Question 1

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

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Question 2

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 3

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

When Alejo makes a principal payment on the note, it reduces the balance due on the note but does not affect their tax basis in the real property. Therefore, statement C is false. The other statements are true: depreciation reduces tax basis (A) and principal payments increase equity (B).

Question 4

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

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Question 5

In 2010, 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

To calculate the gain recognized on sale of the installment note, we need to first calculate the gross profit percentage. Gross profit percentage = (selling price - adjusted tax basis) / selling price = ($130,000 - $39,400) / $130,000 = 0.6969 or 69.69%
Next, we need to calculate the amount of gain that will be recognized on the sale of the note. This can be calculated by multiplying the gross profit percentage by the total payments received on the note. Gain recognized = gross profit percentage x total payments received on the note = 0.6969 x $25,000 = $17,422.50
Finally, we add the gain recognized from the sale of the note to the gain recognized on the initial sale of the business asset. Gain recognized = $39,400 x 0.6969 + $17,422.50 = $38,332. Therefore, the correct answer is B.

Question 6

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 total selling price of the asset is $100,000, out of which $30,000 is received in cash, and $70,000 is in the form of an assumed mortgage. Therefore, the gain on the sale would be:
Selling Price - Adjusted Basis = $100,000 - $78,300 = $21,700
Now, since the tax rate is 35%, the taxes to be paid on this gain would be:
Taxes = 35% * $21,700 = $7,595
O&V received $30,000 in cash, and they need to pay $7,595 in taxes. Therefore, their net cash flow from the sale would be:
Net Cash Flow = Cash Received - Taxes Paid = $30,000 - $7,595 = $22,405
Hence, the correct choice is A.

Question 7

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.

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Question 8

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.

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Question 9

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.

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Question 10

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

To calculate the temporary book/tax difference, we need to subtract the book value from the tax value at the time of sale:

Tax value: $147,327 (accumulated tax depreciation) + $200,000 (proceeds from sale) = $347,327
Book value: $310,000 (original cost) - $93,840 (accumulated book depreciation) = $216,160

Temporary book/tax difference: $347,327 - $216,160 = $131,167 (unfavorable)

Therefore, the temporary difference is unfavorable, meaning that the company will have to pay more in taxes than what was recorded on the books. However, the question specifically asks for the temporary book/tax difference resulting from the sale, which can be calculated as follows:

Tax value of equipment at time of purchase: $310,000 (original cost) - $147,327 (accumulated tax depreciation) = $162,673
Proceeds from sale: $200,000

Taxable gain on sale: $200,000 - $162,673 = $37,327
Book gain on sale: $200,000 - $216,160 = ($16,160)

Temporary book/tax difference: $37,327 - ($16,160) = $53,487 (unfavorable)

Therefore, the correct answer is B, the sale results in a $53,487 unfavorable temporary book/tax difference.

Question 11

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

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Question 12

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

Since Section 179 was used to expense and deduct the cost of the personalty, there is no basis left in the property. The sale of the property will therefore result in a book loss of $6,300 ($90,000 - $31,000 - $52,700). However, for tax purposes, there will be a gain of $52,700 since the full amount of the expense deduction was claimed in the year of purchase. Therefore, the correct answer is A.

Question 13

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

Accepted Answer

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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

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 recognized in the year of sale = ($100,000 cash received + ($675,000 payment to be received in the future x % of profit to be recognized each year)) - Adjusted tax basis = [$100,000 + ($675,000 x ($301,000/$775,000))] - $474,000 = $38,839. Therefore, choice C is the correct answer.

Question 16

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

When selling assets to a 100% owned corporation, the transaction is considered a non-recognition event for tax purposes. This means that Mr. Quick cannot recognize his $17,900 realized loss and the corporation's tax basis in the securities is not affected by the sales price. The tax basis remains at $112,900. The arm's length negotiation or FMV of the securities do not affect the tax treatment of the transaction.

Question 17

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.

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Question 18

In 2012, 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 2013, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2013, TPC's use of the installment sale method results in a:

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Question 19

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?

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Question 20

In 2012, 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 2013, 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 2013.

Accepted Answer

The gain recognized in 2013 is calculated by multiplying the gross profit percentage by the principal payment received. The gross profit percentage is ($775,000 - $474,000) / $775,000 = 38.71%. The gain recognized in 2013 is 38.71% of $67,500, which is approximately $26,216.

Quiz 8: Property Dispositions