Questions and Answers of Concepts In Federal Taxation

LO6 Determine the class life, MACRS recovery period, and ADS recovery period of each of the following assets:a. Bargee. Breeding horsesb. Computerf. Barnc. Automobile g. Office furnitured. Breeding
LO6 For each asset in problem 34, determine the correct IRS percentage table, recovery period, and applicable convention.
LO6 The United Express Company begins business in August 2010 by purchasing the assets listed in the table below. Calculate the maximum MACRS depreciation on the assets. Trucks Asset Tractor units
LO6 Assume that in problem 37, the United Express Company sells a truck that cost $60,000 in 2010 for $15,000 in June 2013. Assume that none of the truck was expensed in 2010. Compute the adjusted
LO6 The Browser Company purchases a computer in August 2010 for $100,000. The company does not elect to expense the asset but wants to claim the maximum depreciation.In May 2013, the company sells
LO6 The Browser Company purchases a computer in December 2010 for $100,000.This is the only depreciable personal property acquired during the year. The company does not elect to expense the asset but
LO6 Larry purchases machinery for his business (7-year MACRS property) on April 1 at a cost of $181,000. On June 1, he spends $84,000 for equipment (5-year MACRS property).a. What is the maximum
LO6 Kris starts a new business in 2010. She purchases 7-year MACRS property costing$12,000. Her business income before any cost-recovery deductions is $8,000.a. What is the maximum cost-recovery
LO6 Dikembe purchases 1,000 breeding hogs for $176,000 in April 2010.a. What is his maximum 2010 cost-recovery deduction for the hogs?b. Dikembe’s farming operation incurs a net loss this year and
LO6 Rograin Corporation purchases turning lathes costing $298,000 and a bus costing$240,000 in June of the current year. The lathes are 7-year MACRS property, and the bus is 5-year MACRS property.a.
LO6 Baker, Inc., purchases office furniture (7-year MACRS property) costing$145,000 and a computer system (5-year MACRS property) costing $145,000 in 2010. What is Baker’s maximum cost-recovery
LO6 Chen Corporation purchases the following business assets during the current year:What is Chen’s maximum current year cost-recovery deduction on the assets purchased?(Hint: Maximize the Section
LO6 Harold purchases the following business assets on the dates indicated:a. What is Harold’s 2010 cost-recovery deduction if he does not elect to expense any of the assets under Section 179?b.
LO6 The Gladys Corporation buys office equipment costing $208,000 on May 12, 2010. In 2013, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment for $34,000
LO6 In June 2010, Copper Kettle, Inc., purchases duplicating equipment for$175,000.a. Compare cost-recovery deductions using maximum, minimum, and intermediate methods over the recovery period of the
LO6 In July 2010, Surecut Sawmills buys office furniture for $204,000.a. Compare cost-recovery deductions using maximum, minimum, and intermediate methods over the recovery period of the equipment.b.
LO7 Stan purchases machinery costing $100,000 for use in his business in 2010. The machinery is 7-year MACRS property and has an ADS life of 12 years. Prepare a depreciation schedule using the
LO6 Refer to problem 52.Guadalupe sells the building on October 26, 2010. What is her 2010 depreciation deduction if she purchased the building ona. June 30, 1992?b. June 30, 1994?
LO6 Anton purchases a building on May 4, 1993, at a cost of $270,000. The land is properly allocated $30,000 of the cost. Anton sells the building on October 18, 2010, for $270,000. What is his gain
LO6 On March 1, 2010, Babar Inc., pays $1,200,000 for a store building, moves into the building, and begins business on April 1.Babar properly allocates$1,000,000 of its cost to the building and
LO8 On June 1, 2009, Kirsten buys an automobile for $42,000. Her mileage log for the year reveals the following: 20,000 miles for business purposes; 7,000 miles for personal reasons; and 3,000 miles
LO8 On May 15, 2009, Lurlene buys a used automobile for $17,000. She drives it 9,000 miles for business and 3,000 miles for personal trips during the year. What is Lurlene’s maximum cost recovery
LO9 Isidro purchases an interest in an oil-producing property for $100,000 on Communication Skills November 3.His geologist estimates 15,000 barrels of oil are recoverable. The entity sells 1,000
LO10 On June 2, 2010, Lokar Corporation purchases a patent for $68,000 from the inventor of a new extrusion process. The patent has 12 years remaining on its legal life.Also, Lokar purchases
LO10 On April 18, 2010, Petros buys all the assets of Brigid’sMuffler Shop. Included in the purchase price of $295,000 is a payment of $20,000 to Brigid not to open a competing shop in the state
Jason is transferred to another city to work and is unable to sell his house. He rents out the house until it is sold.
