Could you please provide me with answers for questions 10, 11, and 12 in the attached document?

Name:________________________________________________ Accounting 385/685 Introduction to Taxation, Fall 2012 Final Exam Instructions: Note that there are three longer problems at the end of the test worth a substantial number of points. The nine multiple choice questions are worth 6 points each. Note, there are twelve problems and six pages, be certain to check that all are present for your exam. 1. 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 fire 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 after $150,000 of repairs are made? a. $300,000 b. $350,000 c. $450,000 d. $500,000 e. $600,000 f. None of the above 2. Mickey buys a used truck (MACRS 5 year property) to use in his business on May 13, 2011 at a cost of $18,000. In November 2011, Mickey purchases additional used equipment, 7year property, for $34,000. Assuming that none of this property is expensed under section 179, and ignoring bonus depreciation, what is his maximum allowable cost recovery deduction? a. $2,114 b. $5,714 c. $8,459 d. $12,086 e. $15,500 f. None of the above 3. Margret Mildred, who has a salary of $50,000, has a net longterm capital loss of $2,000 and a net shortterm capital loss of $5,000 this year. What are her capital loss deduction and carryover? a. $3,000 deduction; $4,000 STCL carryover, b. $3,000 deduction; $2,000 LTCL carryover, $2,000 STCL carryover, c. $3,000 deduction; no carryover d. $5,500 deduction; $2,000 LTCL carryover f. None of the above 1 Name:________________________________________________ 4. Tom Truman sells a business machine which he has owned for four years for $27,000. Tom purchased the machine for $42,000 and has taken $18,000 in depreciation. How much and what type of gain will result from this sale? a. $3,000 longterm capital gain b. $3,000 ordinary income c. $18,000 ordinary income; $3,000 longterm capital gain d. $3,000 Section 1231 gain f. None of the above 5. This year, Norman Newhouse sold equipment used in his business for $11,000. The equipment cost $10,000 and Norman had properly claimed MACRS deductions totaling $4,000. Straightline depreciation, if it had been used, would have been $2,500. What is the amount of gain that should be reported under Sections 1231 and 1245? a. Section 1231: $5,000; Section 1245: $0 b. Section 1231: $3,500; Section 1245: $1,500 c. Section 1231: $1,000; Section 1245: $4,000 d. Section 1231: $0; Section 1245: $5,000 e. None of the above 6. Johnny, a cash basis taxpayer, owns two rental properties. Based on the following information, compute the amount that he must include in this year's gross rental income. Security deposit retained on account of property damage $ 500 Property #1, security deposit received 2/1/11. 500 Property #1, payment received 12/1/10 for last month of lease (2/11) 700 Property #1, rental income received in 2011 2/1112/11 7,700 Property #2, rental income received in 2011 1/1112/11 9,000 Property #2, security deposit received 1/1/11 750 Property #2, rent 12/10 received 1/28/11 800 a. $16,700 b. $17,500 c. $18,200 d. $18,950 f. None of the above 2 Name:________________________________________________ 7. Alex Burg, a cash basis taxpayer, earned an annual salary of $80,000 at Ace Corp. last year, but elected to take only $50,000. Ace, which was financially able to pay Burg's full salary, credited the unpaid balance of $30,000 to Burg's account on the corporate books in 2009, and actually paid this $30,000 to Burg on April 25, 2013. How much salary income from Ace is taxable to Burg in 2012? a. $50,000 b. $60,000 c. $65,000 d. $80,000 f. None of the above 8. Randi, a flight attendant, received wages of $30,000 this year. The airline provided transportation on a standby basis, at no charge, from her home in Detroit to the airline's hub in Chicago. The fair market value of the commuting flights was $5,000. Randi became disabled in November of this year and received worker's compensation of $4,000. What amount must Randi include in gross income? a. $30,000 b. $34,000 c. $35,000 d. $37,000 f. None of the above 9. Tom Thompson traded in a station wagon (used in his business) which had an adjusted basis of $7,700 for a new one costing $26,900. The auto dealer allowed a tradein allowance of $8,000 on the old station wagon and Tom paid $18,900 in cash. What is Tom's basis in the new station wagon? a. $18,900 b. $15,700 c. $26,600 d. $26,800 f. None of the above 3 Name:________________________________________________ This problem is worth 20 points. 10. Jake received a nontaxable distribution of stock rights on his GM stock, which he bought five years ago. He has 100 shares of GM common stock, with a basis of $100 per share (before the distribution). This stock has a fmv, directly after the stock rights distribution, of $110 per share. The fmv of the stock rights is $25 per right, also, directly after the distribution. Jake's ordinary income tax rate is 40% and his LTCG tax rate is 15%. The terms of the rights are that GM will exchange one share of common stock (identical to the stock on which the rights were issued) for one right and a payment of $84. Thus, Jake is able, if he chooses, to exchange his 100 rights plus $8,400 for 100 additional shares of GM stock. Alternatively, he can sell the rights for $25 each, or simply allow them to expire. Expiration is the worst alternative as the rights can be sold for a material sum, and we will ignore this alternative. Required: 1) Is Jake required to allocate basis to the rights, and, if so, how much? Show all work. 2) Without regard to part one, assume that Jake allocates basis to the rights. Evaluate Jakes choices of either selling the rights today or exercising the rights and selling the stock immediately. Which nets the most cash? Be certain to show all work. 4 Name:________________________________________________ This problem is worth 20 points. 11. John was having problems making payments on his debt. As a result, his creditors offered him a deal without going to court. He was relieved of $30,000 of debt. In return he offered additional assets as security against future default. Before the debt relief his total debt was $100,000 and the fair value of his assets was $80,000. a. How much, if any, income must John recognize? Explain. b. Assume for this part, and without relation to your prior answer, that John recognized $15,000 of income from the $30,000 of debt relief. You are to help John decide how to reduce his tax benefits. Assume that John is in the 35% tax bracket for this part. (1) Assuming that he has sufficient basis to do either, should John reduce his basis in his inventory, which turns over every six months, or his basis in three year depreciable assets? Be certain to describe completely why you make the recommendation that you do. (2) Without regard to your answer above in (1) above, and assuming that he has sufficient basis and business credits to do either, should John reduce basis in his inventory, or reduce his business credits. 5 Name:________________________________________________ This problem is worth 25 points. 12. John is transferring some vacant land he owns outside of town to Jane in exchange for her rental house in midtown. His land has a fmv of $145,000 and is subject to a mortgage of $20,000. John's basis in the land is $70,000. Her house has a fmv of $115,000 and her basis in it is $45,000. John is also going to transfer to Jane a business car he keeps on the property, as part of this exchange. His basis in the car is $15,000 and it has an fmv of $18,000. In return she is adding an additional $15,000 to her part of this exchange, and transferring the furniture in the house which has a fmv of $13,000 and a basis to her of $8,000. John's car cost $45,000. Jane's rental house (depreciated under ACRS, placed in service in 1985) cost her $90,000. Straightline depreciation on her property would have been $40,000. The furniture cost her $12,000. Required: (1) Compute for each party their: realized gain, recognized gain, and basis in all assets received (be certain to compute this two ways for the qualified likekind properties.). (2) Determine for each party the amounts of income (and loss) that would be taxed as: 1231 gain/loss, 25% gain, and ordinary gain due to depreciation recapture. Do not provide any planning suggestions. Be very complete and clear in your answers. 6