Question 1

If the shares of stock sold or exchanged are not specifically identified,the average cost method of identification must be used.

Accepted Answer

The IRS requires the use of the FIFO (First-In, First-Out) method if shares are not specifically identified, not the average cost method.

Question 2

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 still responsible for repaying the borrowed funds, even if the asset has already been obtained.

Question 3

Kathleen received land as a gift from her grandfather.At the time of the gift,the land had a FMV of $85,000 and an adjusted basis of $110,000 to Kathleen's grandfather.One year later,Kathleen sold the land for $80,000.What was her gain or (loss)on this transaction?

Accepted Answer

Since Kathleen sold the land for less than its adjusted basis at the time of the gift, she has a loss. The loss is calculated by subtracting the sale price of $80,000 from the adjusted basis of $110,000, which equals ($30,000). However, the loss is limited to the FMV of the land at the time of the gift, which was $85,000. Therefore, Kathleen's loss on this transaction is limited to ($85,000 - $80,000) = ($5,000).

Question 4

In a basket purchase,the total cost is apportioned among the assets purchased according to the relative adjusted basis of the assets.

Accepted Answer

In a basket purchase, the total cost is apportioned among the assets purchased according to their relative fair market values, not their adjusted basis.

Question 5

During the current year,Tony purchased new car wash equipment for use in his service station business.Tony's costs in connection with the new equipment this year were as follows: $$\begin{array} { | l | r | } 
\hline \text { Cost of the equipment } & \$ 45,000 \
\hline \text { Sales tax on the equipment } & 4,000 \
\hline \text { Delivery charges } & 600 \
\hline \text { Installation and testing charges } & 3,000 \
\hline \text { Expenses of operating the equipment } & 2,000 \
\hline
\end{array}$$ What is Tony's basis in the car wash equipment?

Accepted Answer

The answer of During the current year,Tony purchased new car...

Question 6

Terra Corp.purchased a new enterprise software system and incurred the following costs: $$\begin{array} { | l | r | } 
\hline \text { Cost of the system } & \$ 800,000 \
\hline \text { Installation of system } & 5,000 \
\hline \text { Testing of system } & 6,000 \
\hline \text { Initial training of employees } & 9,000 \
\hline
\end{array}$$ What is Terra Corp.'s basis in the software system?

Accepted Answer

The answer of Terra Corp.purchased a new enterprise software system...

Question 7

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

When property is converted from personal use to business use, the basis for depreciation is the lesser of its fair market value (FMV) or its adjusted basis on the date of conversion.

Question 8

Allison buys equipment and pays cash of $50,000,signs a note of $10,000 and assumes a liability on the property for $3,000.In addition,Allison pays an installation cost of $500 and a delivery cost of $800.Allison's basis in the asset is

Accepted Answer

Allison's basis in the asset includes all costs incurred to acquire the asset and prepare it for use. This includes the cash paid ($50,000), the note signed ($10,000), the assumed liability ($3,000), the installation cost ($500), and the delivery cost ($800). Adding these amounts gives a total basis of $64,300.

Question 9

Mr.Dennis purchased a machine for use in his business.Mr.Dennis' costs in connection with this purchase were as follows: $$\begin{array} { | l | r | } 
\hline \text { Note to seller } & \$ 33,000 \
\hline \text { Cash paid to seller } & 5,000 \
\hline \text { State sales tax } & 2,400 \
\hline \text { Freight to place of business } & 1,500 \
\hline \text { Wages paid to workers to install } & \
\text { machine } & 4,200 \
\hline
\end{array}$$ What is the amount of Mr.Dennis' basis in the machine?

Accepted Answer

The basis of the machine includes all costs necessary to acquire and prepare it for use. This includes the note to the seller ($33,000), cash paid to the seller ($5,000), state sales tax ($2,400), freight ($1,500), and installation wages ($4,200), totaling $46,100.