Gates, Inc., purchases a painting by a 16th-century Italian artist and displays it in the corporate headquarters.
During 2010, Schottenheim Corporation buys 20 laptop computers and a mainframe computer to use in its general sales offices. Schottenheim buys 14 laptops for $42,000 on March 29, 6 laptops for
Oliver Company obtains a patent by paying $15,000 on June 21 of this year.
Articles on tax topics are often useful in understanding the income tax law. CPA firms and other organizations publish tax articles on the Internet. Using a search engine or one of the tax directory
Steem Advertising Corporation acquires 100 laptop computers in 2009 for its account executives to use. Steem pays $300,000 for the computers and bundled software. You are the newly hired CPA and you
LO2 In determining the amount of a realized gain or loss to be recognized in the current year, certain types of gains and losses are deferred, whereas others are disallowed.What is the difference
LO3 What effect does the assumption of a seller’s debt have on the amount realized from the disposition of a property?
LO3 Are brokerage commissions paid on the sale of stock a current period expense? Explain.
LO4 What is the purpose of the capital gain-and-loss netting procedure?
LO4 Why is a distinction made between long-term capital gain (loss) property and short-term capital gain (loss)property?
LO4 What is (are) the current tax advantage(s) of selling an asset at a long-term capital gain?
LO4 Evaluate the following statement: Corporations can never deduct net capital losses.
LO4 Under what conditions may a taxpayer exclude a portion of a realized capital gain?
LO5 What basic tax-planning strategy should a taxpayer with a large net capital gain for the year pursue before the end of the year?
LO4 How should taxpayers determine the basis of securities sold when their portfolios contain several purchases of the same stock at different prices?Explain.
LO4 When does a taxpayer realize a loss on a worthless security? What is the amount of realized loss? What rules govern the recognition of a loss on a worthless security?Explain.
LO6 What is Section 1231 property?
LO6 What is the tax advantage of selling a Section 1231 property at a gain?
LO6 Explain the lookback rule as it applies to the Section 1231 netting procedure.
LO7 The chapter noted that all depreciable property is subject to the depreciation recapture rules. What is the intent of the depreciation recapture rules?
LO8 How are the recapture provisions for Section 1245 and Section 1250 property different?
LO8 Are buildings always Section 1250 property? If not, explain the circumstances under which a building would not be Section 1250 property.
LO8 Some tax theorists have noted that in most cases, a sale of a depreciable asset will not be accorded capital gain treatment. What would prompt tax theorists to make this statement?
LO9 What is unrecaptured Section 1250 gain, and how is the gain taxed?
LO3 During the current year, James sells some land he purchased in 2005 as an Communication Skills investment. He had paid $4,000 in cash and borrowed $22,000 to buy the land.He had paid legal fees
LO3 Return to the facts of problem 29.What tax-planning strategy can be used to achieve more favorable tax results? Use this strategy to determine Guerda’s gain or loss on the sale.
