Question 1

Nick and Rodrigo form the NRC Partnership by combining the assets of their respective businesses. Nick contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Rodrigo contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NRC also assumes $60,000 of debt on Rodrigo's assets. What is Rodrigo's basis in his partnership interest?

Accepted Answer

Rodrigo's basis in his partnership interest is calculated as the sum of the adjusted basis of the assets he contributed ($150,000) plus the cash he contributed ($90,000), minus the debt assumed by the partnership ($60,000). Therefore, his basis is $150,000 + $90,000 - $60,000 = $180,000.

Question 2

Which of the following taxable years are allowable by a newly formed partnership without obtaining prior approval from the IRS?
I.A January 31 year-end if it is a retail enterprise with a natural business year ending January 31 and all of its principal partners are on a calendar year.
II.A calendar year if majority partners and principal partners have varied year-ends.
III.A taxable year that is the same as that of its majority partners.
​

Accepted Answer

The answer of Which of the following taxable years are...

Question 3

Nick and Rodrigo form the NRC Partnership by combining the assets of their respective businesses. Nick contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Rodrigo contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NRC also assumes $60,000 of debt on Rodrigo's assets. What is Nick's basis in his partnership interest?

Accepted Answer

The answer of Nick and Rodrigo form the NRC Partnership...

Question 4

Clark Exploration Corporation was organized and began operations on October 1, 2018. It incurs $41,000 in legal fees to obtain the corporate charter. The corporation elects to expense its organizational costs over the shortest allowable period. What amount will Clark report for organizational expenses for 2018?

Accepted Answer

The answer of Clark Exploration Corporation was organized and began...

Question 5

On January 5, 2018, Mike acquires a 50% interest in Precision Tools Partnership by contributing property with an adjusted basis of $20,000 and a fair market value of $24,000, subject to a mortgage of $16,000. What is Mike's basis in Precision Tools Partnership as of January 5, 2018?

Accepted Answer

Mike's basis in Precision Tools Partnership as of January 5, 2018, is equal to the adjusted basis of the property contributed, decreased by the portion of the mortgage that he assumed. Therefore:

Basis = Adjusted basis of contributed property - Assumed mortgage
Basis = $20,000 - $8,000 (50% of the $16,000 mortgage)
Basis = $12,000

Therefore, the correct answer is (C) $12,000.

Question 6

Nigel and Frank form NFS, Inc. an electing S corporation, by combining the assets of their respective businesses. Nigel contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Frank contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NFS also assumes $60,000 of debt on Frank's assets. What is Nigel's basis in his stock?

Accepted Answer

To determine Nigel's basis in his stock, we need to first calculate the total value of the assets contributed by both Nigel and Frank:

Nigel's assets contributed = $90,000 - $60,000 (adjusted basis) + $10,000 cash contribution = $40,000 + $10,000 = $50,000

Frank's assets contributed = $270,000 - $150,000 (adjusted basis) = $120,000

Total assets contributed by both = $50,000 + $120,000 = $170,000

Since Nigel's 1/3 interest represents $170,000/3 = $56,666, then his basis in his stock is $56,666 + $13,333 (his cash contribution) = $70,000.

Question 7

Zeppo and Harpo are equal owners of the Marx Corporation. During the current year, they agree to admit Groucho as a shareholder. Groucho will contribute $35,000 in cash and property worth $75,000 (adjusted basis of $55,000) for 40% of Marx Corporation's stock. How much gain will Groucho recognize from the transfer of the assets to the corporation?

Accepted Answer

Groucho's contribution includes cash of $35,000 and property worth $75,000, with an adjusted basis of $55,000. Thus, the gain on the transfer of property is $75,000 - $55,000 = $20,000. Since Groucho will own 40% of the corporation's stock, he will recognize 40% of the $20,000 gain, or $8,000. Therefore, the correct answer is B) $20,000.

Question 8

Which of the following statements regarding a partnership's tax year is/are correct?
I.A partnership formed on July 1 must adopt a tax year ending on June 30.
II.A valid business purpose can no longer be claimed as a reason for adoption of a tax year other than the generally required tax year.
​

Accepted Answer

Both statements are incorrect.

Statement I is incorrect because a partnership formed on July 1 may adopt any tax year as long as it is not longer than 12 months and ends on the last day of any month other than December.

Statement II is incorrect because a valid business purpose can still be claimed as a reason for adopting a tax year other than the generally required tax year. However, the IRS may review and evaluate the claimed business purpose to determine if it is valid.

Question 9

Winston is the sole shareholder of Winston Inc, an S corporation. In 2017, he paid $50,000 for his shares of stock. During the current year, he contributes a building and land to the corporation. No additional shares of stock are issued. The basis of this property is $75,000, and its fair market value is $200,000. What is Winston's basis in his Winston stock at the end of 2018?

