ADVANCED CONCEPTS IN FEDERAL INCOME TAXATION - BUS 586 - EXAM 3

Chapters 8, 9, and

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

T

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. T/F

F

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. T/F

T

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. T/F

F

N&B Incorporated 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.

T

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. T/F

F

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. T/F

T

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. T/F

F

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. T/F

F

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

F

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

T

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

F

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. T/F

F

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. T/F

F

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

F

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

T

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.

T

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

F

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

T

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

T

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

T

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

F

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

F

Because land is nondepreciable, it is always a capital asset. T/F

F

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

T

Verno Incorporated purchased business equipment in March and sold it in November. Verno's gain or loss recognized on the sale is ordinary. T/F

T

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

T

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. T/F

F

JG Incorporated 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. T/F

T

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. T/F

T

Tullia Incorporated 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. T/F

F

Milton Incorporated recognized a $1,300 net Section 1231 loss in 2022. If Milton recognizes a $5,000 net Section 1231 gain in 2023, it must characterize $1,300 as ordinary income. T/F

T

If a taxpayer sells business realty that was depreciated using the straight-line method, the entire gain is characterized as Section 1231 gain. T/F

F

Milton Incorporated 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 will be treated as ordinary as a result of the full recapture rule. T/F

T

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. T/F

F

Mr. Jason realized a gain on sale of a residential apartment complex that he had placed in service in 1996. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain. T/F

T

CBM Incorporated realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1996. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain. T/F

F

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

F

Ms. Cregg has a $43,790 basis in 2,460 shares of ABD Incorporated 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. T/F

F

Abada Incorporated has a $925,000 basis in 100% of the stock of AbWest Incorporated, 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. T/F

T

Netelli Incorporated 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. T/F

T

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. T/F

T

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. T/F

F

A loss from an involuntary conversion of depreciable business property is characterized as a Section 1231 loss. T/F

F

Lenoci Incorporated 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 these choices are true.

B

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 these choices are correct

A

Noble Incorporated 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

C

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 these statements are false

C

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 these choices are correct

A

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

C

Philp Incorporated sold equipment with a $132,900 adjusted tax basis for $200,000. The tpurchaser 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 these choices are correct

D

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

A

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 principal payment on the note. Brenda's recognized gain this year is:

A) $125,000

B) $60,000

C) $37,500

D) $22,500

C

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

D

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 these choices are correct

D

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 these choices are correct

B

Dolzer Incorporated 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 these choices are correct

C

In 2022, TPC Incorporated 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 2023, 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 2023.

A) $26,216

B) $40,976

C) $67,500

D) None of these choices are correct

A

In 2022, TPC Incorporated 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 2023, TPC received a $67,800 payment on the note ($40,000 principal + $27,800 interest). In 2023, 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 these choices are correct

D

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 notes.

D

Three years ago, ChaGo Incorporated 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

B

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 these choices are true

D

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 these choices are correct

A

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 these choices are correct

B

Warsham Incorporated 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.

A

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 these choices are correct

B

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

C

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 these choices are correct

D

"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 these choices are false

D

Gupta Company made the following sales of capital assets this year.

Tax Basis Sale Price

Asset 1 $ 60,000 $ 47,800

Asset 2 112,500 116,000

Asset 3 13,000 22,400

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 these choices are correct

A

R&T Incorporated made the following sales of capital assets this year.

Tax Basis Sale Price

Asset 1 $ 60,000 $ 68,100

Asset 2 250,000 263,500

Asset 3 50,000 22,400

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 these choices are correct

C

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

B

Fantino Incorporated was incorporated in 2021 and adopted a calendar year for tax purposes. Here is a schedule of Fantino's taxable income for 2021 and 2022.

2021 2022

Ordinary income $ 99,800 $ 168,100

Net capital gain 0 5,800

Taxable income $ 99,800 $ 173,900

In 2023, 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 2021 and receive a $2,940 refund of 2021 tax

C) Fantino can deduct the capital loss against its 2022 ordinary income, producing

$2,940 of tax savings.

D) Fantino can carry the net capital loss back to 2022 and receive a $1,218 refund of 2022 tax.

D

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

C

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 these choices are true.