LO4 Spencer purchases 100 shares of Reality Virtual Corporation common stock for$1,200 on July 30, 2010. He sells 75 shares of this stock for $525 on December 27, 2010. On January 12, 2011, Spencer
LO4 Mort begins investing in stocks in 2009. Listed here are his stock transactions for 2009 and 2010. Determine Mort’s gain or loss on his stock transactions for 2009 and 2010. In addition, for
LO4 For each of the following capital asset dispositions, determine whether the taxpayer has realized a gain or loss on the disposition and whether that gain or loss is short-term or long-term.a. Ari
LO4 For each of the following capital asset dispositions, determine whether the taxpayer has realized a gain or loss and whether that gain or loss is short-term or long-term:a. Larry’s aunt June
LO4 Rudy has the following capital gains and losses for the current year. What is the effect of the capital asset transactions on his taxable income? Explain, and show any calculations. Short-term
LO4 Judith Corporation has the following gains and losses from sales of capital assets during the current year. What is the effect of the capital asset transactions on Judith’s taxable income?
LO4 Tate has the following gains and losses from sales of capital assets during the current year. What is the effect of the capital asset transactions on Tate’s taxable income?Explain, and show any
LO4 Troy has the following gains and losses from sales of capital assets during the current year. What is the effect of the capital asset transactions on his taxable income?Explain, and show any
LO4 Rollie has the following capital gains and losses during the current year:Rollie is married and has a taxable income of $145,000 before considering the effect of his capital gains and losses.
LO4 Loretta has the following capital gains and losses during the current year:Loretta is single and has a taxable income of $200,000 before considering the effect of her capital gains and losses.
LO4 Samantha has the following capital gains and losses during the current year:Samantha is married and has a taxable income of $119,000 before considering the effect of her capital gains and losses.
LO4 Jie has the following capital gains and losses during the current year:Jie is married and has a taxable income of $142,000 before considering the effect of her capital gains and losses. What is
LO4 Yorgi purchases qualified small business stock in Gnu Company, Inc., on September 15, 2004, for $50,000. She sells the shares for $400,000 on December 30, 2010. The stock retains its qualified
LO4 Return to the facts of problem 48.Assume that Yorgi has a net capital loss of$80,000 from her other capital asset transactions in 2010. What is the effect of the sale of the stock on Yorgi’s
LO4 During August 2007,Madeline invests $400,000 in Qual Company, Inc., buying Communication Skills 100,000 shares of stock. Her broker tells her this will be an excellent investment because the
LO4 In 2003, RAD Partnership was organized by 3 equal partners: 2 individuals(Rachael and Adam) and Depesh Corporation. On November 3, 2002, RAD Partnership purchases 18,000 shares of qualified small
LO4 Marnie buys 500 shares of qualified small business stock in H.R. Pizza, Inc., on September 10, 2005, for $20,000. She sells the 500 shares for $120,000 on October 2, 2010. Marnie’s other
LO5 Ansel sells 400 shares of Sharpe, Inc., common stock on October 12, 2010, for$11,800 and pays $600 in commissions on the sale. He acquired the stock for $18,400 plus $800 in commissions on July
LO4 Opal’s neighbor, Jilian, persuades her to invest in Schaake Corporation, a new venture, on March 4, 2009. Opal pays $15,000 for 3,000 shares of common stock.On February 6, 2010, Schaake
LO6 Fred’s Foam Foundations (FFF) is a sole proprietorship that Fred started in 2005. Before the current year, FFF had not disposed of any property it owned. During the current year, FFF has the
LO6 Refer to the facts in problem 57.In the following year, FFF has these gains and losses:What is the effect of these transactions on Fred’s taxable income? Explain, and show the required
LO6 In 2010, Sondra Corporation recognizes $18,000 in Section 1231 gains and$10,000 in Section 1231 losses. In 2005, Sondra reported $12,000 in Section 1231 losses and no Section 1231 gains. No other
LO6 Dawn started her own rock band on January 2, 2008. She acquired all her equipment on January 2, 2008, and did not dispose of any of it before 2010. On April 15, 2010, the band’s amplifiers,
LO6 Rhinelander Corporation has the following net Section 1231 gains and losses for 2005 through 2009:a. What is the proper characterization of the net Section 1231 gains and losses for 2005–2009
LO8 The Gladys Corporation buys office equipment costing $208,000 on May 12, 2010. In 2013, new and improved models of the equipment make it obsolete, and Gladys sells the old equipment for $34,000
LO8 Avalon, Inc., buys equipment costing $150,000 in 2007, and sells it in 2010.Avalon deducts $94,000 in depreciation on the equipment before the sale. What is the character of the gain or loss on
LO8 Maria sells the automobile she uses in her job as a marketing representative for Communication Skills$3,000. The car cost $15,000 four years earlier. Maria uses the automobile 80% of the time in
LO8,9 Anton purchases a building on May 4, 1993, at a cost of $270,000. The land is properly allocated $30,000 of the cost. Anton sells the building on October 18, 2010, for $270,000. What is the
LO4,8,9 Assume that the building in problem 67 is an apartment building held for investment. In addition to the sale of the building, Anton has the following capital gains and losses during
LO4,8,9 Thuy bought a rental house in 2003 for $75,000. In 2010, she sells it for$86,000. Thuy properly deducted $22,000 in depreciation on the house before its sale.What is the amount and character
Nadia sells land for $4,000 and the buyer assumes her $13,000 mortgage. She pays$1,000 in real estate commissions on the sale.
