Exam (elaborations) Acct 505 Federal Tax Final Exam (ACCT505)

Exam (elaborations) Acct 505 Federal Tax Final Exam (ACCT505) 1. Terry Trumbull purchased a tract of land. In order to have city water, he had to pay the water company $5,000 to extend the water line to his property. The $5,000 cost is an addition to the basis of the land. TRUE 2. When property that is subject to an existing debt is purchased, the basis of the property is the amount of cash paid initially plus the unpaid debt to which the property is subject. TRUE 3. The basis for nonbusiness property changed to business use is the greater of the adjusted basis of the property or its fair market value on the date it is converted to business use. FALSE 4. During 2011, Carl Crofts received a gift of property having a fair market value of $25,000 at the time of the gift. The donor’s adjusted basis in the property at the time of the gift was $21,000. The donor paid a gift tax of $700 on the property. Carl’s basis in the property is $21,700. FALSE 5. In 2011, Tom Turner received a gift of property that had a fair market value of $10,000 at the time of the gift. The donor’s adjusted basis in the property at the time of the gift was $12,000. Tom’s basis for computing depreciation is $12,000. TRUE MULTIPLE CHOICE QUESTIONS—CHAPTER 10 36. Leonard Lambert’s commercial building, which had an adjusted basis of $500,000, was partially destroyed by fire. The fair market value was $800,000 just before the fi re and $600,000 immediately after. Leonard received $150,000 insurance proceeds and deducted a $50,000 casualty loss. What is Leonard’s basis in the building before any repairs are made? a. $300,000 b. $350,000 c. $450,000 d. $500,000 e. $600,000 37. Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2011, for $4,000. On March 29, 2011, Lem purchases 50 shares of Redwood Corporation common stock for $2,500. Lem’s recognized loss on the sale is: a. $1,000 b. $500 c. $1,500 d. $0 Acct 505 Federal Tax Final Exam 38. In 2011, Allen Anders sold an asset which cost $70,000. Allen incorrectly claimed $40,000 depreciation over a five-year period. He should have claimed $50,000 depreciation. What was the adjusted basis when sold? a. $0 b. $20,000 c. $30,000 d. $50,000 e. $70,000 39. Which of the following items is not a reduction to the basis of an asset? a. Depreciation b. Assessments for maintenance of sidewalks c. Cash rebate from manufacturer d. Casualty losses 40. In 2011, Bob Brown’s aunt Barbara gave him a house. At the time of the gift, the house had a fair market value of $193,000, the taxable gift was $180,000, and his aunt’s adjusted basis was $73,000. His aunt paid a gift tax of $30,000 on the house. What is Bob’s basis in the house for purposes of determining gain? a. $73,000 b. $93,000 c. $180,000 d. $193,000 41. In May 2011, Automatic, Inc. sold land with a basis to Automatic of $100,000, to Jack Jones, its 60% shareholder, for $80,000. In July, Jack sold the land to an unrelated party for $110,000. What is the amount of Jack’s recognized gain? a. $0 b. $10,000 c. $20,000 d. $30,000 CHAPTER 10 80. On April 18, 2011, Jim Jenkins sold 300 shares of Redwood Corporation common stock for $8,400. Jim acquired the stock in 2007 at a cost of $10,000. On May 9, 2011, he repurchased 150 shares of Redwood Corporation common stock for $3,600 and held them until August 25, 2011, when he sold them for $6,000. How should Jim report the above transactions for 2011? Jim’s realized loss is $1,600 ($8,400 - $10,000); but only one-half of the loss is allowed which is $800. There was a wash sale for 150 shares because identical shares were purchased within 30 days of the sale. The basis of the 150 new shares is $4,400 ($3,600 + $800 disallowed loss). Jim’s gain on the August 25th sale is $1,600 ($6,000 - $4,000) and it is a long-term gain since the holding period of the old stock is included. 81. Norman Nelson owns 1,000 shares of Newton Corp. common stock which he purchased for $60,000 and later receives a nontaxable preferred stock dividend of 300 shares of Newton preferred stock when the FMV of the preferred was $100 per share and the FMV of the common was $90 per share. What is the basis of the common and preferred shares after the dividend? The preferred basis is: $30,000 x $60,000 $30,000 + $90,000 = $15,000 The common basis is: $90,000 x $60,000 $30,000 + $90,000 = $45,000 82. Ronald Rankin owns 1,000 shares of Royal Corp. common stock with a basis of $30,000. He receives a 10 percent taxable stock dividend when the FMV of each share of stock is $15. How much income does he have? What is the basis in the new shares? When does