Answer all questions. Also, please show all calculations and reasoning so that I may trace the answers.

Name: Answer Key ACC 385/685 SPRING 2012 EXAM #2 SECTION M001 VERSION A This Exam consists of 9 questions on 11 pages. You are responsible to ensure that all pages are attached to your exam. Write your answers to the multiple choice questions on the "Multiple Choice Answer Page" (Page 2) Only the "Multiple Choice Answer Page" will be graded. Answers to multiple choice questions written within the exam book will not be graded. Page 1 A Name: Exam #1 Page 2 Multiple Choice questions are worth 6 points each for a total of 36 points. Multiple Choice Answer Page 1.) 4.) 2.) 5.) 3.) 6.) A Name: EXAM #2 1.) Page 3 Bob Buttons, a cash basis calendar year taxpayer, owns and operates an apartment building. During 2011, he received the following payments: Lease cancellation fee from an old tenant $ 500 Rent from a new tenant covering the 6 month period from December 1, 2011, until June 1, 2012 $ 6,000 Security deposit on June 30, 2011, to be returned to the tenant if no damage has occurred $ 700 $ 1,000 Bob also gave the tenant in apartment #2 a discount on their rent in the amount of for improvements the tenant did to the apartment. What is the amount Bob can exclude from his gross rental income in 2011? A.) B.) C.) D.) E.) 2.) $ $ $ $ 700 5,700 2,500 7,500 $0 Don is the treasurer of ABC company. Don is 40 years old. ABC company provides the officers of the company to receive $ 200,000 in group term-life insurance. The cost of the policy for Don is $ 800 per year. How much of the payment must Don include in his gross income? A.) B.) C.) D.) E.) $ $ $ $ $0 15.00 180.00 240.00 800.00 Premium from table $ 0.10 $ 1.20 Annual Amount $ 150,000 Extra Coverage The Company Discriminates all Taxable A Name: EXAM #2 3.) Page 4 Roger Burrows, age 19, is a full-time student at Marshall College and a candidate for a bachelor's degree. During 2011, he received the following payments: State scholarship for tuition Loan from college financial aid office Cash support from parents Cash dividends on qualified investments Cash prize award in contest $ $ $ $ $ $ 3,600 1,500 3,000 700 500 9,300 What amount is included in Burrows' adjusted gross income for 2011? A.) B.) C.) D.) E.) 4.) $ $ $ $ $ 1,200 1,500 8,100 4,800 9,300 $ 15,000 loan from his local credit union. He lost his job John, a cash basis taxpayer, had a and was unable to make the payments on this loan. The credit union determined that the legal $ 6,000 fees to collect might be higher than the amount John owed so they canceled the remaining amount due on the loan. John did not file bankruptcy nor was he insolvent. How much must John include in his income as a result of this? A.) B.) C.) D.) E.) $0 $ 15,000 $ 6,000 $ 9,000 $ 21,000 A Name: EXAM #2 5.) Page 5 On June 3, 2011, Leon Wren, an electrician, was injured in an accident during the course of his employment. As a result of injuries sustained, he received the following payments during 2011: Damages for personal injuries $ 8,000 Excluded Worker's compensation $ 3,000 Excluded Reimbursement from his employer's accident and health plan for medical expenses paid by Wren $ 1,200 Excluded Proceeds from state lottery $ 5,000 Included The amount to be included in Wren's 2011 gross income should be: A.) B.) C.) D.) E.) 6.) $ $ $ $ $0 5,000 3,000 8,000 9,200 Beth, a single taxpayer, redeems Series EE savings bonds in 2011. She received $ 12,000 in proceeds. She originally bought the bonds for $ 8,000 . Beth used the funds she received from the bonds to pay for her son's education. Her son had