Question 1

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 2

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 deduction for the adjusted tax basis of $118,100. However, if the equipment was insured, the loss would be limited to the amount not covered by insurance.

Question 3

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

A) True - Depreciation reduces the adjusted tax basis of the property each year.
B) True - The principal payment reduces the amount of debt owed on the property, thereby increasing the equity.
C) False - The principal payment reduces the amount of debt owed on the property and does not affect Alejo's tax basis in the property. However, the tax basis of the property is reduced each year due to depreciation.
D) False - Choice C is false, therefore this statement cannot be true.

Question 4

In 2019, 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 2020, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2020, TPC's use of the installment sale method results in a:

Accepted Answer

The installment sale method allows for the recognition of income when the payments are received. The gain on the sale is calculated as the selling price minus the book value, which is $523,000 - $388,000 = $135,000. The portion of the total gain recognized in 2020 is based on the ratio of the principal received ($40,000) to the total sale price ($523,000), not creating a permanent or temporary difference as described in the options. The options provided do not accurately describe the tax implications of the installment sale method based on the information given.

Question 5

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 6

Mrs. Beld sold marketable securities with a $79,600 tax basis to her daughter for $60,000 cash. Two years later, the daughter sold the securities through her broker for $93,000. Compute the daughter's gain recognized on sale.

Accepted Answer

The daughter's gain recognized on sale is computed based on the difference between the sale price ($93,000) and her adjusted basis in the securities. Since the securities were purchased from a related party (her mother) at a loss, the daughter's basis for determining loss is the purchase price ($60,000), but her basis for determining gain is the donor's basis ($79,600). Since she sold the securities at a gain, her basis is $79,600. The gain recognized is $93,000 - $79,600 = $13,400.

Question 7

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.

Question 8

Three years ago, ChaGo Inc. sold a business asset with a $39,400 adjusted tax basis for $130,000. The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of the price. ChaGo is using the installment sale method to recognize its gain on sale. This year, ChaGo sold the note to a financial institution for the note's $55,000 face value (ChaGo had received a total of $25,000 principal payments on the note.) Compute ChaGo's gain recognized on sale of the installment note.

Accepted Answer

The amount realized from the sale of the note is $55,000, which is the face value. The adjusted basis of the note is determined by multiplying the remaining principal balance by the gross profit percentage of the original sale, which is ($80,000 - $25,000) / $130,000 = 46.15%. The adjusted basis of the note is therefore $55,000 x 46.15% = $25,332. The gain recognized is the amount realized ($55,000) minus the adjusted basis of the note ($25,332), which comes out to $29,668. However, the gain recognized is limited to the remaining unrecognized gain from the original sale, which is $130,000 - $39,400 = $90,600. Therefore, the gain recognized is $29,668 or the unrecognized gain of $90,600, whichever is less. In this case, the gain recognized is $29,668.

Question 9

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 10

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 11

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 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 on sale: $21,700Less: Tax on gain (21% x $21,700): $4,557Net cash flow: $25,443

Question 13

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 14

In 2019, 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 2020, 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 2020.

Accepted Answer

The gain recognized in 2020 is calculated by multiplying the gross profit percentage by the principal payment received. The gross profit percentage is ($775,000 - $474,000) / $775,000 = 38.84%. The gain recognized in 2020 is 38.84% of $67,500, which is approximately $26,216.

Question 15

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 total amount realized from the sale is $125,000 (cash) + $50,000 (mortgage assumed) = $175,000. The gain is $175,000 - $93,000 (basis) = $82,000. The tax on the gain is $82,000 * 15% = $12,300. The after-tax cash flow is $125,000 (cash received) - $12,300 (tax) = $112,700.

Question 16

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...

Question 17

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

Accepted Answer

The installment sale method of accounting applies only to the sale of property where at least one payment is received after the end of the tax year in which the sale occurs. None of the choices given involve the sale of property where the installment sale method would be applicable.

Question 18

Mr. Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash. Which of the following statements is true?

Accepted Answer

Neither A nor B are true because Mr. Quick cannot recognize a loss from a sale to a related, 100% owned corporation. The transaction is considered a non-arm's length transaction and the IRS may disallow any loss recognition.

C is also not true because the corporation's tax basis in the securities is the purchase price of $95,000, not the tax basis of Mr. Quick.

Question 19

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 20

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

To calculate the gain for both book and tax purposes, we need to use the installment sale method.

For book purposes, we calculate the gross profit percentage, which is the gain divided by the selling price.

Selling price = $775,000
Adjusted book basis = $474,000
Gain = selling price - adjusted book basis = $775,000 - $474,000 = $301,000 
Gross profit percentage = gain / selling price = $301,000 / $775,000 = 0.38838 or 38.838%

The book gain reported in the year of sale is therefore $301,000 * 38.838% = $116,840.

For tax purposes, we also use the installment sale method, but we need to recognize some gain in the year of sale based on the gross profit percentage. The rest of the gain will be recognized in the years when payments are received.

So for the year of sale, we need to recognize the gain on the cash received ($100,000) and on the note received ($675,000 * 38.838% = $262,160).

Tax gain for year of sale = $100,000 + $262,160 = $362,160.

Therefore, the book gain in the year of sale is $116,840 and the tax gain in the year of sale is $362,160. The correct answer is C.

Quiz 8: Property Dispositions