A

Norbett Incorporated 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 differenc

C

Acme Incorporated 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 these choices are correct

C

In 2023, 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):

2022 ($28,000)

2021 $16,000

2020 ($30,000)

Mary's 2023 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

B

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 these statements are true

A

Hugo Incorporated, 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 these choices are correct

A

In its current tax year, PRS Corporation generated $300,000 ordinary income from the performance of consulting services for its clients. PRS sold two assets, recognizing a $20,000 gain on the first sale and a $31,000 loss on the second sale. Which of the following statements is false?

A) If the gain and loss were capital gain and loss, PRS's taxable income was $300,000.

B) If the gain was capital gain and the loss was ordinary, PRS's taxable income was $269,000.

C) If the gain and loss were ordinary, PRS's taxable income was $289,000.

D) If the gain was ordinary and the loss was a capital loss, PRS's taxable income was $320,000.

B

Benlow Company, a calendar year taxpayer, sold two operating assets this year (each held for over a year). The first sale generated a $19,200 Section 1231 loss, and the second sale generated a $33,600 Section 1231 gain. As a result of these sales, Benlow should recognize:

A) $19,200 ordinary loss and $33,600 gain treated as capital gain.

B) $14,400 gain treated as capital gain.

C) $14,400 ordinary income.

D) None of these choices are correct.

B

Which of the following is a Section 1231 asset?

A) Business inventory

B) Business accounts receivable

C) Supplies used in a business

D) None of these choices are Section 1231 assets

D

Which of the following assets is not a Section 1231 asset?

A) Business equipment held for four years

B) Office furniture held for eight months

C) Land used in a business and held for 16 years

D) All of these choices are Section 1231 assets

B

Proctor Incorporated was incorporated in 2017 and adopted a calendar year. Here is a schedule of Proctor's net Section 1231 gains and (losses) reported on its tax returns through 2022.

2017 2018 2019 2020 2021 2022

$-0- $(3,800) $9,040 $(15,900) $-0- $-0-

In 2023, Proctor recognized a $25,000 gain on the sale of business land (held for over one year). How is this gain characterized on Proctor's tax return?

A) $25,000 Section 1231 gain.

B) $19,700 ordinary gain and $5,300 Section 1231 gain.

C) $15,900 ordinary gain and $9,100 Section 1231 gain.

D) $25,000 ordinary gain

C

Delour Incorporated was incorporated in 2017 and adopted a calendar year. Here is a schedule of Delour's net Section 1231 gains and (losses) reported on its tax returns through 2022.

2017 2018 2019 2020 2021 2022

$(4,900) $-0- $-0- $-0- $(12,000) $-0-

In 2023, Delour recognized a $50,000 gain on the sale of business land (held for over one year). How is this gain characterized on Delour's tax return?

A) $50,000 Section 1231 gain.

B) $12,000 ordinary gain and $38,000 Section 1231 gain.

C) $16,900 ordinary gain and $33,100 Section 1231 gain.

D) $50,000 ordinary gain

B

Irby Incorporated was incorporated in 2017 and adopted a calendar year. Here is a schedule of Irby's net Section 1231 gains and (losses) reported on its tax returns through 2022.

2017 2018 2019 2020 2021 2022

$(4,900) $(3,000) $(7,890) $45,600 $-0- $1,300

In 2023, Irby recognized a $14,750 gain on the sale of business land (held for over one year).

How is this gain characterized on Irby's tax return?

A) $14,750 Section 1231 gain.

B) $10,890 ordinary gain and $9,415 Section 1231 gain.

C) $14,750 ordinary gain.

D) None of these choices are correct

A

This year, Adula Company sold equipment purchased in 2017 at a cost of $117,200. Accumulated depreciation through date of sale was $33,000. Which of the following statements isfalse?

A) If the sale price was $90,000, Adula recognized $5,800 ordinary gain.

B) If the sale price was $120,000 Adula recognized $33,000 ordinary gain and $2,800 Section 1231 gain.

C) If the sale price was $80,000, Adula recognized $4,200 ordinary loss.

D) If the sale price was $80,000, Adula recognized $4,200 Section 1231 los

C

This year, Izard Company sold equipment purchased several years ago at a cost of $48,500. Accumulated depreciation through date of sale was $18,900. Which of the following statements is false?

