Question 1

Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.

Accepted Answer

Funds borrowed and used to pay for an asset are included in the cost because the borrower is responsible for paying them back along with any interest or fees associated with the loan. Therefore, the total cost of the asset includes both the initial purchase price and the cost of borrowing.

Question 2

Interest incurred during the development and manufacture of a machine must be capitalized.

Accepted Answer

According to Generally Accepted Accounting Principles (GAAP), interest incurred during the development and manufacture of a machine is considered a cost of acquiring the asset, and must be capitalized along with other direct costs such as materials and labor.

Question 3

For purposes of calculating depreciation,property converted from personal use to business use will take on a basis equal to the greater of its FMV or its adjusted basis on the date of the conversion.

Accepted Answer

False

Question 4

An uncle gifts a parcel of land to his niece,and he has to pay gift taxes. The land has appreciated substantially since he purchased it 20 year ago. A portion of gift taxes paid by the uncle will increase the niece's basis of the land.

Accepted Answer

When a gift is given, the recipient receives the same basis as the donor had in the property. However, if gift taxes are paid, the portion of the gift taxes attributable to the appreciation in value of the property will increase the recipient's basis in the property. This is known as the "gift tax basis rule" and is outlined in IRS Publication 551. Therefore, in this scenario, a portion of the gift taxes paid by the uncle will increase the niece's basis of the land.

Question 5

On January 1 of this year,Brad purchased 100 shares of stock at $4,000.By December 31 of this year,the stock had declined in value to $2,200,but Brad still held the shares.Brad has recognized a $1,800 loss for tax purposes this year.

Accepted Answer

Brad has not recognized a loss for tax purposes because he has not sold the shares. A loss is only recognized for tax purposes when the asset is sold or disposed of.

Question 6

A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000.The taxpayer has a realized gain of $3,000.

Accepted Answer

The realized gain is calculated by subtracting the basis ($25,000) from the sales price ($28,000), resulting in a gain of $3,000.

Question 7

Gains and losses are recognized when property is disposed of by gift or bequest.

Accepted Answer

The answer of Gains and losses are recognized when property...

Question 8

A taxpayer purchased an asset for $50,000 several years ago. He is now planning to sell it. Under the recovery of basis doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.

Accepted Answer

The answer of A taxpayer purchased an asset for $50,000...

Question 9

Capitalization of interest is required if debt is incurred to construct real property.

Accepted Answer

According to accounting standards, interest incurred on debt used for the construction of real property must be capitalized as part of the cost of the property.

Question 10

Unless the alternate valuation date is elected,the basis of property received from a decedent is generally the property's fair market value at the date of decedent's death.

Accepted Answer

This is true according to the Internal Revenue Service (IRS) guidelines for determining the basis of property received from a decedent.

Question 11

Rick sells stock of Ty Corporation,which has an adjusted basis of $20,000,for $22,000.He pays a sales commission of $500.In computing his gain or loss,the amount realized by Rick is $1,500.

Accepted Answer

The amount realized by Rick is $21,500 ($22,000 - $500 commission). Therefore, his gain is $1,500 ($21,500 - $20,000 basis).

Question 12

The initial adjusted basis of property depends upon how the property is acquired.

Accepted Answer

The initial adjusted basis of property is based on the property's acquisition cost. Different rules apply depending on whether the property was acquired through purchase, inheritance, gift, or other means.

Question 13

Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.

Accepted Answer

This is true according to the Internal Revenue Service (IRS). However, there are limitations and restrictions on the deductibility of certain types of losses. It is recommended to consult with a tax professional for specific guidance.

Question 14

All realized gains and losses are recognized for tax purposes.

Accepted Answer

The answer of All realized gains and losses are recognized...

Question 15

Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.

Accepted Answer

This statement is true. Expenditures that do not add value or prolong the life of a property are considered ordinary expenses and can be deducted in the year they are incurred as opposed to being capitalized and depreciated over time.

Question 16

If stock sold or exchanged is not specifically identified,the FIFO (first-in,first-out)method of identification must be used.

Accepted Answer

This statement is true. If stock sold or exchanged is not specifically identified, then the default method of identification is FIFO.

Question 17

With regard to taxable gifts after 1976,no gift tax is added to the basis of the property if the donor's basis is greater than the FMV of the property.

Accepted Answer

This is true. If the donor's basis in the gifted property is greater than the fair market value (FMV) of the property at the time of the gift, no gift tax is added to the basis. This rule applies to taxable gifts made after 1976.

Question 18

Five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.

Accepted Answer

There are five different capital gain tax rates that could apply to long-term capital assets sold by noncorporate taxpayers, depending on the taxpayer's income and the type of asset. These rates range from 0% to 20%.

Question 19

If Houston Printing Co.purchases a new printing press during the current year for $30,000,pays sales taxes of $2,000,and pays $1,000 for installation,the cost basis for the printing press is $33,000.

Accepted Answer

This is because the cost basis of an asset includes its purchase price, sales tax, and installation costs. Therefore, the cost basis of the printing press for Houston Printing Co. is $33,000.

Question 20

All recognized gains and losses must eventually be classified either as capital or ordinary.

Accepted Answer

This is true. All gains and losses must be classified as either capital or ordinary in order to determine the tax treatment of the transaction. Capital gains and losses are treated differently than ordinary gains and losses and are subject to different tax rates and rules.

Quiz 10: Property Transactions: Capital Gains and Losses