Question 1

A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of the destruction, Della recognizes:

Accepted Answer

Della did not sell or exchange the Section 1231 asset so its $748,200 loss (adjusted basis) is ordinary.

Question 2

Thieves stole computer equipment owned by Eaton Company and used for three years in its consulting business. Eaton's adjusted basis in equipment was $23,200, and its replacement value was $50,000. Eaton's insurance company paid only $15,000 on Eaton's claim for the theft loss. As a result, Eaton recognizes:

Accepted Answer

Eaton did not sell or exchange the Section 1231 asset, so its $8,200 realized loss ($15,000 insurance payment - $23,200 basis) is ordinary.

Question 3

Blitza Inc. owned real property used for 12 years in its business that was subject to a $294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the property's appraised FMV was $260,000. Which of the following statements is true?

Accepted Answer

Blitza is treated as selling the Section 1231 asset for an amount realized of $294,500. Blitza has no legal obligation to make any additional payment to the creditor because its debt was nonrecourse.

Question 4

Two months ago, Dawes Inc. broke a multi-year lease on office space that it had occupied for four years. Three years ago, Dawes paid $85,300 to install carpeting and new electrical fixtures throughout the office. Accumulated depreciation through the date that Dawes vacated the office was $51,000. What is the tax consequence of Dawes' abandonment of the carpeting and fixtures?

Accepted Answer

Abandonment of assets results in an ordinary loss equal to the asset's adjusted basis minus any salvage value. In this case, the adjusted basis is the original cost of $85,300 minus the accumulated depreciation of $51,000, resulting in a adjusted basis of $34,300. Since there is no mention of any salvage value, the entire amount of $34,300 will be treated as an ordinary loss for tax purposes.

Question 5

Which of the following results in a permanent book/tax difference for a corporate taxpayer?

Accepted Answer

Permanent differences between book and tax income arise when an item is included in book income but never in taxable income, or vice versa. A loss realized on a related party sale is disallowed for tax purposes but recognized for book purposes, creating a permanent difference.

Question 6

Twelve years ago, Mr and Mrs Bathgate purchased a business. This year, they sold the business for $750,000 lump-sum payment. The business had the following balance sheet assets. As a result of the sale, the Bathgates should recognize:

Accepted Answer

Gain on sale of the inventory is ordinary. Gain on sale of the furniture and fixtures and purchased goodwill does not exceed the accumulated depreciation and amortization on those Section 1231 assets. Consequently, the entire gain is recaptured as ordinary gain.
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Question 7

WQP Company generated $1,814,700 ordinary income from the sale of inventory to its customers. It also sold three noninventory assets during the year. Compute WQP's taxable income assuming that:
a. The first sale resulted in a $10,400 ordinary gain, the second sale resulted in a $23,900 capital loss, and the third sale resulted in a $44,000 capital gain.
b. The first sale resulted in a $79,100 capital loss, the second sale resulted in a $35,200 ordinary loss, and the third sale resulted in a $16,000 capital gain.

Accepted Answer

The answer of WQP Company generated $1,814,700 ordinary income from...

Question 8

Steiger Company owned investment land subject to a $715,000 recourse mortgage. Steiger failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Steiger's basis in the land was $587,300, and the land's appraised FMV was $690,000. Steiger completely settled its recourse debt by paying $25,000 cash to the creditor. As a result of the foreclosure, Steiger recognizes:

Accepted Answer

Steiger recognizes a $102,700 capital gain ($690,000 relief of debt equal to the land's FMV - $587,300 basis).

Question 9

Dender Company sold business equipment with a $386,000 initial cost basis and $171,000 accumulated tax depreciation. Compute Dender's recaptured ordinary income and Section 1231 gain or loss recognized if the amount realized on sale was:
a. $200,000
b. $300,000
c. $400,000

Accepted Answer

The answer of Dender Company sold business equipment with a...

Question 10

A tornado demolished several delivery vans owned for three years by Wadham Company. Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase new vans. Wadham received a $25,000 settlement from its casualty insurance company. Consequently, Wadham recognizes:

Accepted Answer

Wadham recognizes a $3,400 ordinary casualty loss.

Question 11

Several years ago, Y&S Inc. purchased a patent on a production process for $250,000 and has amortized $91,000 of the cost. Y&S has learned that a rival company recently developed a new process that renders the patent worthless. Consequently, Y&S made a public announcement that it would no longer enforce the patent. What is the tax consequence to Y&S of this unfortunate situation?

Accepted Answer

Y&S is allowed an abandonment loss when it relinquishes the legal monopoly represented by the patent.