A) If the sale price was $25,000, Izard recognized $4,600 Section 1231 loss.

B) If the sale price was $42,500, Izard recognized $12,900 Section 1231 gain.

C) If the sale price was $50,000, Izard recognized $18,900 ordinary gain and $1,500 Section 1231 gain.

D) None of these choices are false

B

Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of sale was $18,000. Determine the amount and character of Nipher's gain recognized.

A) $24,500 ordinary gain

B) $24,500 Section 1231 gain

C) $18,000 ordinary gain and $6,500 capital gain

D) $18,000 ordinary gain and $6,500 Section 1231 gain

D

Mr. and Mrs. Churchill operate a small business. This year, the Churchills sold a commercial office building used in their business for $1.5 million. They purchased the building in 2000 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. The Churchills should characterize the $638,000 gain recognized on sale as:

A) Ordinary gain

B) Capital gain

C) $538,000 ordinary gain and $100,000 Section 1231 gain

D) Section 1231 gain

D

Kuong Incorporated sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 2002 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain recognized on sale as:

A) $127,600 ordinary gain and $510,400 Section 1231 gain

B) $107,600 ordinary gain and $530,400 Section 1231 gain

C) $538,000 ordinary gain and $100,000 Section 1231 gain

D) Section 1231 gain

B

Mr. and Mrs. Marley operate a small business. This year, the Marleys sold a commercial office building used in their business for $1.1 million. They purchased the building in 2007 for a cost of $900,000 and have deducted $300,000 MACRS depreciation through date of sale. The Marleys should characterize the $500,000 gain recognized on sale as:

A) Capital gain

B) Section 1231 gain

C) $300,000 ordinary gain and $200,000 Section 1231 gain

D) None of these choices are correct

B

B&I Incorporated sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 2011 for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale. B&I should characterize the $329,200 gain recognized on sale as:

A) $167,200 ordinary gain and $162,000 Section 1231 gain

B) Section 1231 gain

C) Capital gain

D) None of these choices are correct

D

Which of the following statements about Section 1250 recapture rule is false?

A) The rule applies to sales of depreciable realty by noncorporate taxpayers but not to sales by corporate taxpayers.

B) The rule applies only to sales of depreciable realty placed in service before 1987.

C) The rule applies only to sales of depreciable realty for which an accelerated tax depreciation method was used.

D) The rule has no effect on the characterization of gain recognized on sale of any realty with a zero tax basis.

A

Firm F purchased a commercial office building for business use in 2010 for $965,000. This year, the firm sold the building for $1 million. Accumulated MACRS depreciation through date of sale was $275,000. Which of the following statements istrue?

A) If Firm F is a corporation, it recognizes $55,000 ordinary income and $255,000

Section 1231 gain.

B) If Firm F is a corporation, it recognizes $62,000 ordinary income and $248,000

Section 1231 gain.

C) If Firm F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain.

D) Both if Firm F is a corporation, it recognizes $55,000 ordinary income and $255,000 Section 1231 gain and if Firm F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain are true

D

Zeron Incorporated generated $1,349,600 ordinary income from operations this year. It also recognized $29,200 recaptured ordinary income, $21,000 net Section 1231 gain, and $14,900 net capital loss on the sale of assets. Compute Zeron's taxable income.

A) $1,349,000

B) $1,378,800

C) $1,384,900

D) $1,399,800

C

Lettuca Incorporated generated a $77,050 ordinary loss from operations this year. It also recognized $5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss on the sale of assets. Compute Lettuca's net operating loss.

A) ($77,050)

B) ($126,130)

C) ($132,050)

D) ($133,970)

B

Delta Incorporated generated $668,200 ordinary income from operations this year. It also recognized $3,910 recaptured ordinary income, $5,000 net Section 1231 gain, and $14,600 net capital loss on the sale of assets. Compute Delta's taxable income.

A) $672,110

B) $677,110

C) $668,200

D) $697,700

A

Bastrop Incorporated generated a $169,000 ordinary loss from operations this year. It also recognized $35,920 recaptured ordinary income, $18,000 net Section 1231 loss, and $125,750 net capital gain on the sale of assets. Compute Bastrop's net operating loss.

A) ($169,000)

B) ($133,080)

C) ($151,080)

D) ($25,330)

D