cash from the purchaser consisting of a $29,250 principal payment and a $21,200 interest payment.Assuming that Oslego does not elect out of the installment sale method,compute the company's 2019 gain recognized on sale and its tax basis in the note receivable on December 31.

Accepted Answer

The answer of Oslego Company,a calendar year taxpayer,sold land with...

Question 3

Mrs.Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2009.This year,HiFli declared bankruptcy and announced that its stock has no value.What is the tax consequence to Mrs.Tinker of this bad news?

Accepted Answer

The loss from the stock becoming worthless is treated as a capital loss for tax purposes, as it is considered a loss from the sale or exchange of a capital asset.

Question 4

Nolan Inc.sold marketable securities with a $223,000 basis to Totem Company.Compute Nolan's recognized gain or loss assuming that:
a.Nolan's amount realized on sale was $160,000,and Nolan and Totem are unrelated parties.
b.Nolan's amount realized on sale was $275,000,and Nolan and Totem are unrelated parties.
c.Nolan's amount realized on sale was $160,000,and Nolan and Totem are related parties.
d.Nolan's amount realized on sale was $275,000,and Nolan and Totem are related parties.

Accepted Answer

The answer of Nolan Inc.sold marketable securities with a $223,000...

Question 5

Twelve years ago,Mr.and Mrs.Bathgate purchased a business.This year,they sold the business for $750,000 lump-sum payment.The business had the following balance sheet assets.  As a result of the sale,the Bathgates should recognize:

Accepted Answer

The answer of Twelve years ago,Mr.and Mrs.Bathgate purchased a business.This...

Question 6

Steiger Company owned investment land subject to a $715,000 recourse mortgage.Steiger failed to make timely mortgage payments,so the creditor foreclosed.At date of foreclosure,Steiger's basis in the land was $587,300,and the land's appraised FMV was $690,000.Steiger completely settled its recourse debt by paying $25,000 cash to the creditor.As a result of the foreclosure,Steiger recognizes:

Accepted Answer

Steiger recognizes a capital gain of $102,700, which is the difference between the debt settled ($715,000) and the basis in the land ($587,300). The $25,000 cash payment does not affect the gain calculation.

Question 7

Dender Company sold business equipment with a $386,000 initial cost basis and $171,000 accumulated tax depreciation.Compute Dender's recaptured ordinary income and Section 1231 gain or loss recognized if the amount realized on sale was:
a.$200,000
b.$300,000
c.$400,000

Accepted Answer

The answer of Dender Company sold business equipment with a...

Question 8

Mrs.Stile owns investment land subject to a $600,000 nonrecourse mortgage.Her basis in the land is $212,000,and the land's appraised FMV is $575,000.Mrs.Stile is considering defaulting on the mortgage and allowing the creditor to foreclose.If Mrs.Stile disposes of the land through a foreclosure,she will recognize:

Accepted Answer

The answer of Mrs.Stile owns investment land subject to a...

Question 9

A tornado demolished several delivery vans owned for three years by Wadham Company.Wadham's adjusted basis in the vans was $28,400,and Wadham paid $90,000 to purchase new vans.Wadham received a $25,000 settlement from its casualty insurance company.Consequently,Wadham recognizes:

Accepted Answer

The answer of A tornado demolished several delivery vans owned...

Question 10

Ficia Inc.owned investment land subject to a $294,500 recourse mortgage.Ficia failed to make timely mortgage payments,so the creditor foreclosed.At date of foreclosure,Ficia's basis in the land was $300,000,and the land's appraised FMV was $260,000.The creditor informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage.Which of the following statements is true?

Accepted Answer

Ficia recognizes $34,500 as ordinary income from the cancellation of debt (COD) income because the creditor forgave the unpaid balance. Additionally, Ficia recognizes a $40,000 capital loss, calculated as the difference between the basis in the land ($300,000) and the FMV at foreclosure ($260,000).

Question 11

Princetown Inc.has a $4.82 million basis in 88% of the outstanding stock of Merryvale Corporation.Merryvale manufactures Christmas decorations,cards,and wrapping paper.Princetown's board of directors recently learned that Merryvale is bankrupt.The board voted unanimously to dissolve the corporation and distribute all assets to Merryvale's creditors.What is the tax consequence to Princetown of the board's actions?

Accepted Answer

When a corporation becomes bankrupt and is dissolved, shareholders may recognize a loss on their investment. In this case, Princetown Inc. has a basis in the Merryvale stock of $4.82 million. Since the stock is now worthless due to Merryvale's bankruptcy, Princetown can recognize an ordinary loss of $4.82 million on its tax return. Therefore, the correct answer is choice D.