Question 12

Nolan Inc. sold marketable securities with a $223,000 basis to Totem Company. Compute Nolan's recognized gain or loss assuming that:
a. Nolan's amount realized on sale was $160,000, and Nolan and Totem are unrelated parties.
b. Nolan's amount realized on sale was $275,000, and Nolan and Totem are unrelated parties.
c. Nolan's amount realized on sale was $160,000, and Nolan and Totem are related parties.
d. Nolan's amount realized on sale was $275,000, and Nolan and Totem are related parties.

Accepted Answer

The answer of Nolan Inc. sold marketable securities with a...

Question 13

DiLamer Inc. paid $300,000 to purchase 30-year bonds issued by a publicly held foreign corporation. The foreign government recently privatized the corporation and declared that all outstanding corporate debt obligations would not be honored. What is the tax consequence to DiLamer of this bad news?

Accepted Answer

The bad news constitutes a complete and final loss of DiLamer’s investment in the bonds, resulting in a $300,000 capital loss. It is not an abandonment loss since DiLamer did not voluntarily dispose of the bonds. There is also no Section 1231 loss since the bonds are not considered property used in a trade or business, which is a requirement for Section 1231 treatment.

Question 14

Oslego Company, a calendar year taxpayer, sold land with a $400,000 tax basis for $635,000 in March 2018. The purchaser paid $50,000 cash at closing and gave Oslego an interest-bearing note for the $585,000 remaining price. In September, Oslego received $50,450 cash from the purchaser consisting of a $29,250 principal payment and a $21,200 interest payment. Assuming that Oslego does not elect out of the installment sale method, compute the company's 2018 gain recognized on sale and its tax basis in the note receivable on December 31.

Accepted Answer

The answer of Oslego Company, a calendar year taxpayer, sold...

Question 15

Mrs Stile owns investment land subject to a $600,000 nonrecourse mortgage. Her basis in the land is $212,000, and the land's appraised FMV is $575,000. Mrs Stile is considering defaulting on the mortgage and allowing the creditor to foreclose. If Mrs Stile disposes of the land through a foreclosure, she will recognize:

Accepted Answer

The foreclosure is treated as a sale of the land for an amount realized equal to the $600,000 nonrecourse mortgage.

Question 16

Michael sold machinery used in his business for $50,000. He purchased the equipment three years ago for $55,000 and deducted $22,800 MACRS depreciation through the date of sale. Compute and characterize Michael's gain on sale.

Accepted Answer

The gain in this case is calculated as follows:
Sale Price = $50,000
Less: Adjusted Basis = $55,000 - $22,800 = $32,200
Gain or Loss = Sale Price - Adjusted Basis = $50,000 - $32,200 = $17,800
Since the machinery was used in Michael's business and held for more than one year, the gain is treated as an ordinary gain rather than a capital gain.

Question 17

Ficia Inc. owned investment land subject to a $294,500 recourse mortgage. Ficia failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's basis in the land was $300,000, and the land's appraised FMV was $260,000. The creditor informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage. Which of the following statements is true?

Accepted Answer

Ficia recognizes $34,500 cancellation-of-debt income. It is treated as selling the land for $260,000 relief of debt equal to the land's FMV.

Question 18

Princetown Inc. has a $4.82 million basis in 88% of the outstanding stock of Merryvale Corporation. Merryvale manufactures Christmas decorations, cards, and wrapping paper. Princetown's board of directors recently learned that Merryvale is bankrupt. The board voted unanimously to dissolve the corporation and distribute all assets to Merryvale's creditors. What is the tax consequence to Princetown of the board's actions?

Accepted Answer

Merryvale is an affiliated corporation, so Princetown is allowed an ordinary loss on the worthlessness of the stock.

Question 19

Nancy owned business equipment with a $16,950 adjusted basis and a $7,500 FMV that was destroyed by a tornado. The equipment was uninsured. As a result of this casualty, Nancy:

Accepted Answer

C) Nancy is allowed to deduct a $16,950 ordinary loss because the loss of uninsured business property due to a casualty (like a tornado) allows for the deduction of the adjusted basis of the property, not its fair market value (FMV).

Question 20

Mrs Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2007. This year, HiFli declared bankruptcy and announced that its stock has no value. What is the tax consequence to Mrs Tinker of this bad news?

Accepted Answer

Mrs Tinker can claim a capital loss of the full $78,400 since the stock has become worthless due to the company's bankruptcy. This loss can be used to offset capital gains for the year and can also be carried forward to future years to offset future capital gains. Ordinary abandonment loss is not applicable in this scenario, and there is no need for Mrs Tinker to dispose of the stock to recognize the loss.

Quiz 8: Property Dispositions