Exam 9: Nontaxable Exchanges

On July 2, 2015, a tornado destroyed an asset owned by Leigh Inc., a calendar year taxpayer. Leigh's adjusted tax basis in the asset was $22,700, and the reimbursement from its property insurance company was $35,000. If Leigh wants to defer recognizing its $12,300 realized gain, it must replace the asset no later than December 31, 2016.

Eight years ago, Prescott Inc. realized a $16,200 gain on the exchange of old equipment for new equipment. Prescott included the gain in book income, but the exchange was nontaxable. This year, Prescott sold the new equipment for $2,500. At date of sale, the equipment's book basis and tax basis had both been depreciated to zero. Which of the following statements is true?

Lorch Company exchanged an old asset with a $120,700 tax basis and a $155,000 FMV for a new asset with a $142,250 FMV and $12,750 cash. a. If the old asset and the new asset are like-kind properties, compute Lorch's realized and recognized gain and Lorch's tax basis in the new asset. b. How would your answers change if the new asset is worth only $116,000, and Lorch received $39,000 cash in the exchange?

Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000. Which of the following statements is false?

Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.

Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had 7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and recognized gain on the exchange and the tax basis in her 4,200 M&W shares.

In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its property insurance company, and on August 8, it paid $60,000 to replace the signage. Compute Renfru's recognized gain or loss on the involuntary conversion and its tax basis in the new signage.

Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash. Which of the following statements is false?

Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for $533,000 cash. Compute Q&J's book and tax gain on sale.

All types of business and investment real properties are like-kind.

Luce Company exchanged the copyright on a software application for a copyright on a different software application. Luce's gain on the exchange was nontaxable (because the copyrights were like-kind) but was included in financial statement income. Which of the following statements is false?

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the property received from Johnson.

Johnson Inc. and C&K Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the property received from C&K.

Kornek Inc. transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in exchange for a new asset worth $260,000. Which of the following statements is false?

Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for 148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the transferred assets, each Triple share is worth $125. Which of the following is false?

The tax basis in property received in a like-kind exchange in which no gain or loss is recognized is a:

Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex.

Nontaxable exchanges typically cause a temporary difference between book income and taxable income.

Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the following statements is true?

If a taxpayer elected to defer a $13,000 gain realized on an involuntary conversion, the tax basis of the taxpayer's replacement property equals the cost of the property less $13,000.