Question 1

A fire destroyed business equipment that was worth $160,000 and had a $118,100 adjusted tax basis. The equipment was uninsured. The owner can recognize a $160,000 ordinary casualty loss.

Accepted Answer

The loss equals the adjusted basis of the equipment.

Question 2

The installment sale method of accounting does not apply to which of the following sales?

Accepted Answer

The installment sale method of accounting does not apply to the sale of 12-acre tract of land held as inventory by a real estate developer or to the sale of U.S. Treasury notes because these are not considered installment sales.

Question 3

In 2017, TPC Inc. sold investment land with a $388,000 book and tax basis for $523,000. The purchaser paid $60,000 in cash and gave TPC a note for the $463,000 balance of the price. In 2018, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2018, TPC's use of the installment sale method results in a:

Accepted Answer

$40,000 principal payment × ($135,000 gain/$523,000 contract price) = $10,325 recognized gain in excess of -0- book gain. The difference is a reversal of the favorable book/tax difference in the year of sale.

Question 4

This year, Ms. Lucas sold investment land for $125,000 cash plus the purchaser's assumption of a $50,000 mortgage on the land. Ms. Lucas's tax basis in the land was $93,000. If any recognized gain is taxed at 15 percent, compute the after-tax cash flow from the sale.

Accepted Answer

$125,000 cash payment - $12,300 tax ($82,000 gain × 15%).

Question 5

O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash flow from the sale assuming a 21% tax rate.

Accepted Answer

$30,000 cash payment - $4,557 tax ($21,700 gain × 21%).

Question 6

Mr Beck sold real property with a $140,000 adjusted basis for $255,000. The buyer paid $148,000 cash and assumed Mr Beck's $107,000 mortgage on the realty. Mr Beck's realized gain or loss on sale is:

Accepted Answer

Mr. Beck's realized gain is calculated by subtracting the adjusted basis of the property ($140,000) from the selling price ($255,000). The selling price includes both the cash received ($148,000) and the mortgage assumed by the buyer ($107,000), totaling $255,000. Therefore, the realized gain is $255,000 - $140,000 = $115,000.

Question 7

A fire destroyed business equipment that was worth $100,000 and had a $118,100 adjusted tax basis. The equipment was uninsured. The owner can recognize a $118,100 ordinary casualty loss.

Accepted Answer

Since the equipment was uninsured, the owner can recognize a casualty loss for the adjusted tax basis amount of $118,100.

Question 8

The installment sale method of accounting applies to which of the following?

Accepted Answer

The installment sale method of accounting applies to the sale of property with payments to be received in more than one tax year. None of the options given involve the sale of property with a payment plan, therefore the installment sale method of accounting does not apply.

Question 9

Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the land. Netelli must recognize a $53,500 gain on the disposition of the land.

Accepted Answer

When a nonrecourse debt is forgiven or discharged, the amount of debt forgiven is treated as proceeds from the disposition of the property, which can result in a gain for tax purposes. In this case, the foreclosure of the land with a nonrecourse mortgage resulted in a gain of $53,500 ($228,500 in debt forgiveness minus the $175,000 basis). Therefore, Netelli must recognize this gain on their tax return.

Question 10

Philp Inc. sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser paid $20,000 in cash and assumed Philp's $180,000 mortgage on the asset. Compute Philp's net cash flow from the sale assuming a 21% tax rate.

Accepted Answer

$20,000 cash payment - $14,091 tax ($67,100 gain × 21%) = 5,909 net cash flow.

Question 11

Lenoci Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Which of the following statements is true?

Accepted Answer

The gain or loss on sale for tax purposes is calculated as follows: 
Sale price $200,000 
Less: Tax basis ($310,000 - accumulated tax depreciation of $147,327) $162,673 
Tax loss ($37,327)

The gain or loss on sale for book purposes is calculated as follows: 
Sale price $200,000 
Less: Book basis ($310,000 - accumulated book depreciation of $93,840) $216,160 
Book loss ($16,160)

Therefore, the temporary book/tax difference is ($16,160 - $37,327) = $21,167 unfavorable, and the permanent book/tax difference is ($93,840 - $147,327) = $53,487 unfavorable. Since the question asks for the statement that is true, the answer is B.

Question 12

O&V sold a business asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and gave O&V a note for the $70,000 balance of the price. O&V will not receive a payment on the note until next year. Compute O&V's gain recognized under the installment sale method.

Accepted Answer

$30,000 cash payment × ($21,700 gain/$100,000 contract price).

Question 13

Noble Inc. paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Assuming a 21% tax rate, what is the effect of the sale on Noble's deferred tax accounts?

Accepted Answer

The $53,487 excess of tax depreciation over book depreciation resulted in an $11,232 deferred tax liability on Noble's balance sheet. The excess depreciation reversed as $53,487 excess tax gain on sale of the asset, which resulted in a reduction of the deferred tax liability to zero.

Question 14

In 2017, TPC Inc. sold investment land with a $474,000 book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave TPC a note for the $675,000 balance of the price. In 2018, TPC received a $105,500 payment on the note ($67,500 principal + $38,000 interest). Assuming that TPC is using the installment sale method, compute its gain recognized in 2018.

Accepted Answer

$67,500 principal payment × ($301,000 gain/$775,000 contract price) = $26,216 recognized gain.

Question 15

Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses the installment sale method, compute Dolzer's book and tax gain in the year of sale.

Accepted Answer

$100,000 cash payment × ($301,000 gain/$775,000 contract price) = $38,839 tax gain.

Question 16

A casualty loss realized on the destruction of depreciable business property is characterized as a Section 1231 loss.

Accepted Answer

Because the disposition was not a sale or exchange, the casualty loss is ordinary.

Question 17

Skeen Company paid $90,000 for tangible personalty three years ago and elected to expense and deduct the cost under Section 179. This year, Skeen sold the personalty for $52,700. Accumulated book depreciation through date of sale was $31,000. What is the effect of the sale on Skeen's book income and taxable income?

Accepted Answer

The answer of Skeen Company paid $90,000 for tangible personalty...

Question 18

Winslow Company sold investment land to an unrelated purchaser. The purchaser paid $250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow its $580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on sale.

Accepted Answer

The amount realized on the sale includes the cash received, the mortgage assumed by the purchaser, and the value of the note received. Therefore, it's $250,000 (cash) + $600,000 (mortgage assumed) + $580,000 (note) = $1,430,000.

Question 19

Six years ago, Alejo Company purchased real property by paying $250,000 cash and giving the seller its $1 million note for the balance of the purchase price. This year, Alejo deducted $30,800 depreciation on the property and made a $125,000 principal payment on the note. Which of the following statements is false?

Accepted Answer

The principal payment had no effect on the tax basis in the real property.

Question 20

Brenda sold investment land for $200,000 in June. Her basis in the land was $75,000. The purchaser paid Brenda $40,000 cash and gave her his 5-year, interest-bearing note for the $160,000 remaining contract price. In December, Brenda received a $20,000 principle payment on the note. Brenda's recognized gain this year is:

Accepted Answer

Brenda's gross profit percentage is 62.5% = ($200,000 - $75,000) ÷ $200,000. Gain recognized this year is $37,500 ($60,000 total payments received × 62.5%).

Quiz 8: Property Dispositions