Question 1

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

Accepted Answer

According to IRS regulations, if shares are not specifically identified, the default method for determining which shares were sold or exchanged is FIFO (first-in, first-out).

Question 2

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

Allison's basis in the asset includes all costs incurred to acquire the asset and prepare it for use. This includes the cash paid ($50,000), the note signed ($10,000), the assumed liability ($3,000), the installation cost ($500), and the delivery cost ($800), totaling $64,300.

Question 3

Taj Corporation has started construction of a new mall with a cost estimate of $50 million. The mall is expected to be ready to open in 18 months. Taj cannot deduct the interest expense on the construction loan.

Accepted Answer

According to tax laws, interest expenses on construction loans cannot be deducted during the construction period. They can only be capitalized and added to the cost of the asset being constructed. Therefore, Taj Corporation cannot deduct the interest expense on the construction loan during the 18-month construction period.

Question 4

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...

Question 5

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...

Question 6

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 increased by the $25,000 of gift taxes paid by the uncle.

Accepted Answer

The answer of An uncle gifts a parcel of land...

Question 7

Rachel holds 110 shares of Argon Mutual Fund. She is planning to sell 90 shares. Her record of the share purchas 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

Courtney sells a cottage at the lake that the family had used for their summer vacations. The purchaser paid Courtney $100,000 and assumed the mortgage which had a principal balance of $50,000. Courtney had purchased the cottage five years ago for $170,000. Courtney will recognize

Accepted Answer

The answer of Courtney sells a cottage at the lake...

Question 9

If the shares of stock sold or exchanged are not specifically identified, the average cost method of identification must be used.

Accepted Answer

The answer of If the shares of stock sold or...

Question 10

Jordan paid $30,000 for equipment two years ago and has claimed total depreciation deductions of $15,600 for the two years. The cost of repairs during the same time period was $2,000 while a major overhaul which extended the life of the equipment cost $7,000. What is Jordan's adjusted basis in the equipment at the end of the two- year period?

Accepted Answer

The adjusted basis is the original cost of the equipment minus the depreciation deductions plus the cost of repairs and major overhauls. So, the adjusted basis is $30,000 - $15,600 + $2,000 + $7,000 = $21,400.

Question 11

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 is the original cost plus the cost of improvements. The original cost is $500,000. The cost of improvements is $200,000. The total basis is $700,000. The interest paid on the loan is not added to the basis.

Question 12

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...

Question 13

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 basi 80 shares sold is

Accepted Answer

The answer of Edward purchased stock last year as follows:...

Question 14

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

Accepted Answer

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

Question 15

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 statement is true according to the IRS. The allocation of basis is based on the relative fair market values of the stock received as a nontaxable dividend compared to the stock owned prior to the dividend.

Question 16

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

This statement is true according to the Internal Revenue Service (IRS) rules for determining the basis of property received from a decedent.

Question 17

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 to pay for an asset are included in the cost of the asset because they are part of the total amount paid for it. The fact that the funds are borrowed and will be repaid later does not change the initial cost of the asset.

Question 18

If Houston Printing Co. purchases a new printing press during the current year for $30,000, pays sales taxes of
$2,000, and pays $1,000 for installation, the cost basis for the printing press is $33,000.

Accepted Answer

The cost basis for an asset includes not only its purchase price, but also any additional costs directly related to its acquisition, such as sales taxes and installation fees. Therefore, the cost basis for the printing press in this situation is $33,000.

Question 19

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

Accepted Answer

The answer of During the current year, Tony purchased new...

Question 20

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 is true according to the IRS guidelines on determining basis for gifted property. If the donor's basis is greater than the fair market value (FMV) of the property at the time of the gift, the recipient's basis for determining gain or loss on a subsequent sale or disposition of the property is the donor's basis at the time of the gift, rather than the FMV. Therefore, no gift tax is added to the basis in this situation.

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals