Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for $533,000 cash. Compute Q&J's book and tax gain on sale.

Question

Quizplus · Accepted Answer

For book purposes, the gain on sale is computed by subtracting the book value of the land received in the exchange ($345,000) from the sale price ($533,000), resulting in a book gain of $188,000. For tax purposes, however, the basis of the land received is its fair market value at the time of the exchange ($472,000) because the exchange was nontaxable and the gain was not recognized. Therefore, the tax gain is computed by subtracting this tax basis ($472,000) from the sale price ($533,000), resulting in a tax gain of $61,000. However, none of the choices accurately reflect this correct calculation, as they either mismatch the book and tax gains or present incorrect figures.

Five Years Ago, Q&J Inc