Question 12

Michael sold machinery used in his business for $50,000.He purchased the equipment three years ago for $55,000 and deducted $22,800 MACRS depreciation through the date of sale.Compute and characterize Michael's gain on sale.

Accepted Answer

Michael's gain is calculated as the sale price ($50,000) minus the adjusted basis ($55,000 purchase price - $22,800 depreciation = $32,200), resulting in a gain of $17,800. Since the gain is due to depreciation recapture, it is characterized as ordinary gain under Section 1245.

Question 13

Blitza Inc.owned real property used for 12 years in its business that was subject to a $294,500 nonrecourse mortgage.Blitza failed to make timely mortgage payments,so the creditor foreclosed.At date of foreclosure,Blitza's basis in the property was $300,000,and the property's appraised FMV was $260,000.Which of the following statements is true?

Accepted Answer

Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage because it was a nonrecourse mortgage.

Blitza will recognize a Section 1231 loss equal to the difference between the basis and the amount realized. The amount realized would be the appraised FMV of $260,000, so the loss would be $40,000 ($300,000 - $260,000). However, since the loss exceeds the gain recognized during the year, it will be treated as an ordinary loss under Section 1231(b)(3).  The amount of the ordinary loss is limited to $5,500 (the excess of the net Section 1231 gains over the net Section 1231 losses).

Question 14

Thieves stole computer equipment owned by Eaton Company and used for three years in its consulting business.Eaton's adjusted basis in equipment was $23,200,and its replacement value was $50,000.Eaton's insurance company paid only $15,000 on Eaton's claim for the theft loss.As a result,Eaton recognizes:

Accepted Answer

The loss is an ordinary loss because the equipment was used in a trade or business and was not a capital asset. The loss is the difference between the adjusted basis and the insurance proceeds, which is $8,200.

Question 15

Nancy owned business equipment with a $16,950 adjusted basis and a $7,500 FMV that was destroyed by a tornado.The equipment was uninsured.As a result of this casualty,Nancy:

Accepted Answer

C) Nancy is allowed to deduct a $16,950 ordinary loss because the loss of uninsured business property due to a casualty (like a tornado) allows for the deduction of the adjusted basis of the property, not its fair market value (FMV).

Question 16

Which of the following results in a permanent book/tax difference for a corporate taxpayer?

Accepted Answer

Permanent differences between book and tax income arise when an item is included in book income but never in taxable income, or vice versa. A loss realized on a related party sale is disallowed for tax purposes but recognized for book purposes, creating a permanent difference.

Question 17

Several years ago,Y&S Inc.purchased a patent on a production process for $250,000 and has amortized $91,000 of the cost.Y&S has learned that a rival company recently developed a new process that renders the patent worthless.Consequently,Y&S made a public announcement that it would no longer enforce the patent.What is the tax consequence to Y&S of this unfortunate situation?

Accepted Answer

The abandonment of the patent results in an ordinary loss for tax purposes equal to the unamortized cost of the asset, which is $159,000 ($250,000 - $91,000). This loss is reported on the company's tax return as an ordinary deduction, which reduces taxable income.

Question 18

DiLamer Inc.paid $300,000 to purchase 30-year bonds issued by a publicly held foreign corporation.The foreign government recently privatized the corporation and declared that all outstanding corporate debt obligations would not be honored.What is the tax consequence to DiLamer of this bad news?

Accepted Answer

The bad news would result in a total loss of the investment for DiLamer. This loss would be treated as a capital loss, as it is an investment in a capital asset (the bonds).

Question 19

A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business.Della's adjusted basis in the warehouse was $748,200,and its replacement value was $1 million.Unfortunately,the warehouse was uninsured.As a result of the destruction,Della recognizes:

Accepted Answer

The answer of A fire completely destroyed a warehouse owned...

Question 20

WQP Company generated $1,814,700 ordinary income from the sale of inventory to its customers.It also sold three noninventory assets during the year.Compute WQP's taxable income assuming that:
a.The first sale resulted in a $10,400 ordinary gain,the second sale resulted in a $23,900 capital loss,and the third sale resulted in a $44,000 capital gain.
b.The first sale resulted in a $79,100 capital loss,the second sale resulted in a $35,200 ordinary loss,and the third sale resulted in a $16,000 capital gain.

Accepted Answer

The answer of WQP Company generated $1,814,700 ordinary income from...

Quiz 8: Property Dispositions