Question 1

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. Which of the following statements is true?

Accepted Answer

When Q&J Inc. exchanged land worth $472,000 for a land with a book and tax basis of $345,000, it resulted in a realized gain of $127,000. However, since the exchange was nontaxable, Q&J did not recognize the gain for tax purposes, resulting in a deferred tax liability. When Q&J sold the land for $533,000, it resulted in a taxable gain of $188,000 ($533,000 sales price - $345,000 tax basis). Since the deferred tax liability associated with the nontaxable exchange has now been reversed due to the recognition of taxable gain, Choice B is the correct option.

Question 2

Kornek Inc. transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in exchange for a new asset worth $260,000. Which of the following statements is false?

Accepted Answer

If the exchange is nontaxable, Kornek recognizes no gain or loss. The tax basis in the new asset would be the same as the tax basis in the old asset ($200,000), plus any additional cash paid ($12,000), for a total tax basis of $212,000. Therefore, statement B is false. Statements A and C are true, and D is not a statement (it is the option to choose if all statements are true).

Question 3

Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash. Which of the following statements is false?

Accepted Answer

In a taxable exchange, Itak would recognize a gain of $6,700, calculated as the sum of the new asset's value ($48,000) and cash received ($3,000) minus the old asset's adjusted tax basis ($44,300). In a nontaxable exchange, Itak would not recognize any gain related to the exchange itself, and the tax basis of the new asset would be adjusted to include the basis of the old asset plus any gain recognized, if applicable. Therefore, none of the statements provided are false.

Question 4

Mr. and Mrs. Eyre own residential rental property that they would like to dispose of in a nontaxable exchange. Which of the following would not qualify as like-kind property?

Accepted Answer

All of the options listed (commercial office building, undeveloped land, warehouse used to store transportation equipment) qualify as like-kind property under IRS rules for a 1031 exchange, which allows for the exchange of certain types of property without immediate tax implications. The key requirement is that the properties be held for productive use in a trade or business or for investment, not necessarily that they be of the same type.

Question 5

Which of the following statements about boot included in a nontaxable exchange is false?

Accepted Answer

The payment of boot does not trigger recognition of realized gain to the payer. Rather, it is the receipt of boot that triggers recognition of realized gain to the recipient. Option A is a true statement, as boot is used to equalize the values of the properties being exchanged. Option C is also true, as the receipt of boot triggers recognition of realized gain to the recipient. Option D is also true, as the receipt of boot does not trigger recognition of realized loss to the recipient.

Question 6

Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000. Which of the following statements is false?

Accepted Answer

If the exchange is nontaxable, Eliot's recognized gain is not $5,000; in a nontaxable exchange, no gain is recognized.

Question 7

Teco Inc. and MW Company exchanged like-kind assets. Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the following statements is false?

Accepted Answer

The answer of Teco Inc. and MW Company exchanged like-kind...

Question 8

Thirty years ago, Prescott Inc. realized a $16,200 gain on the exchange of an old building for a new building. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new building for $250,000. At date of sale, the new building's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?

Accepted Answer

The nontaxable exchange resulted in a deferral of the taxable gain, which reduced the tax basis of the new building acquired. Therefore, the tax basis of the new building was lower than its book basis. When the building was sold, the gain realized was the excess of the amount realized over the tax basis, which was zero. Consequently, there was no deferred tax balance associated with the sale.

Question 9

LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash. Which of the following statements is false?

Accepted Answer

In a taxable exchange, the loss recognized would be the difference between the book value of the old asset and the sum of the cash received plus the fair market value of the new asset received. Here, the book value is $13,600, and the total consideration received is $12,500 ($11,000 + $1,500), leading to a recognized loss of $1,100 if the exchange is taxable, making statement A true. In a nontaxable exchange, generally, no loss is recognized, making statement B true. For statement C, in a nontaxable exchange, the basis of the new asset would typically be the same as the old asset's adjusted basis, adjusted for any cash received or paid, making the basis of the new asset $12,100 ($13,600 - $1,500), assuming the exchange has no other complicating factors. Therefore, none of the statements provided are false.

Question 10

Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for a new asset worth $90,000 and $10,000 cash. Which of the following statements is false?

Accepted Answer

The answer of Doppia Company transferred an old asset with...

Question 11

G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false?