the holding period of the new shares begin? What is the basis in the old stock? Ronald has $1,500 in income (100 shares x $15). The basis in the new shares is $15 per share. The holding period begins on the day following the date of receipt of the stock dividend. The basis in the old stock remains the same or $30,000. CHAPTER 11 41. Ed Edmonds exchanged a business truck with an adjusted basis of $320,000 for another business truck with a fair market value of $20,000, a boat with a fair market value of $6,000, and $2,000 cash. What is the basis of the new truck? a. $18,000 b. $20,000 c. $24,000 d. $30,000 e. $32,000 42. A fire destroyed Carl Cramer’s business automobile. Carl originally paid $24,000 for the automobile and up to the time of the fi re had been allowed $15,000 in depreciation. Within three months the insurance company replaced the old automobile with a new one which was worth $21,000. What is the basis of the new automobile for purposes of computing depreciation? a. $3,000 b. $9,000 c. $15,000 d. $21,000 e. $24,000 43. Which of the following statements are correct? (1.) A sale is generally a transfer of property for money only or for a promise to pay money. (2.) An exchange is a transfer of property in return for other property or services. (3.) Recognized gain is always the excess of the amount realized over the adjusted basis of the property. (4.) Realized loss is always the excess of the adjusted basis of the property over the amount realized. (5.) The adjusted basis of the property is always the original cost adjusted for such items as casualty losses, improvements, and depreciation. a. 1, 2, and 3 b. 1, 2, and 4 c. 1, 3, and 4 d. 1, 4, and 5 e. 2, 3, and 4 44. Which of the following is not an example of a nontaxable like-kind exchange? a. Improved real estate for unimproved real estate. b. A printer for a computer. c. Common stock of one company exchanged for common stock of another. d. The trade of an apartment building for a store building. e. Real estate for a ranch. 45. Tom Tanner traded in a printing press with an adjusted basis of $20,000 for a smaller press valued at $12,000. In addition to the smaller press, Tom received $3,000 in cash and was relieved of the existing liability on the old press of $5,000. What is Tom’s recognized gain? a. $0 b. $3,000 c. $4,800 d. $5,000 e. $8,000 46. Greg Grotto exchanged an eight-unit apartment building for a four-unit apartment building. His adjusted basis for the eight-unit building was $320,000 and the fair market value was $400,000. The fair market value of the four-unit building, which was subject to a $40,000 mortgage, was $440,000 on the date of the transaction. What is Greg’s taxable gain? a. $120,000 b. $80,000 c. $48,000 d. $40,000 e. $0 TRUE­FALSE QUESTIONS—CHAPTER 11 1. Alfred Ahern sold a truck with an adjusted basis of $6,000 for $1,500 to a salvage yard. He purchased a replacement truck two months later for $24,000. Alfred’s basis in the new truck is $28,500. FALSE 2. Ed Evans traded in a large lathe used in his business with an adjusted basis of $7,000 for a smaller lathe valued at $8,000. In addition to the smaller lathe, Ed received $2,000 cash. Ed’s recognized gain is $3,000. FALSE 3. Leonard Longstreet owns a rental building with an adjusted basis of $300,000 and a fair market value of $280,000. In July 2011, the state condemned the property for a highway project and paid him $280,000, which he immediately reinvested in a similar rental property. Leonard may recognize a loss. TRUE 4. Melvin Monroe reads in the newspaper that the state highway department has decided to take his property for public use. He verifies the news by phoning an official of the highway department who is involved in the project acquiring this property. This is a threat of condemnation. TRUE 5. Ray Rambler’s office building with a basis of $75,000 was condemned by the county which paid him $120,000 as compensation. He purchased a new office one year later for $105,000. Ray is entitled to postpone all of the $45,000 realized gain. FALSE CHAPTER 12 1. For purposes of determining the holding period for property, the holding period begins on the day the property is acquired and ends on the day before the sale of the property. FALSE 2. On receipt of a gift of property purchased by the donor in 2006 the basis is determined by the donor’s basis. The holding period begins on the day the gift is received. FALSE 3. Fully depreciated property used in a trade or business is a capital asset. FALSE 4. Some examples of capital assets are stocks and bonds held in a personal account, a personal residence, and household furnishings.