qualified education expenses in 2011 of $ 24,000 . Beth's adjusted gross income is $ 77,000 . Based on this information, what amount of interest income can Beth exclude in 2011? A.) B.) C.) D.) E.) $ $ $ $ $0.00 3,146.67 2,426.67 1,573.33 4,000.00 Floor $ 71,100 Above the Floor $ 5,900 Range $ 15,000 Ratio 0.3933333 Inclusion $ 1,573.33 A Name: EXAM #2 7.) Page 6 On January 1, 1985, Joyce Jillian purchased an office building for $ 1,200,000 . She allocated 12% of her purchase price to the land and the remainder to the building. She took ACRS statutory depreciation, over its useful life of 30 years. As a result, she took $ 1,056,000 in depreciation expense prior to selling the building on February 1, 2011 for $ 1,380,000 . (32 Points) Fully analyze Joyce's transaction for the sale of her office building. Assume the same allocation between building and land for the selling price. (4 Total Points Analysis) Building is Non-residential (1 Point) Property is purchased between 1981 & 1986 (1 Point) Taxpayer elected to use ACRS Depreciation Method (1 Point) Therefore, the property is Section 1245 Property (1 Point) Building Amount Realized $ 1,380,000 * 88% $ 1,214,400 Adjusted Basis $ 1,200,000 * 88% Depreciation Taken (1/2 Point) (4 Total Points Calculation) $ 1,056,000 $ 1,056,000 $ - (1/2 Point) Realized Gain $ 1,214,400 (1/2 Point) Recognized Gain $ 1,214,400 * Recognized Gain Section 1245 $ 1,214,400 $ 1,056,000 * (1 Point) Section 1231 $ (1/2 Point) (1 Point) 158,400 ** * Since this property is Section 1245 property, all depreciation taken must be recaptured at ordinary rates. (2 Points) ** The capital appreciation is Section 1231 gain, and will be taxed at long-term (2 Points) capital rates (15%) (4 Total Points Analysis) A Name: EXAM #2 7.) Page 7 Continued Land Amount Realized $ 1,380,000 * 12% $ Adjusted Basis Depreciation Taken 165,600 (4 Total Points Land) $ 1,200,000 * 12% $ $ (1/2 Point) 144,000 $ 144,000 (1/2 Point) Realized Gain $ 21,600 (1/2 Point) Recognized Gain $ 21,600 *** (1/2 Point) *** The land is Section 1231 gain, and will be taxed at long-term capital rates (15%) (2 Points) Would your answer change if Joyce had purchased an apartment building instead of an office building? Why or why not? You must fully analyze your answer. (16 Total Points) Recognized Gain does not change, only the treatment and tax rates of the gain will change. The building is now residential, and would no longer be treated as section 1245 property. It would be section 1250 property. (2 Points) Section 1250 says that: (4 Total Points Analysis) SL depreciation taken is recaptured at 25%. (1/2 Point) Excess depreciation is taxed at ordinary rates. (1 Point) Capital Appreciation is Section 1231 and taxed at long-term capital rates. (1/2 Point) A Name: EXAM #2 7.) Page 8 Continued Must Calculate SL Depreciation (2 Total Points) (1/2 Point) Adjusted Basis Useful Life $ 1,056,000 30 (1 Point) = $ 35,200.00 Per Year (1/2 Point) Time in Service 1985 1986 - 2010 2011 (2 Total Points) 12 Months Each Year Total Months In Service 313 12 Months Months Gain Classification SL Depreciation Years In service SL Depreciation = (1/2 Point) (1/2 Point) (1/2 Point) (1/2 Point) (8 Total Points) $ 35,200.00 26.08333333 (1/2 Point) $ * Section 1250, Recaptured at 25% 918,133 (1/2 Point) $ 1,056,000 $ 918,133 $ 137,867 (1 Point) ** Excess Depr recaptured at ordinary. (1 Point) Capital Appreciation Selling Price Original Basis Excess Depreciation Months Months Months Months 26.083 Years (1 Point) Excess Depreciation Depreciation Taken SL Depreciation Excess Depreciation 11.5 300 1.5 313 $ 1,214,400 $ 1,056,000 $ 