Multiple Choice Questions

21. 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? 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 the above is true.

22. 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 the above statements is false.

23. 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 35% tax rate.

A. $22,405 B. $13,095 C. $14,105 D. None of the above

24. 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

25. Philp Inc. sold equipment with a $132,900 adjusted tax basis for $200,000. The purchaser 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 35% tax rate.

A. $23,485 B. $20,000 C. -0- D. None of the above

26. 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

27. 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 principle payment on the note. Brenda's recognized gain this year is

A. $125,000 B. 60,000 C. $37,500 D. $22,500

28. 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

29. 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 the above

30. 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 the above

31. 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 a. and c.

32. 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 the above

33. Warsham Inc. 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 a. and c. are true.

34. 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

35. 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 the above