Question 1

In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its property insurance company, and on August 8, it paid $60,000 to replace the signage. Compute Renfru's recognized gain or loss on the involuntary conversion and its tax basis in the new signage.

Accepted Answer

The answer of In April, vandals completely destroyed outdoor signage...

Question 2

Thieves stole computer equipment used by Ms. James in her small business. Ms. James' tax basis in the equipment was zero. One month after the theft, she received a $17,600 reimbursement from her casualty insurance company and used $14,850 to replace the computer equipment. She used the $2,750 remaining reimbursement to purchase a new desk for her office. Which of the following statements is false?

Accepted Answer

The answer of Thieves stole computer equipment used by Ms....

Question 3

Grantly Seafood is a calendar year taxpayer. In 2015, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2015, Grantly received a $1.2 million reimbursement from its insurance company. What is the latest date that Grantly can replace the boats to avoid gain recognition from the involuntary conversion?

Accepted Answer

The answer of Grantly Seafood is a calendar year taxpayer....

Question 4

In March, a flood completely destroyed three delivery vans owned by Totle Inc. Totle's adjusted tax basis in the vans was $48,900. Totle received a $90,000 reimbursement from its property insurance company, and on September 8, it purchased one new delivery van for $70,000. Compute Totle's recognized gain or loss on the involuntary conversion and its tax basis in the new van.

Accepted Answer

Since the insurance reimbursement of $90,000 exceeded the adjusted tax basis of the three destroyed vans of $48,900, there is a realized gain of $41,100 ($90,000 - $48,900). To determine the recognized gain, the gain must be reinvested in property similar or related in service or use to the property destroyed. Since Totle purchased a new delivery van for $70,000 on September 8, which is within two years of the end of the tax year in which the involuntary conversion occurred, they meet the reinvestment requirement. The recognized gain is $20,000 ($70,000 - $48,900). Therefore, Totle's tax basis in the new van is $48,900 (adjusted basis of destroyed vans) plus $70,000 (cost of new van) minus $20,000 (recognized gain) = $98,900.

Question 5

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex.

Accepted Answer

The answer of Babex Inc. and OMG Company entered into...

Question 6

In June, a fire completely destroyed office furniture owned by W&S Inc. W&S's adjusted tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its property insurance company, and on August 8, it paid $16,000 to replace the furniture. Compute W&S's recognized gain or loss on the involuntary conversion and its tax basis in the new furniture.

Accepted Answer

To determine the recognized gain or loss, we need to compare the amount of reimbursement received ($15,000) to the adjusted tax basis of the furniture ($17,040). Since the reimbursement is less than the adjusted tax basis, there is a recognized loss.

The recognized loss is calculated as follows:

Reimbursement received: $15,000 
Adjusted tax basis of furniture: $17,040 
Loss: $17,040 - $15,000 = $2,040

The tax basis in the new furniture is calculated as follows:

Cost to replace the furniture: $16,000 
Plus: recognized loss: $2,040 
Tax basis in new furniture: $18,040

Therefore, the correct answer is B.

Question 7

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Perry's gain recognized on the exchange and its tax basis in the property received from Dally.

Accepted Answer

The answer of Perry Inc. and Dally Company entered into...

Question 8

Mr. Weller and the Olson Partnership entered into an exchange of investment real property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of the following statements is true?

Accepted Answer

Boot refers to any value given in the exchange that is not like-kind property. In this case, Mr. Weller's property had a mortgage of $428,000, while Olson's had a mortgage of $235,000. Since Olson assumed Mr. Weller's mortgage, they effectively paid that amount in addition to their own mortgage. This means that Olson paid $193,000 in boot ($428,000 - $235,000). Conversely, since Mr. Weller assumed Olson's mortgage, he effectively received that amount in addition to his own mortgage. This means that Mr. Weller received $193,000 in boot ($235,000 - $428,000, but it is negative boot so it is shown as $193,000). Therefore, answer A is correct.