Luke trades his baseball card collection for an automobile. The automobile is worth$11,000, and Luke assumes the $3,000 loan on the car. Luke has $3,500 invested in his baseball card collection.
Jackie receives 100 shares of stock as a birthday gift from her Uncle Horace. Horace acquired the shares 22 years ago for $4 each. The stock’s value on Jackie’s birthday is $36 per share. She
While snorkeling on spring break in Cancun, Melody finds a small bag containing several jewels lodged between some rocks about 25 yards offshore. She reports the find to the local authorities.
Carter owns 1,200 shares of Echo Corporation stock. He purchased 400 shares of the stock on December 23, 2008, for $48,000, and the other 800 shares on October 31, 2009, for $84,000. On August 14,
Martina purchases 10,000 shares of Monrovia Corporation stock for $90,000 on November 14, 2009. On June 18, 2010, Monrovia declares bankruptcy. Because the corporation’s assets are less than its
Deskjet Corporation sells equipment with an adjusted basis of $22,000 for $3,000.The corporation paid $43,000 for the equipment three years ago.
Bostian Company reports a net Section 1231 gain of $31,000 during the current year.
Jammer, Inc., sells a building for $180,000. The company paid $135,000 for the building four years earlier and had taken $12,000 in depreciation on it up to the date of the sale.
Bernadero Corporation sells a construction crane with an adjusted basis of $32,000 for $37,000. The corporation paid $50,000 for the crane.
Harry sells the automobile he has used in his job as a salesman for $2,000. It cost$15,000 four years earlier. Harry used the automobile 70% of the time in his job and 30% of the time for personal
Tawana purchased real property in 2008 at a cost of $200,000. In 2010, she is experiencing cash-flow problems and sells the property for $220,000. The adjusted basis of the property is $185,000.
In 2009, Nuts & Seeds Inc., purchased a new ‘‘high-tech’’ shelling machine from Soft-Core Corporation. Nuts and Seeds paid $1,000 in cash and gave Soft-Core a $29,000 note. The note is
As discussed in this chapter, planning for capital gains and losses is an important aspect of tax practice. Use the Internet to find information that provides year-end tax planning opportunities.
The Internal Revenue Service provides various types of help to taxpayers on its World Wide Web site (www.irs.gov/). Its publication series explains the tax treatment of many different transactions
On April 3, 2009, Arlene sells land that she holds as an investment to a construction company. The deed conveying the land to the construction company contains a covenant restricting construction on
Jeremiah owns farm land that he paid $20,000 for in 1998. In 2009, he planted a winter wheat crop on the land, incurring $35,000 of expenses. Jeremiah deducted the$20,000 of planting expenses that he
Barney is a farmer who has the following transactions during 2010: Communication Skillsa. A barn that cost $36,000 in 2002 with an adjusted basis of $16,000 is destroyed by a tornado. Barney’s

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