Question 1

A casualty loss realized on the destruction of depreciable business property is characterized as a Section 1231 loss.

Accepted Answer

Because the disposition was not a sale or exchange, the casualty loss is ordinary.

Question 2

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 3

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

The owner can recognize a casualty loss equal to the adjusted tax basis of the property, which in this case is $118,100. Since the equipment was uninsured, the loss is considered a casualty loss and can be recognized as an ordinary loss on the owner's tax return.

Question 4

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 sale of the tangible personalty results in a book loss because the sales price of $52,700 is less than the cost of $90,000 minus the accumulated depreciation of $31,000, which equals $59,000 ($90,000 - $31,000 = $59,000).

Book loss = Sales price - Book value = $52,700 - $59,000 = -$6,300

However, for tax purposes, since the property was expensed under Section 179, Skeen must recapture the amount deducted as ordinary income to the extent of the gain.

Tax gain = Sales price - Adjusted basis = $52,700 - $59,000 + $90,000 = $83,700 - $59,000 = $24,700

Therefore, Skeen will have a book loss of $6,300 and a tax gain of $24,700.

Question 5

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 the amount she received from the sale ($200,000) minus her basis in the land ($75,000), which equals $125,000. However, since she received only $40,000 cash at the time of sale, the remaining $85,000 of gain is considered to be on the installment basis. When Brenda receives the $20,000 principle payment on the note in December, she must recognize a portion of the installment gain. This portion is calculated as the ratio of the gross profit (total gain minus basis) to the contract price ($160,000). Therefore, Brenda must recognize ($85,000/$160,000) x $20,000 = $10,625 of gain in December. Thus, Brenda's recognized gain this year is the $125,000 she received at the time of sale, plus the $10,625 she recognized when she received the principle payment, which equals $135,625. However, since $40,000 of this gain was recognized in the year of sale, only the remaining gain of $95,625 is included in Brenda's gross income for this year. Therefore, the correct answer is $95,625/2 = $47,812.50, which is rounded to $37,500 for tax purposes.

Question 6

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 35% tax rate,what is the effect of the sale on Noble's deferred tax accounts?

Accepted Answer

The answer of Noble Inc.paid $310,000 for equipment three years...

Question 7

Lenoci 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.Which of the following statements is true?

Accepted Answer

The gain or loss on the sale of equipment is calculated as follows:

Sale Price - Book Value = Gain/Loss

Book Value = Original Cost - Accumulated Book Depreciation
Book Value = $310,000 - $93,840 = $216,160

Sale Price - Book Value = $200,000 - $216,160 = -$16,160 (loss)

Now we need to compare the tax and book gain/loss. The tax gain or loss is calculated as follows:

Sale Price - Tax Basis = Taxable Gain/Loss

Tax Basis = Original Cost - Accumulated Tax Depreciation
Tax Basis = $310,000 - $147,327 = $162,673

Sale Price - Tax Basis = $200,000 - $162,673 = $37,327 (tax loss)

We can see that the tax loss is greater than the book loss, resulting in an unfavorable temporary book/tax difference of $53,487 (tax loss - book loss). Therefore, the correct answer is B.

Question 8

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

The principal payment reduced Alejo's tax basis in the real property, but it did not reduce the tax basis in the balance due on the note. The tax basis in the note would only be reduced by interest payments and any discounts or premiums on the note.

Question 9

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

Accepted Answer

The installment sale method of accounting applies to the sale of property where at least one payment is received after the end of the tax year of the sale. None of the options provided in the question meet this criteria, therefore the answer is D, "None of the above".

Question 10

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 11

Netelli Inc.owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage.Netelli defaulted on the mortgage,and the creditor foreclosed on the land.Netelli must recognize a $53,500 gain on the disposition of the land.

Accepted Answer

When a nonrecourse mortgage is foreclosed, the difference between the outstanding debt and the adjusted basis of the property is treated as a gain. In this case, the outstanding debt is $228,500 and the adjusted basis is $175,000, resulting in a gain of $53,500. As a result, Netelli must recognize this gain on the disposition of the land.

Question 12

In 2016,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 2017,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 2017.

Accepted Answer

The gain recognized in 2017 is calculated by multiplying the principal payment received in 2017 ($67,500) by the gross profit percentage. The gross profit percentage is calculated as the gain on sale ($775,000 - $474,000 = $301,000) divided by the total contract price ($775,000), which is approximately 38.84%. Therefore, the gain recognized in 2017 is $67,500 * 38.84% = $26,216.

Question 13

The installment sale method of accounting does not apply to which of the following sales?

Accepted Answer

The answer of The installment sale method of accounting does...

Question 14

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 35% tax rate.

Accepted Answer

The answer of Philp Inc.sold equipment with a $132,900 adjusted...

Question 15

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

Under the installment sale method, the gain is recognized proportionally as payments are received. The total gain on the sale is $301,000 ($775,000 sale price - $474,000 adjusted basis). The gross profit ratio is 38.8387% ($301,000 / $775,000). In the year of sale, Dolzer will recognize the gross profit ratio on the $100,000 cash received, which is a book gain of $38,839 ($100,000 x 38.8387%). The tax gain will also be $38,839 since Dolzer is using the installment sale method for tax purposes. The gain on the note will be recognized in future years as payments are received.

Question 16

In 2016,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 2017,TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest).In 2017,TPC's use of the installment sale method results in a:

Accepted Answer

The answer of In 2016,TPC Inc.sold investment land with a...

Question 17

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 18

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 answer of This year,Ms Lucas sold investment land for...

Question 19

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 35% tax rate.

Accepted Answer

O&V's gain from the sale is $21,700 ($100,000 - $78,300). The tax on the gain is $7,595 ($21,700 * 35%). The net cash flow is the cash received minus the tax: $30,000 - $7,595 = $22,405.

Question 20

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

To compute the gain recognized under the installment sale method, we first need to calculate the gross profit percentage, which is the selling price ($100,000) minus the adjusted tax basis ($78,300), divided by the selling price. Gross profit percentage = ($100,000 - $78,300) / $100,000 = 21.7%.

Next, we need to determine the amount of the installment sale that is taxable in the current year. This is calculated by multiplying the gross profit percentage by the amount of the payment received in cash. Taxable gain in current year = 21.7% x $30,000 = $6,510.

The remaining amount of the sale ($70,000 - $30,000 = $40,000) is treated as a deferred gain, and will be taxed in the year(s) that the payments on the note are received. Therefore, the correct answer is B) $6,510, as this is the amount of gain recognized in the current year.

Quiz 8: Property Dispositions