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Property Dispositions questions and problems

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Chapter 8
Chapter 8 - Property Dispositions
Chapter 8
Questions and Problems for Discussion
1.
a. Section 1231 asset.
b. Capital asset.
c.
Section 1231 asset.
d. Capital asset.
e. Noncapital asset.
f.
Capital asset.
g. Capital asset.
h. Section 1231 asset.
2.
In a sale of property, the amount realized consists of cash or a cash equivalent (purchaser’s not
e). In an exchange of property, the amount realized includes noncash assets.
3.
If a taxpayer is relieved of a debt on the disposition of an asset (i.e., the purchaser assumes the
seller’s debt), the relief of debt is an amount realized. If the taxpayer receives services in excha
nge for the asset, the fair market value of the services is an amount realized.
4.
If a taxpayer has losses that could be deducted against gain recognized on an installment sale,
the taxpayer might elect out of the installment sale method. Alternatively, if the taxpayer’s margi

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nal rate in the year of sale is considerably lower than the projected marginal rate in future years
, the taxpayer might prefer to recognize the entire gain in the year of sale.
5.
The characterization of gain or loss for tax purposes has no effect on the computation of net inc
ome per books.
6.
A firm’s tax basis in an asset includes any portion of the asset’s cost that the firm borrowed from
another party to purchase the asset, even if the asset is the collateral for the debt. A firm’s equi
ty in an asset equals the fair market value of the asset less any creditor claims on the asset.
7.
Corporation A generated its goodwill through its own business operations. Such internally creat
ed goodwill is not a depreciable or amortizable business asset and, therefore, is a capital asset
by default. Corporation Z acquired its goodwill by purchase, thereby establishing an amortizabl
e cost basis in this business asset. Amortizable goodwill meets the definition of a Section 1231
asset.
8.
Mrs. Carly’s gain on sale will be capital gain only if the land is a capital asset in her hands. Whe
ther the land is a capital asset depends on how Mrs. Carly has held the land since she acquired
it eight years ago. If she held the land as inventory in a real estate business, the land is not a c
apital asset, and her gain on sale will be ordinary income. If she held the land as an investment,
the land is a capital asset, and her gain on sale will be capital. The accountant cannot answer t
he question without further information from Mrs. Carly.
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 Chapter 8 Chapter 8 - Property Dispositions Chapter 8 Questions and Problems for Discussion 1. a. Section 1231 asset. b. Capital asset. c. Section 1231 asset. d. Capital asset. e. Noncapital asset. f. Capital asset.  g. Capital asset.  h. Section 1231 asset.  2. In a sale of property, the amount realized consists of cash or a cash equivalent (purchaser’s  note). In an exchange of property, the amount realized includes noncash assets.  3. If a taxpayer is relieved of a debt on the disposition of an asset (i.e., the purchaser assumes the  seller’s debt), the relief of debt is an amount realized. If the taxpayer receives services in  exchange for the asset, the fair market value of the services is an amount realized.  4. If a taxpayer has losses that could be deducted against gain recognized on an installment sale,  the taxpayer might elect out of the installment sale method. Alternatively, if the taxpayer’s  marginal rate in the year of sale is considerably lower than the projected marginal rate in future  years, the taxpayer might prefer to recognize the entire gain in the year of sale. 5. The characterization of gain or loss for tax purposes has no effect on the computation of net  income per books.  6. A firm’s tax basis in an asset includes any portion of the as ...
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