Tax Exam 2 Practice

Moses Inc. purchased the following assets this year:

office building: $410,000 including land $60,000

office furniture: $8,200 + 492 sales tax and a 150 delivery charge

Moses’ depreciable basis in the office building is $350,000

XYZ Corp. was incorporated 3 years ago. in its 1st year, XYZ capitalized $35,000 organizational and start-up costs for tax purposes. However, it expensed these costs for financial statement purposes. which of the following is true?

as a result of the accounting difference 3 years ago, XYZ has a $2,000 favorable book/tax difference in the current year

($35,000 - 5,000 = 30,000 / 15 years = 2,000 a yr)

Which of the following about MACRS is false?

all personalty assets are depreciated using the mid-month conversion

Colby Company, a calendar year taxpayer, made only 1 asset purchase this year: machinery costing: $1,932,500. the machinery is 7-year recovery property, and Colby placed it into service on Oct. 12. how many months of MACRS depreciation on the machinery is Colby allowed this year?

1 and ½ months

Gerry Inc., a calendar year taxpayer, purchased $1,496,000 of equipment on March 23. This is Gerry’s only purchase of depreciable property for the year. if the equipment has a 7 yr recovery period, compute Gerry’s 1st and 2nd yr MACRS depreciation (14.29% and 24.49%)

1st Yr: $213,778 2nd Yr: $366,370

JebSim Inc. was organized on June 1st and began business on Aug. 10. JebSim elected a calendar year for tax purposes. the corp. incurred $25,160 of legal and other professional fees attributed to its formation. how much of these costs can JebSim deduct on it’s first tax return?

$5,560

25,160 - 5,000 = 20,160 / 180 months [15 yrs] = 112.

Aug - Dec = 5 x 112 = 560

5,000 immediate deduction + 560

Delite Inc manufactures small appliances. This yr, Delite capitalized $3,679,000 indirect costs to inventory for book purposes and $3,865,000 indirect costs to inventory for tax purposes. The consequences of the different accounting methods is a $186,000

Temporary unfavorable book/tax difference

4 yrs ago, Betty Inc paid $5 million-lump-sum price to purchase a business. Betty allocated $600,000 of the price to goodwill. Betty didn’t record an impairment expense this year. which of the following is true?

The yr, Betty has a $40,000 favorable temporary difference bc of the accounting treatment of goodwill.

B&P Inc, calendar yr corp., purchased only one operating asset during 2019: $599,900 of used computer equipment (5yr recovery property) placed in service on March 18. assuming that B&P uses Section 179, compute b&Ps adjusted tax basis in the property at the end of 2019

0

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2019.

Kemp made one asset purchase: used manufacturing equipment costing $1,543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made necessary elections with respect to the equipment to maximize its deduction, compute Kemp's 2019 cost recovery deduction.

$1,543,600

Dolzer Inc. sold a business asset with an adjusted book and tax basis of $474,000 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 Dozer's book and tax gain in the year of sale.

Book gain $301,000; tax gain $38,839

These are not assets:

Supplies used in a business

Business accouhts receivable

Creative assets held by the creator

Asset 1	$ 60,000	$ 68,100
Asset 2	250,000	263,500
Asset 3	50,000	22,400

R&T Inc. made the following sales of capital assets this year. what is the effect of the 3 sales on the taxable income this year

−$6,000​ ($8,100+$13,500−$27,600)

Delta Inc. 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.

$672,110

Only $5,000 of the net capital loss is deductible against the net Section 1231 gain

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?

The sale results in a $53,487 unfavorable temporary book/tax difference.

The sale results in a $53,487 unfavorable temporary book/tax difference. Which of the following assets is not a Section 1231 asset?

Office furniture held for eight months

(The office furniture is not a Section 1231 asset because it was held for less than 12 months)

William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the sale of marketable securities and a $15,000 Section 1231 loss on the sale of business equipment. What is the net effect of these gains and losses on William's taxable income?

$3,300 net capital gain; $12,000 deductible net Section 1231 loss

Warsham Inc. sold land with a $300,000 basis to Sara Phillips for $117,000 cash. Sara owns 68% of Warsham's outstanding stock. Which of the following statements is true?

Warsham cannot recognize its $183,000 realized loss on sale on its current year tax return.

Nancy owned business equipment with a $16,950 adjusted basis and a $7,500 FMV that was destroyed by a tornado. The equipment was uninsured. As a result of this casualty, Nancy:

Recognizes a $7,500 capital loss

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?

Schatz must pay tax at the regular corporate rate on $8,156,900 taxable income.

Teco Inc. and MW Company exchanged like-kind assets. Teco's asset had an $80,000 MV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange.

Teco's realized gain is $26,100 and recognized gain is -0-

MW's realized gain is $59,400 and recognized gain is $7,500.
Teco's basis in its newly acquired asset is $61,400.

Which of the following statement is true?

A taxpayer's basis in property received in a taxable exchange is the FMV of the property.

Which of the following statements about like-kind exchanges is true?

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

Ms. Ellis sold 889 shares of publicly traded Omer stock (tax basis $161,400) for $125,000 cash on July 2. She paid $136,200 cash to purchase 900 Omer shares on August 8. Compute Ms. Ellis' loss recognized on the July 2 sale and determine her tax basis in the 1,000 shares.

$36,400 loss recognized; $136,200 basis

Some statements about the transfer of debt in a like-kind exchange:

The party relieved of debt treats the relief as boot received.

The party assuming debt treats the assumption as boot paid.

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 .$18,700 recognized gain; $60,000 basis in the signage

$18,700 recognized gain; $60 basis of signage

Which of the following statements about the inclusion of boot in a nontaxable exchange is false?

The receipt of boot does not trigger recognition of realized loss to the recipient.

Luce Company exchanged investment land for a building to be used in its business. Luce's gain on the exchange was nontaxable (because the assets were like-kind) but was included in financial statement income.

The book basis in the building received is the building's cost (FMV).

Tax basis in the building received equals its tax basis in the land surrendered.

Future depreciation deductions with respect to its tax basis in the building will be different from future depreciation expense for financial statement purposes.

Hank exchanged an old asset with a $12,000 adjusted basis for a new asset with a $32,000 FMV plus $2,000 cash. Compute Hank's realized and recognized gain if the new and old assets are like-kind properties.

$22,000 realized gain; $2,000 recognized gain

Which of the following is a true statement regarding nontaxable exchanges?

If only qualified properties are exchanged hands then no gain or loss should be recognized.