Question 1

Noelle owns an automobile which she uses for personal use.Her adjusted basis is $40,000 (i.e. ,the original cost).The car is worth $24,000.Which of the following statements is correct?

Accepted Answer

If Noelle sells the car for $24,000, her realized loss of $16,000 is not recognized because the loss is not realized until the car is sold. If Noelle exchanges the car for another car worth $24,000, her realized loss of $16,000 is not recognized because the exchange is a like-kind exchange. If the car is stolen and it is uninsured, Noelle may be able to recognize part of her realized loss of $24,000 if she can prove that the car was stolen.

Question 2

The bank forecloses on Lisa's apartment complex.The property had been pledged as security on a nonrecourse mortgage,whose principal amount at the date of foreclosure is $750,000.The adjusted basis of the property is $480,000,and the fair market value is $750,000.What is Lisa's recognized gain or loss?

Accepted Answer

The answer of The bank forecloses on Lisa's apartment complex.The...

Question 3

Which of the following statements is correct?

Accepted Answer

Realized gains on personal use assets are taxable, while realized losses are disallowed. Therefore, all statements A, B, and C are correct.

Question 4

Sandra's automobile,which is used exclusively in her trade or business,was damaged in an accident.The adjusted basis prior to the accident was $11,000.The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000.Insurance proceeds of $3,200 are received.What is Sandra's adjusted basis for the automobile after the casualty?

Accepted Answer

The answer of Sandra's automobile,which is used exclusively in her...

Question 5

Alicia buys a beach house for $325,000 which she uses as her personal vacation home.She builds an additional room on the house for $45,000.She sells the property for $450,000 and pays $22,000 in commissions and $4,000 in legal fees in connection with the sale.What is the recognized gain or loss on the sale of the house?

Accepted Answer

The recognized gain is $80,000. The cost of the house is $325,000, and the cost of the additional room is $45,000, for a total cost of $370,000. The selling price is $450,000, and the commissions and legal fees are $22,000 and $4,000, respectively, for a total of $26,000. The recognized gain is the selling price minus the cost, minus the commissions and legal fees, or $450,000 - $370,000 - $26,000 = $80,000.

Question 6

Jamie bought her house in 2001 for $395,000.Since then,she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing.She sells the house on July 1,2010.Her realtor charged $34,700 in commissions.Prior to listing the house with the realtor,she spent $300 advertising in the local newspaper.Sammy buys the house for $500,000 in cash,assumes her mortgage of $194,000,and pays property taxes of $4,200 for the entire year on December 1,2010.What is Jamie's adjusted basis at the date of the sale and the amount realized?

Accepted Answer

The answer of Jamie bought her house in 2001 for...

Question 7

Kate sells property for $120,000.The buyer pays $2,000 in property taxes that had accrued during the year while the property was still legally owned by Kate.In addition,Kate pays $6,000 in commissions and $2,000 in legal fees in connection with the sale.How much does Kate realize from the sale of her property?

Accepted Answer

The answer of Kate sells property for $120,000.The buyer pays...

Question 8

Elvis owns all of the stock of Shadow Corporation.The accumulated earnings and profits of Shadow Corporation at the end of the year are a deficit of $110,000.The current earnings and profits are $0.Elvis' basis for his stock is $295,000.He receives a distribution of $300,000 on the last day of the tax year.How much gain should Elvis report?

Accepted Answer

When a shareholder receives a distribution from a corporation, the distribution is first applied to reduce the shareholder's basis in the stock. In this case, Elvis' basis is $295,000 and he received a distribution of $300,000, therefore $295,000 of the distribution will reduce his basis to $0. The remaining $5,000 of the distribution will be treated as gain to Elvis, even though Shadow Corporation had an accumulated earnings and profits deficit. Therefore, Elvis should report a gain of $5,000 on his tax return.

Question 9

Steve purchased his home for $500,000.As a sole proprietor,he operates a certified public accounting practice in his home.For this business,he uses one room exclusively and regularly as a home office.In Year 1,$3,042 of depreciation expense on the home office was deducted on his income tax return.In Year 2,Steve sustained losses in his business;therefore,no depreciation was taken on the home office.Had he been allowed to deduct depreciation expense,his depreciation expense would have been $3,175.What is the adjusted basis in the home?

Accepted Answer

The answer of Steve purchased his home for $500,000.As a...

Question 10

Which of the following is correct?

Accepted Answer

The answer of Which of the following is correct?
...