158,400 (1 Point) *** Section 1231, l/t capital (15%) (1 Point) The treatment of the land does not change. (1 Point) (1 Point) A Name: EXAM #2 8.) Page 9 Paul and Laura Smith are a married retired couple. Laura bought a joint and survivor annuity for $ 25,000 through her former employer that provides payments of $500 per month. Upon the death of Laura, Paul will receive $350 per month. Paul is 74 and Laura is 66 . Paul and Laura received their first payment on June 1, 2011. Based on this information, (14 Points) how much income must Paul and Laura claim on their 2011 tax return? Calculate the Expected Return Life Expectancy - BothTP's Table 3 Annual Payments $350 * 12 (8 Total Points) 21.4 (2 Points) * $4,200 $89,880 Extra Annual Payment Life Expectancy - Laura Table 1 Annual Payments $150 * 12 19.2 (2 Points) * $1,800 $34,560 $124,440 Total Expected Return OR Life Expectancy - Laura Table 1 $500 Annual Payments * 12 19.2 21.4 19.2 2.2 * $4,200 $9,240 $124,440 (1 Point) (2 Points) (2 Total Points) (1 Point) Investment Expected Return (1 Point) (2 Points) Total Expected Return Compute the Exclusion Ratio (2 Points) (2 Points) $115,200 $350 * 12 (1 Point) * $6,000 Extra Annual Payment Life Expectancy - Both Table 1 Annual Payments (1 Point) = $ 25,000 $124,440 Compute Annual Exclusion (4 Total Points) Annual Payments Received $ 500 (1 Point) * 7 $3,500 0.2009 * Amount Included (1 Point) = 0.2009 $703.15 (1 Point) A $3,500 - $703.15 = $2,796.85 (2 Points) A Name: EXAM #2 9.) Page 10 Linda Larenson is a single taxpayer. During 2011 Linda had a casualty loss on business property she owned. The loss resulted in a decrease in fair market value of the property in the amount of $ 5,000 . During 2011, Linda also sold two machines she used in her business. The first machine was purchased 3 years ago for $ 20,000 . Total depreciation taken on the first $ 12,850 . The machine was sold for $ 5,000 . The second machine was machine was $ 37,000 . Total depreciation taken on the second machine was purchased 5 years ago for $ 6,000 . The machine was sold for $ 40,000 . Linda had the no other Section 1231 transactions for the previous 5 years. Prior to these transactions, Linda had an adjusted gross (18 Points) of $ 55,000 . Fully analyze all of Linda's 2011 transactions. Business Casualty (4 Total Points) Because it is a business casualty, there is no $100 deduction and is not subject to and additional deduction of 10% of her AGI. (2 Points) Based on the first netting process, the business casualty is fully deductible and and will be treated as an ordinary deduction. (2 Points) Second Netting First Machine Amount Realized Adjusted Basis Cost $ 20,000 $ 12,850 Depr Second Machine Amount Realized Adjusted Basis Cost $ 37,000 Depr $ 6,000 (7 Points Calculation) $ 5,000 (1/2 Point) $ 7,150 (1 Point) Realized Gain/Loss $ (2,150) $ 40,000 (1 Point) (1/2 Point) $ 31,000 (1 Point) Realized Gain/Loss $ 9,000 Net Realized Gain $ 6,850 * (1 Point) Recognized Gain $ 6,850 ** (1 Point) (1 Point) A A Name: EXAM #2 9.) Page 11 Continued * This is net section 1231 gain. ** Because she is recognizing Section 1231 Gain, Linda must look back at other Section 1231 transactions for the past 5 years to determine the tax treatment. Since there are no prior section 1231 transactions, she will not be subject to look back. (2 Points) (1 Point) Linda will be forced to recognize all depreciation taken on the second machine as ordinary income because of Section 1245. (2 Points) The remaining $ 850 (1 Point) (7 Points Explanation) will be treated as section 1231, and will receive longterm capital gain treatment. (1 Point) A