Deck 8: Property Dispositions

Question 1

Mr Hickem sold an investment asset worth $20,000. The purchaser paid Mr Hickem by giving him $12,500 cash and an oil painting worth $7,500. Mr Hickem's amount realized on sale is $12,500.

Answer 1

False

Question 2

The gain or loss recognized on any disposition of a capital asset is characterized as capital gain or loss.

Answer 2

False
Explanation: The disposition must be a sale or exchange to result in a capital gain or loss.

Question 3

Inventory, accounts receivable, and machinery used in a business are examples of capital assets.

Answer 3

False

Question 4

The use of the installment sale method can result in an unfavorable difference between book income and taxable income in the year of sale.

Question 5

The characterization of income as ordinary or capital gain has no relevance for financial reporting purposes.

Question 6

A taxpayer that is using the installment sale method to recognize gain must recompute the gross profit percentage every year during the term of the installment note.

Question 7

Sandy Cole realized a loss on sale of an investment asset to her mother, Lynne. If the facts and circumstances prove that the selling price was an arm's length market price, Sandy can recognize the loss.

Question 8

For tax purposes, every asset is a capital asset unless it falls into one of eight categories of noncapital assets.

Question 9

The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in the hands of a different taxpayer.

Question 10

The installment sale method of accounting is not applicable to realized losses.

Question 11

The seller's amount realized on the sale of property equals any cash received plus the FMV of any property received plus any amount of debt relief to the seller.

Question 12

Gain or loss realized on the disposition of property is recognized unless the tax law provides a nonrecognition exception.

Question 13

N&B Inc. sold land worth $385,000. The purchaser paid $80,000 cash and assumed N&B's $305,000 mortgage on the land. N&B's amount realized on sale is $385,000.

Question 14

Four years ago, Mrs Beights purchased marketable securities for $75,000 cash. At the end of the current year, the FMV of the securities had plummeted to $4,000. Mrs Beights may elect to recognize her $71,000 loss this year, even though she still owns the securities.

Question 15

According to the realization principle, an increase in the value of an asset is not accounted for as income unless the amount of the increase can be accurately measured.

Question 16

Kopel Company transferred an inventory asset to Cassim LLC in exchange for Cassim's $230,000 interest-bearing note. Kopel's tax basis in the note is its $230,000 face value.

Question 17

Every gain or loss realized on the disposition of property is ultimately characterized as either ordinary or capital for tax purposes.

Question 18

Mrs Lex realized a $78,400 gain on sale of investment land to S&T, which issued a 10-year note in full payment. Mrs Lex must recognize the gain in the year of sale unless she elects to use the installment sale method to recognize gain over the term of the note.

Question 19

Mr and Mrs Plame sold an investment asset to their grandson Leonard. Because Leonard is a related party, the Plames do not recognize any gain or loss realized on sale.

Question 20

A corporation can use the installment sale method of accounting for both book and tax purposes.

Question 21

Milton Inc. recognized a $1,300 net Section 1231 loss in 2015. If Milton recognizes a $5,000 net Section 1231 gain in 2016, it must characterize $1,300 as ordinary income.

Question 22

Langtry Corporation recognized $798,000 ordinary income, $13,000 net Section 1231 loss, and $6,000 net capital loss this year. Langtry's taxable income is $785,000.

Question 23

Tullia Inc. recognized $500,000 ordinary income, $22,600 net Section 1231 gain, and $6,000 net capital loss this year. Tullia's taxable income is $522,600.

Question 24

JG Inc. recognized $690,000 ordinary income, $48,000 net Section 1231 gain, and $77,000 net capital loss this year. JG's taxable income is $690,000.

Question 25

A taxpayer cannot compute its net Section 1231 gain or loss for a taxable year until the year closes.

Question 26

Mr Jason realized a gain on sale of a residential apartment complex that he had placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Question 27

Milton Inc. recognized a $16,900 gain on sale of depreciable equipment held for three years. If Milton's accumulated MACRS depreciation on the equipment is $16,900 or more, the entire gain is ordinary income.

Question 28

The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section 1231 gain is treated as ordinary income.

Question 29

The abandonment of business equipment with a $6,019 adjusted basis results in a $6,019 Section 1231 loss.

Question 30

Both corporate and individual taxpayers can deduct capital losses to the extent of capital gains.

Question 31

If a taxpayer sells business realty that was depreciated using the straightline method, the entire gain is characterized as Section 1231 gain.

Question 32

CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1994. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.

Question 33

Cregg has a $43,790 basis in 2,460 shares of ABD Inc. common stock. ABD recently declared bankruptcy and announced that its common stock is worthless. As a result, Ms. Cregg can recognize a $43,790 ordinary loss.

Question 34

Both corporate and individual taxpayers may be taxed at a preferential rate on net capital gain.

Question 35

The sale of business inventory always generates ordinary income or loss.

Question 36

Verno Inc. purchased business equipment in March and sold it in November. Verno's gain or loss recognized on the sale is ordinary.