Question 11

Capital recoveries include:

Accepted Answer

The answer of Capital recoveries include:
...

Question 12

Which of the following statements is false?

Accepted Answer

The answer of Which of the following statements is false?
...

Question 13

Milton owns a bond (face value of $25,000)for which he paid $28,000.Which of the following statements is correct?

Accepted Answer

The answer of Milton owns a bond (face value of...

Question 14

Pedro borrowed $45,000 to purchase a machine.He later borrowed $15,000 using the machine as collateral.Both notes are nonrecourse.Eight years later,the machine has an adjusted basis of zero and two outstanding note balances of $30,000 and $6,000.Pedro sells the machine subject to the two liabilities for $21,000.What is his realized gain or loss?

Accepted Answer

The answer of Pedro borrowed $45,000 to purchase a machine.He...

Question 15

Alice owns land with an adjusted basis of $610,000,subject to a mortgage of $350,000.Real estate taxes are $9,000 per calendar year and are payable on December 31.On April 1,2010,Alice sells her land subject to the mortgage for $650,000 in cash,a note for $600,000,and property with a fair market value of $120,000.What is the amount realized?

Accepted Answer

The amount realized for tax purposes is the sum of all cash received and the fair market value of any property received:

$650,000 (cash) + $600,000 (note) + $120,000 (property) = $1,370,000

Note that the mortgage is not included in the amount realized since it is assumed that the buyer will assume responsibility for the mortgage.

Question 16

Which of the following decreases adjusted basis?

Accepted Answer

All three options, amortization of bond premium, a corporate distribution treated as a return of capital, and depreciation decrease adjusted basis. Amortization of bond premium reduces the bond’s cost basis, a corporate distribution treated as a return of capital reduces the shareholder’s cost basis, and depreciation reduces the basis of the asset being depreciated.

Question 17

Kimmy sells her personal use automobile for $19,000.She purchased the car three years ago for $35,000.What is Kimmy's recognized gain or loss?

Accepted Answer

The answer of Kimmy sells her personal use automobile for...

Question 18

Karen owns City of Richmond bonds with a face value of $10,000.She purchased the bonds on January 1,2010,for $11,000.The maturity date is December 31,2019.The annual interest rate is 8%.What is the amount of taxable interest income that Karen should report for 2010,and the adjusted basis for the bonds at the end of 2010,assuming straight-line amortization is appropriate?

Accepted Answer

The answer of Karen owns City of Richmond bonds with...

Question 19

Carlton purchases land for $300,000.He incurs legal fees of $5,000 associated with the purchase.He subsequently incurs additional legal fees of $20,000 in having the land rezoned from agricultural to residential.He subdivides the land and installs streets and sewers at a cost of $600,000.What is Carlton's basis for the land and the improvements?

Accepted Answer

Carlton's basis for the land will be its purchase price plus any associated legal fees, which is $305,000 ($300,000 + $5,000).
His basis for the improvements will be the cost of installing streets and sewers which is $600,000.
Therefore, Carlton's total basis is $925,000 ($305,000 + $600,000).

Question 20

Tony's factory building was destroyed in a fire (adjusted basis of $90,000;fair market value of $140,000).Of the insurance proceeds of $128,000 he receives,Tony uses $88,000 to purchase additional inventory and invests the remaining $40,000 in short-term certificates of deposit.What is Tony's recognized gain or loss?

Accepted Answer

To calculate the recognized gain or loss, we need to determine Tony's adjusted basis in the building and compare it to the amount of insurance proceeds he received.

Tony's adjusted basis in the building is $90,000, but it was destroyed in a fire, so its basis is reduced to zero. Therefore, Tony has a realized gain of $140,000 (fair market value of the building) - $0 (adjusted basis) = $140,000.

However, Tony used $88,000 of the insurance proceeds to purchase additional inventory, which increases his basis in the inventory but does not affect the recognized gain or loss. The remaining $40,000 he invested in short-term certificates of deposit, which is considered a reinvestment of the insurance proceeds and does not affect the recognized gain or loss.

Therefore, Tony's recognized gain is $140,000, and he will owe taxes on that amount. The amount he reinvested in short-term CDs does not affect his recognized gain. Thus, the answer is C) $38,000 gain.

Quiz 13: Part 1--Property Transactions: Determination of Gain or Loss,basis Considerations,and Nontaxable Exchanges

Noelle owns an automobile which she uses for personal use.Her adjusted basis is $40,000 (i.e. ,the original cost) .The car is worth $24,000.Which of the following statements is correct?