Question 1

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

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

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 does not recognize any gain. The $12,000 cash received will increase the tax basis of the new asset to $224,000 ($212,000 + $12,000). Therefore, statement B is false.

Question 3

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

Accepted Answer

The purpose of boot in a nontaxable exchange is to equalize the values of the exchanged properties. If one party agrees to give less than the fair market value of the property being received, that party is said to be receiving boot. If one party agrees to give more than the fair market value of the property being received, that party is said to be paying boot. The receipt of boot does not trigger recognition of realized gain to the recipient, but it may trigger recognition of realized loss. However, the payment of boot does trigger recognition of realized gain to the payer.

Question 4

Acme Inc. and Beamer Company exchanged like-kind production 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 realized gain is calculated as the FMV of the asset received minus the adjusted tax basis of the asset given up. Therefore, Acme's realized gain is $240,000 - $117,300 = $122,700. However, since this is a like-kind exchange, no recognized gain or loss is recorded. Acme's basis in the newly acquired asset is the same as the adjusted tax basis of the asset given up, which is $117,300. Beamer's realized gain is calculated as the FMV of the asset received minus the adjusted tax basis of the asset given up plus any cash paid. Therefore, Beamer's realized gain is $225,000 - $168,200 + $15,000 = $71,800. However, since this is a like-kind exchange, Beamer's recognized gain would be limited to the amount of cash paid, which is $15,000, and the basis in the newly acquired asset would be the same as the adjusted tax basis of the asset given up, which is $168,200. Since the question only asks which statement is true, the correct answer is C.

Question 5

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 6

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

Accepted Answer

The answer of Which of the following statements about like-kind...

Question 7

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 8

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 qualify as like-kind property for a nontaxable exchange of residential rental property. Like-kind property is broadly defined as any property held for investment or productive use in a trade or business.

Question 9

Tauber Inc. and J&I Company exchanged like-kind production 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 10

Tanner Inc. owns a fleet of passenger automobiles that it would like to dispose of in a nontaxable exchange. Which of the following would qualify as like-kind property?

Accepted Answer

Like-kind property for passenger automobiles would include other passenger automobiles, such as sports utility vehicles, but not commercial vehicles such as double decker buses or dump trucks.

Question 11

YCM Inc. exchanged business equipment (initial cost $114,800; accumulated depreciation $63,400) for like-kind equipment worth $110,000 and $10,000 cash. As a result, Rydell must recognize:

Accepted Answer

The exchange of business equipment for like-kind equipment and cash results in a recognized gain or loss. In this case, the initial cost of the equipment was $114,800, and the accumulated depreciation was $63,400, resulting in a basis of $51,400. YCM Inc. received like-kind equipment worth $110,000 and $10,000 cash, which exceeds the basis of the equipment given up. Therefore, Rydell must recognize a $10,000 ordinary gain.

Question 12

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, the basis of the old asset carries over to the new asset. Therefore, Nagin's basis in the new asset is $79,200 ($85,000 - $5,800 depreciation). Since Nagin received $90,000 ($84,000 new asset + $6,000 cash) in exchange for an asset with a basis of $79,200, Nagin must recognize a $10,800 gain ($90,000 - $79,200).

Question 13

Luce Company exchanged the copyright on a software application for a copyright on a different software application. Luce's gain on the exchange was nontaxable (because the copyrights were like-kind) but was included in financial statement income. Which of the following statements is false?

Accepted Answer

The answer of Luce Company exchanged the copyright on a...

Question 14

Rydell Company exchanged business equipment (initial cost $55,250; accumulated depreciation $25,450) for like-kind equipment worth $44,000 and $2,000 cash. As a result, Rydell must recognize:

Accepted Answer

The answer of Rydell Company exchanged business equipment (initial cost...

Question 15

Teco Inc. and MW Company exchanged like-kind production 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 16

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 17

Eight years ago, Prescott Inc. realized a $16,200 gain on the exchange of old equipment for new equipment. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new equipment for $2,500. At date of sale, the equipment's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?

Accepted Answer

The answer of Eight years ago, Prescott Inc. realized a...

Question 18

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 in this transaction.

Question 19

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

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

Question 20

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

The answer of Five years ago, Q&J Inc. transferred land...

Quiz 9: Nontaxable Exchanges