Question 37

Because land is nondepreciable, it is always a capital asset.

Question 38

Abada Inc. has a $925,000 basis in 100% of the stock of AbWest Inc., which derives all its income from a manufacturing activity. If Abada determines that the AbWest stock is worthless, it can recognize a $925,000 ordinary loss.

Question 39

Both corporate and individual taxpayers can carry back a net capital loss to the three prior taxable years.

Question 40

Stone Company recognized a $7,700 loss on sale of depreciable equipment held for three years. If Stone's accumulated MACRS depreciation on the equipment is $7,700 or more, the entire loss is ordinary.

Question 41

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.

Question 42

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

A) Sale of 12-acre tract of land held as inventory by a real estate developer
B) Sale of business equipment
C) Sale of U.S. Treasury notes
D) The method does not apply to the sale of 12-acre tract of land held as inventory by a real estate developer or to the sale of U.S. Treasury.

Question 43

In 2017, 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 2018, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2018, TPC's use of the installment sale method results in a:

A) $10,325 favorable permanent book/tax difference
B) $17,496 unfavorable temporary difference
C) $17,496 favorable temporary difference
D) None of the above

Question 44

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.

A) $62,300
B) $69,700
C) $112,700
D) $162,700

Question 45

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 21% tax rate.

A) $25,443
B) $17,143
C) $23,700
D) None of the above

Question 46

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:

A) $115,000 gain
B) $8,000 gain
C) $33,000 loss
D) $0 gain or loss

Question 47

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.

Question 48

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

A) $89,300 gain realized on sale of business inventory.
B) $798,600 gain realized on sale of common stock in a publicly held corporation.
C) ($41,500) loss realized on sale of land used in a trade or business.
D) None of the above

Question 49

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.

Question 50

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 21% tax rate.

A) $15,800
B) $20,000
C) -0-
D) None of the above

Question 51

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?

A) The sale results in a $53,487 favorable temporary book/tax difference.
B) The sale results in a $53,487 unfavorable temporary book/tax difference.
C) The sale results in a $53,487 unfavorable permanent book/tax difference.
D) None of the above is true.

Question 52

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.

A) $7,690
B) $6,510
C) $4,920
D) None of the above

Question 53

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 21% tax rate, what is the effect of the sale on Noble's deferred tax accounts?

A) $11,232 increase in deferred tax assets
B) $11,232 increase in deferred tax liabilities
C) $11,232 decrease in deferred tax liabilities
D) No effect on deferred tax accounts

Question 54

In 2017, 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 2018, 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 2018.

A) $26,216
B) $40,976
C) $67,500
D) None of the above

Question 55

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.

A) Book gain $301,000; tax gain $100,000
B) Book and tax gain $38,839
C) Book gain $301,000; tax gain $38,839
D) None of the above

Question 56

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

Question 57

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?

A) $6,300 book loss: $52,700 tax gain
B) $6,300 book loss; -0- tax gain
C) $6,300 book and tax gain
D) None of the above

Question 58

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.

A) $250,000
B) $830,000
C) $850,000
D) $1,430,000

Question 59

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?

A) The depreciation deduction reduced Alejo's adjusted tax basis in the real property.
B) The principal payment increased Alejo's equity in the real property.
C) The principal payment reduced Alejo's tax basis in the real property and the balance due on the note.
D) None of the above statements is false.

Question 60

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:

A) $125,000
B) $60,000
C) $37,500
D) $22,500

Question 61

Which of the following is a capital asset?

A) Supplies used in a business
B) Business inventory
C) Land used in a business
D) None of the above

Question 62

Which of the following is a capital asset?

A) Accounts receivable of an accrual basis business
B) Business equipment
C) Self-created goodwill
D) Purchased goodwill

Question 63

In 2018, Mary recognized a $45,000 gain on the sale of Section 1231 property. Over the previous five-year period, Mary recognized the following net Section 1231 gains and (losses):
2017 ($28,000)
2016 $16,000
2015 ($30,000)
Mary's 2018 gain is characterized as

A) $45,000 ordinary gain
B) $42,000 ordinary gain and $3,000 capital gain
C) $28,000 ordinary gain and $17,000 capital gain
D) $45,000 capital gain

Question 64

Nilex Company sold three operating assets this year. Nilex recognized a $14,100 Section 1231 loss on the first sale, a $20,000 Section 1231 loss on the second sale, and a $19,600 Section 1231 gain on the third sale. Which of the following statements is true?

A) Nilex can deduct its $14,500 net Section 1231 loss.
B) Nilex can deduct its $34,100 net Section 1231 loss and can treat its $19,600 Section 1231 gain as a capital gain.
C) Nilex must treat its $14,500 net Section 1231 loss as a capital loss.
D) None of the above statements is true.

Question 65

Hugo Inc., a calendar year taxpayer, sold two operating assets this year. The first sale generated a $38,700 Section 1231 gain, and the second sale generated a $59,400 Section 1231 loss. As a result of these sales, Hugo should recognize:

A) $20,700 ordinary loss
B) $38,700 Section 1231 gain treated as capital gain and $59,400 ordinary loss
C) $20,700 capital loss
D) None of the above

Question 66

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.