Question 9

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 in a nontaxable exchange must be of the same nature or character, not necessarily identical in quality or grade. Therefore, sports utility vehicles would qualify as like-kind property in exchange for passenger automobiles. Dump trucks and double decker buses do not qualify as like-kind property to passenger automobiles.

Question 10

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG.

Accepted Answer

In order to compute Babex's gain recognized on the exchange, we need to determine the fair market values (FMVs) of both properties. The FMV of the Babex property is given as $1,000,000, and the FMV of the OMG property is given as $1,175,000 ($1,000,000 + $175,000 mortgage assumption).

To calculate the gain recognized by Babex, we need to compare the FMV of the property given up ($1,000,000) to the FMV of the property received ($1,175,000). The difference is $175,000, so that is the amount of gain recognized by Babex.

Babex's tax basis in the property received from OMG is equal to the FMV of the property received ($1,175,000) minus the amount of gain recognized ($175,000), which equals $1,000,000.

Question 11

Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange. Which of the following properties will qualify for like-kind exchange treatment?

Accepted Answer

In a like-kind exchange, the properties being exchanged must be similar in nature or character. Therefore, the New York office building may qualify as it is also income-producing real estate, while the tractor and hogs do not qualify as they are personal property, and the personal residence does not qualify as it is not a business or investment property.

Question 12

Grantly Seafood is a calendar year taxpayer. In 2015, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2015, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2016, Grantly purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in the new boat.

Accepted Answer

To determine the recognized gain or loss on the involuntary conversion, we need to compare the amount of insurance proceeds received ($1 million) to the adjusted tax basis of the destroyed assets ($784,500). The excess of insurance proceeds over the adjusted tax basis is recognized as a gain.

$1,000,000 − $784,500 = $215,500 recognized gain

To determine the tax basis in the new boat, we start with the recognized gain and adjust for any reinvested funds. In this case, Grantly reinvested the entire insurance proceeds in a new boat, so there is no basis reduction required.

Tax basis in new boat = Cost of new boat − Gain not recognized
Tax basis in new boat = $750,000 − $0
Tax basis in new boat = $750,000

Question 13

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 14

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 15

Perry Inc. and Dally Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange and its tax basis in the property received from Perry.

Accepted Answer

To calculate Dally's gain recognized, we need to compute the amount realized and the adjusted basis. The amount realized is the fair market value of the property received ($350,000) minus the mortgage assumed ($250,000) plus the mortgage released ($150,000), which equals $250,000. The adjusted basis is the fair market value of the property given up ($300,000) plus the mortgage assumed ($100,000), which equals $400,000. Thus, the realized gain is $250,000 - $400,000 = -$150,000, but because this is a nonrecognition exchange, no gain or loss is recognized. Dally's tax basis in the property received is equal to Perry's adjusted basis in the property given up ($300,000) minus the mortgage assumed by Dally ($100,000), which equals $200,000. Therefore, the correct answer is C.

Question 16

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the property received from Johnson.

Accepted Answer

The answer of Johnson Inc. and C&K Company entered into...

Question 17

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, no gain or loss is recognized if both the assets exchanged are of like-kind, and neither cash nor other boot is received. In this case, both assets are like-kind, and Beamer paid $15,000 cash. Therefore, Acme will recognize a realized gain of $122,700 ($240,000 FMV - $117,300 adjusted tax basis), but since there is no boot received, the recognized gain is zero. Acme's basis in its newly acquired asset will be the same as the adjusted tax basis of the exchanged asset, which is $117,300. Beamer will recognize a realized gain of $56,800 ($225,000 FMV - $168,200 adjusted tax basis), and since $15,000 cash was paid, the recognized gain is $41,800. Beamer's basis in its newly acquired asset will be the same as the adjusted tax basis of the exchanged asset, which is $168,200. However, the question only asks for the true statement, which is that Acme's basis in its newly acquired asset is $117,300.

Question 18

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

The answer of Mr. and Mrs. Eyre own residential rental...

Question 19

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged.  Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

Accepted Answer