Question 1

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 2

Mr. Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash. Which of the following statements is true?

Accepted Answer

Mr. Quick sold marketable securities to his 100% owned corporation for $95,000 cash, which is less than his $112,900 tax basis. This creates a realized loss of $17,900. However, this transaction is considered a non-recognition event under Section 351 of the Internal Revenue Code, which means that no gain or loss is recognized by either party. Therefore, Mr. Quick cannot recognize his loss on this transaction. The corporation's tax basis in the securities is equal to Mr. Quick's tax basis of $112,900.

Question 3

In 2011, 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 2012, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2012, TPC's use of the installment sale method results in a:

Accepted Answer

The answer of In 2011, TPC Inc. sold investment land...

Question 4

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 temporary difference is the difference between the tax basis and the book basis of an asset or liability that will reverse in the future (usually upon sale).

In this case:
- Tax basis = $310,000 - accumulated tax depreciation = $162,673
- Book basis = $310,000 - accumulated book depreciation = $216,160

Therefore, the temporary difference at the date of sale is: 
$216,160 - $162,673 = $53,487 unfavorable (since book basis > tax basis)

So, the correct answer is B.

Question 5

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 6

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

Accepted Answer

The installment sale method of accounting applies only to the sale of property where the seller finances the purchase for the buyer and receives payment in installments over time. None of the options mentioned in the question involve installment sales, so the answer is D.

Question 7

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 8

Mrs. Beld sold marketable securities with a $79,600 tax basis to her daughter for $60,000 cash. Two years later, the daughter sold the securities through her broker for $93,000. Compute the daughter's gain recognized on sale.

Accepted Answer

The answer of Mrs. Beld sold marketable securities with a...

Question 9

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 10

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 11

Mr. Quick sold marketable securities with a $112,900 tax basis to his son for $95,000 cash. Two years later, the son sold the securities through his broker for $90,000. Compute the son's loss recognized on sale.

Accepted Answer

Since the son sold the securities for $90,000, his loss recognized on sale is $5,000 ($95,000 - $90,000).

Question 12

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 only reduces Alejo's tax basis in the balance due on the note, not the tax basis in the real property itself. Therefore, statement C is false. The depreciation deduction in statement A is true and reduces Alejo's adjusted tax basis in the real property. The principal payment in statement B increases Alejo's equity in the real property. Therefore, the correct answer is C.

Question 13

Warsham Inc. sold land with a $300,000 basis to Sara Phillips for $117,000 cash. Sara owns 68 percent of Warsham's outstanding stock. Which of the following statements is true?

Accepted Answer

The answer of Warsham Inc. sold land with a $300,000...

Question 14

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 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

Book gain = selling price - adjusted book basis = $775,000 - $474,000 = $301,000
Tax gain = gain percentage x payments received = ($775,000 - $474,000) / $775,000 x $100,000 = $38,839
Since the installment sale method is being used, only the payments received in the year of sale are recognized for tax purposes. Therefore, the tax gain is only on the $100,000 cash payment. The remaining gain will be recognized as payments are received in future years.

Question 16

In 2007, ChaGo Inc. sold a business asset with a $39,400 adjusted tax basis for $130,000. The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of the price. ChaGo is using the installment sale method to recognize its gain on sale. This year, ChaGo sold the note to a financial institution for the note's $55,000 face value (ChaGo had received a total of $25,000 principal payments on the note.) Compute ChaGo's gain recognized on sale of the installment note.

Accepted Answer

ChaGo's gain on the sale of the installment note is calculated by determining the gross profit percentage from the original sale and applying it to the amount received from the sale of the note. The gross profit percentage is ($130,000 - $39,400) / $130,000 = 69.69%. The gain recognized on the sale of the note is 69.69% of $55,000, which is approximately $38,332.

Question 17

In 2011, 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 2012, 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 2011.

Accepted Answer

The answer of In 2011, TPC Inc. sold investment land...

Question 18

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 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

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...

Quiz 8: Property Dispositions