Question 1

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 2

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

Book value of the personalty = Cost - Accumulated depreciation = $90,000 - $31,000 = $59,000
Selling price of the personalty = $52,700
Book loss = Selling price - Book value = $52,700 - $59,000 = ($6,300)
Since the asset was previously expensed under Section 179, the entire amount realized on the sale is taxable as ordinary income. Therefore, taxable gain = $52,700.
Hence, the answer is (A) $6,300 book loss: $52,700 tax gain.

Question 3

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

The answer of This year, Ms Lucas sold investment land...

Question 4

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 where at least one payment is received in a different tax year than the year of sale. None of the given scenarios involve the sale of property that qualifies for the installment sale method of accounting.

Question 5

In 2015, 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 2016, 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 2016.

Accepted Answer

Under the installment sale method, the gain recognized is based on the gross profit percentage. The gross profit is $301,000 ($775,000 - $474,000), and the gross profit percentage is 38.84% ($301,000 / $775,000). In 2016, TPC received $67,500 in principal, so the recognized gain is $26,216 ($67,500 * 38.84%).

Question 6

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

The answer of O&V sold a business asset with a...

Question 7

In 2015, 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 2016, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2016, TPC's use of the installment sale method results in a:

Accepted Answer

The answer of In 2015, TPC Inc. sold investment land...

Question 8

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 35% tax rate, what is the effect of the sale on Noble's deferred tax accounts?

Accepted Answer

The answer of Noble Inc. paid $310,000 for equipment three...

Question 9

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 10

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

Accepted Answer

The answer of The installment sale method of accounting does...

Question 11

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 35% tax rate.

Accepted Answer

The answer of O&V sold an asset with a $78,300...

Question 12

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 recognized loss is the difference between the adjusted tax basis of the equipment ($118,100) and its fair market value after the casualty (which is $0 since it was destroyed), not the original worth of the equipment. Therefore, the loss is $118,100, not $160,000.

Question 13

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 mortgage is foreclosed, the difference between the outstanding debt and the adjusted basis of the property is treated as a gain. In this case, the outstanding debt is $228,500 and the adjusted basis is $175,000, resulting in a gain of $53,500. As a result, Netelli must recognize this gain on the disposition of the land.

Question 14

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 15

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 equal to the adjusted tax basis of the equipment, which is $118,100 in this case. This loss would be considered an ordinary loss for tax purposes.

Question 16

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 the sale of the equipment is calculated as follows:

Sale price: $200,000
Book value: $310,000 - $93,840 = $216,160
Tax basis: $310,000 - $147,327 = $162,673

Since the sale price is less than the book value, the company incurs a loss of $16,160 for book purposes. However, for tax purposes, the company incurs a gain of $37,327 ($200,000 - $162,673).

The temporary difference between book and tax is calculated as follows:
	Book: $16,160 loss
	Tax: $37,327 gain
	Temporary difference: $53,487 unfavorable (taxable)

Therefore, the correct answer is B.

Question 17

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

Book gain = selling price - adjusted book basis = $775,000 - $474,000 = $301,000
Taxable gain = (cash received + net sales price due in the year after sale) x (gain percentage) = ($100,000 + $100,000) x (301,000/775,000) = $38,839. Therefore, the book gain is $301,000 and the tax gain is $38,839.

Question 18

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 recognized gain is the amount she receives from the sale minus her basis in the property. She received $40,000 in cash and a $160,000 note, for a total contract price of $200,000. Her basis in the property was $75,000, so her recognized gain is:

$200,000 - $75,000 = $125,000

However, Brenda only received $20,000 in principle payment on the note in December, which reduces her recognized gain:

$125,000 x ($20,000/$160,000) = $15,625

Therefore, Brenda's recognized gain this year is:

$40,000 + $15,625 = $55,625

This amount is then subject to capital gains tax. Brenda had held the investment land for more than one year, so it is a long-term capital gain. The tax rate on long-term capital gains depends on her income level. Assuming she falls into the 15% tax bracket for long-term capital gains, her tax liability would be:

$55,625 x 0.15 = $8,343.75

Therefore, Brenda's recognized gain this year is:

$55,625 - $8,343.75 = $37,281.25 (rounded to $37,500)

Question 19

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 35% tax rate.

Accepted Answer

The answer of Philp Inc. sold equipment with a $132,900...

Question 20

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 reduces Alejo's tax basis in the real property, but it does not reduce the tax basis of the balance due on the note. The tax basis of the note itself remains unchanged.

Quiz 8: Property Dispositions

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

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.

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

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.

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.

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

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 35% tax rate.

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.

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.

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

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.

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?

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 35% tax rate.