A) $13,400
B) $19,600
C) $33,000
D) None of the above

Question 67

Mr and Mrs Sykes operate a very profitable small business. This year, the Sykes recognized a $100,000 gain on sale of a trade name they had created and copyrighted for use in their business. Which of the following statements is true?

A) The $100,000 gain is capital gain eligible for a preferential tax rate.
B) The $100,000 gain is capital gain against which the Sykes can deduct any capital losses recognized this year.
C) The $100,000 gain is ordinary business income.
D) Statements a. and b. are true.

Question 68

Andrew sold IBM stock to his sister Susan for $6,000. Andrew purchased the stock two years ago for $8,000. Susan sold the stock through her broker for $7,300. How much gain or loss did Susan recognize on the sale?

A) $700 loss
B) No gain or loss
C) $1,300 gain
D) None of the above

Question 69

Acme Inc. sold three capital assets this year. The corporation realized an $18,900 gain on the first sale, a $93,000 loss on the second sale, and a $40,000 gain on the third sale. If Acme's ordinary taxable income from operations was $250,000, compute Acme's taxable income.

A) $308,900
B) $215,900
C) $250,000
D) None of the above

Question 70

R&T Inc. made the following sales of capital assets this year.
What is the effect of the three sales on R&T's taxable income this year?

A) $21,600 increase
B) $12,900 increase
C) No effect
D) None of the choices are correct

Question 71

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.

A) -0-
B) $5,000
C) $22,900
D) None of the above

Question 72

"Tiny Dancer" is the name of a bronze figurine created by artist Diego Ossa. The owner recently recognized a $43,500 gain on sale of the figurine. Which of the following statements is false?

A) If Diego Ossa was the seller, the gain is ordinary.
B) If a commercial art gallery that had held Tiny Dancer in its inventory was the seller, the gain is ordinary.
C) If a private collector who purchased Tiny Dancer from an art gallery was the seller, the gain is capital gain.
D) None of the above is false.

Question 73

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?

A) If Mr. Quick can offer evidence that the FMV of the securities is $95,000, he can recognize his $17,900 realized loss.
B) If Mr. Quick and his corporation negotiated the terms of the sale at arm's length, Mr. Quick can recognize his $17,900 realized loss.
C) The corporation's tax basis in the securities is $112,900.
D) None of the above is true.

Question 74

Norbett Inc. generated $15,230,000 ordinary taxable income and realized a $238,000 net capital loss on the sale of marketable securities this year. Which of the following statements is false?

A) Norbett's net income per books includes the $238,000 net capital loss.
B) Norbett's taxable income is $15,230,000.
C) The $238,000 net capital loss is a favorable book/tax difference.
D) The $238,000 net capital loss is a temporary book/tax difference.

Question 75

Schatz Corporation generated $8,083,000 ordinary business income and recognized a $73,900 net capital gain on the sale of assets. Which of the following statements is true?

A) Schatz must pay tax at the regular corporate rate on $8,156,900 taxable income.
B) Schatz must pay tax at the regular corporate rate on $8,083,000 taxable income. The $73,900 capital gain is eligible for a preferential tax rate.
C) Schatz's net capital gain results in a permanent book/tax difference.
D) None of the above is true.

Question 76

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?

A) Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return.
B) Warsham does not report the $183,000 realized loss on its current year financial statements.
C) The $183,000 loss is an unfavorable temporary difference between Warsham's book and tax income.
D) Both Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return and the $183,000 loss is an unfavorable temporary difference between Warsham's book and tax income is true.

Question 77

Three years ago, 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.

A) -0-
B) $38,332
C) $52,268
D) $55,000

Question 78

Rizzi Corporation sold a capital asset with a $692,000 book and tax basis for $650,000 cash. This was Rizzi's only asset sale during the year. The sale results in:

A) $42,000 unfavorable permanent book/tax difference
B) $42,000 unfavorable temporary book/tax difference
C) $42,000 favorable permanent book/tax difference
D) No book/tax difference

Question 79

Fantino Inc. was incorporated in 2018 and adopted a calendar year for tax purposes. Here is a schedule of Fantino's taxable income for 2018 and 2019.
In 2020, Fantino generated $297,300 ordinary income and recognized a $14,000 net capital loss. Which of the following statements is true?

A) Fantino can deduct its $14,000 net capital loss only on a carryforward basis.
B) Fantino can carry the net capital loss back to 2018 and receive a $2,940 refund of 2018 tax.
C) Fantino can deduct the capital loss against its 2020 ordinary income, producing $2,940 of tax savings.
D) Fantino can carry the net capital loss back to 2019 and receive a $1,218 refund of 2019 tax.

Question 80

Gupta Company made the following sales of capital assets this year.
What is the effect of the three sales on Gupta's taxable income?

A) $700 increase
B) $12,900 increase
C) No effect
D) None of the choices are correct