Accepted Answer

When Winston contributed the building and land to the corporation, his basis in the stock increased by the fair market value of the property minus any liabilities assumed by the corporation (since no additional shares were issued).

Therefore, Winston's new basis in his stock would be:

$50,000 (original basis) + $125,000 (increase in basis from the property contribution) = $175,000

However, since his basis cannot exceed the fair market value of the property, his basis in his stock is limited to $125,000. Therefore, the answer is choice letter C.

Question 10

Doug, Kate, and Gabe own Refiner Group, Inc., an electing S corporation. The shareholder's ownership percentages and fiscal year ends follow:
Which of the following statements is (are) correct?
$$\begin{array} { l l l } 
& \text { Ownership } & \text { Year End } \
\text { Doug } & 60 \% & \text { January } 31 \
\text { Kate } & 20 \% & \text { May } 31 \
\text { Gabe } & 15 \% & \text { September } 30
\end{array}$$
I.Refiner Group, Inc. must use a calendar year.
II.Refiner Group, Inc. may elect to use a fiscal year ending January 31.
?

Accepted Answer

Since all shareholders have a calendar year-end, Refiner Group, Inc. is required to use a calendar year as its fiscal year-end. Therefore, statement I is incorrect. Statement II is incorrect because the corporation cannot elect to use a fiscal year different from the calendar year when all shareholders have a calendar year-end.

Question 11

Which of the following businesses must use the accrual method of accounting?
I.Pryor and Ransom, a local law firm with annual gross receipts of $650,000.
II.Mayson Manufacturing, which has annual gross receipts of $30,000,000.
​

Accepted Answer

Businesses with annual gross receipts exceeding $25 million (as of 2023) are required to use the accrual method of accounting. Mayson Manufacturing, with $30,000,000 in receipts, must use the accrual method, while Pryor and Ransom does not exceed this threshold.

Question 12

Snoopy Corporation, Garfield Corporation, and Dogbert Corporation are partners in Comic Partnership. The partners' fiscal year ends and ownership interests follow:
?
$$\begin{array} { l l l } 
\text { Snoopy Corporation } & \text { March 31 FYE } & 15 \% \text { Interest } \
\text { Garfield Corporation } & \text { May 31 FYE } & 30 \% \text { Interest } \
\text { Dogbert Corporation } & \text { October 31 FYE } & 55 \% \text { Interest }
\end{array}$$
I.Comic Partnership must use a calendar year end, unless the IRS approves an election for a different tax year.
II.Comic Partnership must use a October 31 fiscal year end.
?

Accepted Answer

The answer of Snoopy Corporation, Garfield Corporation, and Dogbert Corporation...

Question 13

Which of the following businesses must use the accrual method of accounting?
I.Champion Mortgage Corporation, which has annual gross receipts of $30,000,000.
II.The Happy Bookworm, a chain of bookstores with annual gross receipts of $39,500,000.
​

Accepted Answer

Under IRS rules, corporations and partnerships with average annual gross receipts over $25 million for the preceding three years are required to use the accrual method of accounting. Both Champion Mortgage Corporation and The Happy Bookworm exceed this threshold, making statement C correct.

Question 14

A fiscal year can be
I.a period of 12 months ending on any day during the month other than a Sunday.
II.a period of 12 months ending on the last day of any month other than January
​

Accepted Answer

The answer of A fiscal year can be
I.a period of...

Question 15

Nigel and Frank form NFS, Inc. an electing S corporation, by combining the assets of their respective businesses. Nigel contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Frank contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NFS also assumes $60,000 of debt on Frank's assets. What is Frank's basis in his stock?

Accepted Answer

The answer of Nigel and Frank form NFS, Inc. an...

Question 16

Zeppo and Harpo are equal owners of the Marx Corporation. During the current year, they agree to admit Groucho as a shareholder. Groucho will contribute $25,000 in cash and property worth $50,000 (adjusted basis of $35,000) for 25% of Marx Corporation's stock. What is Groucho's basis in the Marx Corporation stock?

Accepted Answer

Groucho's basis in the Marx Corporation stock is the sum of the cash contributed ($25,000) and the adjusted basis of the property contributed ($35,000), totaling $60,000. However, since Groucho is receiving 25% of the corporation's stock in exchange for these contributions, the value of the stock received is actually based on the fair market value of the contributions, which is $75,000 ($25,000 in cash + $50,000 in property value). Therefore, Groucho's basis in the Marx Corporation stock is $75,000.