Question 10

Harwood Company purchased an office building for $5,000,000 cash on April 1.Prior to renting it out to tenants on July 1,Harwood spent $1,000,000 on materials and labor to renovate the property.It funded $100,000 of the renovation cost with its own funds and borrowed the remaining $900,000.As of July 1,$10,000 of interest had been paid to the bank,but none of the principal had been repaid.The basis of the building on July 1 is

Accepted Answer

The basis of the building on July 1 is the purchase price plus any capital expenditures made before it was placed in service. Therefore, the basis of the building on July 1 is $5,000,000 + $1,000,000 = $6,000,000. The $100,000 expenditure that was funded with Harwood's own funds does not affect the basis since it is already reflected in the purchase price. The $900,000 borrowed for the renovation is not yet considered since none of the principal has been repaid, but the $10,000 interest paid is still a deductible expense. Therefore, the final basis of the building on July 1 is $6,000,000 + $10,000 = $6,010,000.

Question 11

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 according to the rules of gift tax. If the donor's basis is higher than the fair market value (FMV) of the gifted property, then no gift tax is added to the basis of the property. However, if the donor's basis is lower than the FMV, then the gift tax is added to the basis of the property.

Question 12

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

Accepted Answer

If shares of stock are not specifically identified, the default method of identification is FIFO (first-in, first-out).

Question 13

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 statement is true according to current US tax laws.

Question 14

Edward purchased stock last year as follows: $$\begin{array} { | l | c | r | } 
\hline \text { Month } & \text { Shares } & \text { Total Cost } \
\hline \text { March } & 100 & \$ 270 \
\hline \text { July } & 200 & 600 \
\hline \text { October } & 600 & \$ 1,200 \
\hline
\end{array}$$ In April of this year,Edward sells 80 shares for $250.Edward cannot specifically identify the stock sold.The basis for the 80 shares sold is

Accepted Answer

The answer of Edward purchased stock last year as follows:...

Question 15

An uncle gifts a parcel of land to his niece,and he has to pay $25,000 of gift taxes.The land has appreciated substantially since he purchased it 20 year ago.The niece's basis in the land will be the uncle's cost increased by the $25,000 of gift taxes paid by the uncle.

Accepted Answer

The niece's basis in the land is the uncle's original cost basis, not increased by the gift taxes paid. Gift taxes do not affect the recipient's basis in the property.

Question 16

Taj Corporation has started construction of a new mall with a cost estimate of $50 million.The mall is expected to be ready to open in 18 months.Taj cannot deduct the interest expense on the construction loan.

Accepted Answer

Since Taj Corporation cannot deduct the interest expense on the construction loan, they will not receive any tax benefits from it.

Question 17

Kathleen received land as a gift from her grandfather.At the time of the gift,the land had a FMV of $105,000 and an adjusted basis of $85,000 to Kathleen's grandfather.The grandfather did not have any gift taxes due.One year later,Kathleen sold the land for $110,000.What was her gain or (loss)on this transaction?

Accepted Answer

The answer of Kathleen received land as a gift from...

Question 18

Dale gave property with a basis of $16,000 to Sarah when it had a FMV of $12,000.No gift taxes were due.Sarah later sold the property for $22,000 resulting in a recognized gain of

Accepted Answer

The basis for Sarah is the same as Dale's basis since the FMV at the time of the gift was less than the basis. Therefore, Sarah's basis is $16,000. The gain is calculated as the selling price ($22,000) minus the basis ($16,000), resulting in a gain of $6,000.

Question 19

Rachel holds 110 shares of Argon Mutual Fund.She is planning to sell 90 shares.Her record of the share purchases is noted below.What could be her basis for the 90 shares to be sold for purposes of determining gain? $$\begin{array} { | l | c | c | } 
\hline & \text { Cost per Share } & \text { No. of Shares } \
\hline \text { Purchase April 1, 2017 } & \$ 100 & 100 \
\hline \text { Reinvested Dividends April 1, 2018 } & \$ 150 & 10 \
\hline
\end{array}$$

Accepted Answer

Rachel can choose different methods to determine the basis for the shares sold, such as specific identification, FIFO (First-In, First-Out), or average cost. Each method could result in a different basis for the 90 shares sold.

Question 20

If the stock received as a nontaxable stock dividend is not the same type as the stock owned prior to the dividend,the allocation of basis is based on relative fair market values of the stock.

Accepted Answer

This statement is true according to the IRS guidelines for basis allocation of nontaxable stock dividends.

Quiz 21: Property Transactions: Capital Gains and Losses