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 of the asset as they represent a cost of acquiring the asset. The borrowed funds may also be subject to interest and financing charges, further increasing the overall cost of the asset.

Question 2

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 the general rule under the Internal Revenue Code for determining the basis of property received from a decedent. However, if the executor of the decedent's estate elects to use the alternate valuation date, the basis of the property is generally its fair market value on the alternate valuation date (which is usually six months after the date of death).

Question 3

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

Accepted Answer

This is true according to the IRS guidelines. If specific identification is not used, then the default method of identification for stocks is FIFO.

Question 4

On January 1,2013,Brad purchased 100 shares of stock at $4,000.By December 31,2013,the stock had declined in value to $2,200,but Brad still held the shares.For 2013,Brad has recognized a $1,800 loss for tax purposes.

Accepted Answer

The answer of On January 1,2013,Brad purchased 100 shares of...

Question 5

All realized gains and losses are recognized for tax purposes.

Accepted Answer

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

Question 6

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 to the value or prolong the life of property, such as repairs and maintenance, can be expensed in the year that they are incurred. This is in contrast to capital expenditures, which are added to the cost basis of the property and depreciated over time.

Question 7

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

Accepted Answer

The initial adjusted basis of property is determined by how the property is acquired, such as by purchase, gift, inheritance, or exchange.

Question 8

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 correct as the cost basis of an asset includes the original purchase price, taxes, and installation costs. In this case, the cost basis of the printing press would be $30,000 + $2,000 + $1,000 = $33,000.

Question 9

In 2013,five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.

Accepted Answer

In 2013, the long-term capital gain tax rates for noncorporate taxpayers were 0%, 15%, and 20% for most taxpayers, as well as 25% and 28% for higher-income taxpayers who had gains from certain types of assets. Therefore, five different capital gain tax rates could apply.

Question 10

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 11

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

Accepted Answer

According to the tax law, if debt is incurred to construct real property, the interest incurred during the construction period must be capitalized, which means it is added to the cost of the property and depreciated over its useful life.

Question 12

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

Accepted Answer

According to tax laws in most countries, all gains and losses must eventually be classified as either capital or ordinary. Capital gains and losses are those that result from the sale or exchange of a capital asset, while ordinary gains and losses are those that result from normal business operations or other regular activities. It is important to properly classify gains and losses for tax purposes in order to ensure compliance with tax laws and minimize tax liability.

Question 13

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

Accepted Answer

This is correct as per the tax code. When property is converted from personal use to business use, the taxpayer must determine the property's basis for depreciation purposes. The basis will be equal to the lower of the property's fair market value (FMV) on the date of conversion or its adjusted basis (which is generally the original cost, plus any improvements, minus any depreciation previously claimed).

Question 14

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

Accepted Answer

According to accounting standards (GAAP), interest incurred during the development and manufacture of a machine must be capitalized as part of the cost of the machine. This increases the cost basis of the machine and reduces the amount of interest expense that can be recognized in the current period.

Question 15

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 statement is true according to the IRS code. If the donor's basis is greater than the fair market value of the gifted property, no gift tax is added to the basis of the property.

Question 16

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 17

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 someone gifts property to another person, the recipient generally assumes the donor's original cost basis in the property. However, if the property has appreciated since the donor purchased it, the donor may be required to pay gift taxes on the difference between the original cost basis and the property's current fair market value. This gift tax paid by the donor can be added to the recipient's tax basis of the property, effectively reducing any potential capital gains taxes if the property is later sold.

Question 18

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 a basic principle of tax law. Losses that are incurred in carrying on a trade or business, or in an activity engaged in for profit, are generally deductible. However, there are specific rules and limitations that apply, so it is important to consult with a tax professional or refer to IRS guidance for specific situations.

Question 19

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

This is because the amount realized ($28,000) is greater than the basis ($25,000), resulting in a realized gain of $3,000.

Question 20

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 would be $21,500 ($22,000 - $500 commission). Therefore, his gain or loss would be $1,500 minus the adjusted basis of $20,000, resulting in a $18,500 gain.

Quiz 10: Property Transactions: Capital Gains and Losses