Question 17

During 2018, Mercedes incorporates her accounting practice. Mercedes is the sole shareholder. The following assets are transferred to the corporation:
?
$$\begin{array} { l r } 
\text { Cash } & \$ 1,000 \
\text { Computer equipment: } & \
\text { Fair market value } & 10,000 \
\text { Adjusted basis } & 6,000 \
\text { Original cost } & 12,000
\end{array}$$
What is the corporation's total basis in all of the transferred assets?

Accepted Answer

The answer of During 2018, Mercedes incorporates her accounting practice....

Question 18

Milo contributes a building with a fair market value of $400,000 to a new partnership in exchange for a 25% interest. His adjusted basis in the building is $125,000, which is subject to a $100,000 mortgage. The partnership assumes the mortgage. What is Milo's basis in his partnership interest?

Accepted Answer

Milo's basis in his partnership interest is equal to the fair market value of the building he contributed, which is $400,000.

Question 19

Dogg Corporation, Katt Corporation, and Rabitt Corporation are equal partners in Critter Partnership. The partner's fiscal year ends follow:
Which of the following statements is (are) correct?
$$\begin{array} { l l } 
\text { Dogg Corporation } & \text { February } 28 \
\text { Katt Corporation } & \text { May } 31 \
\text { Rabitt Corporation } & \text { August } 31
\end{array}$$
I.Critter Partnership may elect to use any of the three dates that the partners use.
II.Critter Partnership must use the tax year of the partner that creates the least amount of deferral.
?

Accepted Answer

Partnership tax returns are filed on Form 1065, which must be filed by the 15th day of the fourth month following the end of the partnership tax year. Therefore, the partnership must use a tax year-end that allows the Form 1065 to be filed by the due date. If the partnership has a deferral resulting from a difference between the partnership tax year and the partners' tax years, the deferral period will be determined by the partner using the latest tax year-end. Therefore, Critter Partnership must use the tax year of the partner that creates the least amount of deferral. Statement I is incorrect because the partnership must use a tax year-end that allows the Form 1065 to be filed by the due date and not any of the three partners' tax year-ends.

Question 20

A new corporation's choice for its annual accounting period
I.must be approved by the IRS.
II.must be the same as its majority shareholder.
​

Accepted Answer

Neither statement is correct. A new corporation can choose any accounting period as long as it is within 12 months and it falls in line with the corporation's business operations. The approval of the IRS is not required for a corporation to select its accounting period. The accounting period chosen by the corporation does not have to be the same as that of its majority shareholder.

Quiz 13: Choice of Business Entity-General Tax and Nontax Factorsformation

On January 5, 2018, Mike acquires a 50% interest in Precision Tools Partnership by contributing property with an adjusted basis of $20,000 and a fair market value of $24,000, subject to a mortgage of $16,000. What is Mike's basis in Precision Tools Partnership as of January 5, 2018?

Which of the following statements regarding a partnership's tax year is/are correct? I.A partnership formed on July 1 must adopt a tax year ending on June 30. II.A valid business purpose can no longer be claimed as a reason for adoption of a tax year other than the generally required tax year. ​

Which of the following businesses must use the accrual method of accounting? I.Pryor and Ransom, a local law firm with annual gross receipts of $650,000. II.Mayson Manufacturing, which has annual gross receipts of $30,000,000. ​

Which of the following businesses must use the accrual method of accounting? I.Champion Mortgage Corporation, which has annual gross receipts of $30,000,000. II.The Happy Bookworm, a chain of bookstores with annual gross receipts of $39,500,000. ​

A fiscal year can be I.a period of 12 months ending on any day during the month other than a Sunday. II.a period of 12 months ending on the last day of any month other than January ​

Milo contributes a building with a fair market value of $400,000 to a new partnership in exchange for a 25% interest. His adjusted basis in the building is $125,000, which is subject to a $100,000 mortgage. The partnership assumes the mortgage. What is Milo's basis in his partnership interest?

A new corporation's choice for its annual accounting period I.must be approved by the IRS. II.must be the same as its majority shareholder. ​

Which of the following statements regarding a partnership's tax year is/are correct? I.A partnership formed on July 1 must adopt a tax year ending on June 30. II.A valid business purpose can no longer be claimed as a reason for adoption of a tax year other than the generally required tax year.

Which of the following businesses must use the accrual method of accounting? I.Pryor and Ransom, a local law firm with annual gross receipts of $650,000. II.Mayson Manufacturing, which has annual gross receipts of $30,000,000.

Which of the following businesses must use the accrual method of accounting? I.Champion Mortgage Corporation, which has annual gross receipts of $30,000,000. II.The Happy Bookworm, a chain of bookstores with annual gross receipts of $39,500,000.

A fiscal year can be I.a period of 12 months ending on any day during the month other than a Sunday. II.a period of 12 months ending on the last day of any month other than January

A new corporation's choice for its annual accounting period I.must be approved by the IRS. II.must be the same as its majority shareholder.