Accepted Answer

The old asset's FMV is not $150,000 as it was only exchanged for a new asset worth $150,000. The FMV of the old asset is not relevant to this transaction.

Question 12

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.

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.

Question 13

Acme Inc. and Beamer Company exchanged like-kind assets. Acme's asset had a $240,000 FMV and $117,300 adjusted tax basis, and Beamer's asset had a $225,000 FMV and a $168,200 adjusted tax basis. Beamer paid $15,000 cash to Acme as part of the exchange. Which of the following statements is true?

Accepted Answer

In a like-kind exchange, the basis of the acquired asset is the same as the basis of the asset given up. Therefore, Acme's basis in its newly acquired asset is $117,300. There is no recognized gain or loss in a like-kind exchange as long as certain requirements are met, so options A and B are incorrect. Option D is also incorrect as Beamer's basis in its newly acquired asset is $225,000 (the FMV of the asset given up).

Question 14

Luce Company exchanged investment land for a building to be used in its business. Luce's gain on the exchange was nontaxable (because the assets were like-kind) but was included in financial statement income. Which of the following statements is false?

Accepted Answer

In a like-kind exchange that is nontaxable, for tax purposes, the basis of the new asset (building) is the same as the basis of the old asset (land) surrendered, making statement B true. Statement A is false in a tax context because the book basis for financial reporting purposes is indeed the fair market value (FMV) of the building received, but it's presented as a true statement in the context of financial accounting. Statement C is true because the difference in tax basis (carrying over from the land) and book basis (FMV of the building) will lead to different depreciation calculations for tax and financial reporting purposes. However, the question asks for the false statement, and since all provided statements are accurate in their respective contexts (with the clarification that A refers to financial accounting), the correct answer is that none of these statements are false.

Question 15

Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?

Accepted Answer

The answer of Nixon Inc. transferred Asset A to an...

Question 16

Tauber Inc. and J&I Company exchanged like-kind assets. Tauber's asset had a $17,500 FMV and $3,000 adjusted tax basis, and J&I's asset had a $19,000 FMV and a $9,000 adjusted tax basis. Tauber paid $1,500 cash to J&I as part of the exchange. Which of the following statements is false?

Accepted Answer

The answer of Tauber Inc. and J&I Company exchanged like-kind...

Question 17

Nagin Inc. transferred an old asset in exchange for a new asset worth $84,000 and $6,000 cash. The old asset and new asset were like-kind properties. Which of the following statements is true?

Accepted Answer

In a like-kind exchange, any cash or non-like-kind property received is called boot. In this case, Nagin Inc. received $6,000 cash in addition to the new asset worth $84,000, making the total value of the new property received $90,000. To determine the gain or loss recognized, we need to compare the adjusted basis of the old asset ($79,200) with the total value of the new property received ($90,000).

$90,000 - $79,200 = $10,800 gain

Since Nagin Inc. must recognize any gain on the exchange, the correct statement is that if Nagin's basis in the old asset was $79,200, Nagin must recognize a $6,000 gain. The other statements are incorrect because they either do not recognize the additional boot received or do not properly calculate the gain or loss recognized.

Question 18

Rydell Company exchanged business realty (initial cost $55,250; accumulated depreciation $25,450) for like-kind realty worth $44,000 and $2,000 cash. Assume that depreciation on the realty exchanged was computed using the straight-line method and that Rydell Company is not a corporation. As a result, Rydell must recognize:

Accepted Answer

The exchange qualifies for like-kind exchange treatment under Section 1031 of the Internal Revenue Code. Therefore, no gain or loss is recognized on the exchange. However, the $2,000 cash received in the exchange is considered boot and is subject to tax as a Section 1231 gain.

Question 19

Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no cash was included in the exchange). The assets were like-kind properties. Oxono reported the gain as revenue on its financial statements. Which of the following is true?

Accepted Answer

The exchange resulted in a favorable temporary book/tax difference because the gain recognized for financial reporting purposes does not immediately affect taxable income due to the like-kind exchange deferral provisions under tax laws, creating a temporary difference that will reverse in the future.

Question 20

Which of the following statements about like-kind exchanges is false?

Accepted Answer

Like-kind exchanges allow for the exchange of both developed and undeveloped real estate as long as both properties are held for business or investment purposes. This means businesses can indeed exchange undeveloped land for developed real estate, making statement D false.

Quiz 9: Nontaxable Exchanges