Name: McGraw-Hill's Essentials of Federal Taxation 2020 Edition By Brian Spilker - Test Bank
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McGraw-Hill’s Essentials of Federal Taxation 2020 Edition By Brian Spilker – Test Bank

Essentials of Federal Taxation, 11e (Spilker)
Chapter 11 Property Dispositions

1) The amount realized is the sale proceeds less the adjusted basis.

Answer: FALSE
Difficulty: 1 Easy
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

2) Generally, the amount realized is everything of value received in a sale less selling expenses.

Answer: TRUE
Difficulty: 1 Easy
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

3) The adjusted basis is the initial basis less cost recovery deductions.

4) An asset’s tax-adjusted basis is usually greater than its book-adjusted basis.

Answer: FALSE
Explanation: Because businesses generally use more highly accelerated depreciation methods for tax purposes than they do for book purposes, the tax-adjusted basis of a particular asset is likely to be lower than the book-adjusted basis.
Difficulty: 1 Easy
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

5) The gain or loss realized on the sale of an asset is the amount realized less the adjusted basis.

Answer: TRUE
Difficulty: 2 Medium
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

6) The gain or loss realized on the sale of an asset is always recognized for tax purposes.

7) All tax gains and losses are ultimately characterized as either ordinary or capital.

Answer: TRUE
Difficulty: 1 Easy
Topic: Character of Gain or Loss
Learning Objective: 11-02 Describe the general character types of gain or loss recognized on property dispositions.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

8) Ordinary gains and losses are obtained on the sale of investments.

Answer: FALSE
Explanation: Capital gains and losses are obtained on the sale of investments.
Difficulty: 1 Easy
Topic: Character of Gain or Loss
Learning Objective: 11-02 Describe the general character types of gain or loss recognized on property dispositions.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

9) Accounts receivable and inventory are examples of ordinary assets.

10) Assets held for investment and personal use assets are examples of capital assets.

11) §1231 assets include all assets used in a trade or business.

Answer: FALSE
Explanation: §1231 assets are used in a trade or business and are held by taxpayers for more than one year.
Difficulty: 2 Medium
Topic: Character of Gain or Loss
Learning Objective: 11-02 Describe the general character types of gain or loss recognized on property dispositions.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

12) A parcel of land is always a capital asset.

Answer: FALSE
Explanation: Whether an asset qualifies as a capital asset depends on the purpose for which the taxpayer uses or holds the asset.
Difficulty: 2 Medium
Topic: Character of Gain or Loss
Learning Objective: 11-02 Describe the general character types of gain or loss recognized on property dispositions.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

13) Taxpayers can recognize a taxable gain on the sale of an asset even though an asset’s real economic value has declined.

Answer: TRUE
Difficulty: 2 Medium
Topic: Character of Gain or Loss
Learning Objective: 11-02 Describe the general character types of gain or loss recognized on property dispositions.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking

14) After application of the look-back rule, net §1231 gains become capital while net §1231 losses become ordinary.

Answer: TRUE
Difficulty: 2 Medium
Topic: Depreciation Recapture; Calculating Net section 1231 Gains or Losses
Learning Objective: 11-03 Calculate depreciation recapture.; 11-05 Describe the tax treatment of §1231 gains or losses, including the §1231 netting process.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

15) Depreciation recapture changes both the amount and character of a gain.

Answer: FALSE
Explanation: Depreciation recapture changes the character of the gain, not the amount.
Difficulty: 1 Easy
Topic: Depreciation Recapture
Learning Objective: 11-03 Calculate depreciation recapture.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

16) Only accelerated depreciation is recaptured for §1245 assets.

Answer: FALSE
Difficulty: 1 Easy
Topic: Depreciation Recapture
Learning Objective: 11-03 Calculate depreciation recapture.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

17) §1250 recaptures the excess of accelerated depreciation over straight-line depreciation on real property placed in service before 1987 as ordinary income.

Answer: TRUE
Difficulty: 1 Easy
Topic: Depreciation Recapture
Learning Objective: 11-03 Calculate depreciation recapture.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

18) For corporations, §291 recaptures 20 percent of the lesser of depreciation taken or the realized gain as ordinary income.

Answer: TRUE
Difficulty: 3 Hard
Topic: Depreciation Recapture
Learning Objective: 11-03 Calculate depreciation recapture.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

19) Unrecaptured §1250 gain is taxed at a maximum rate of 25 percent.

Answer: TRUE
Difficulty: 1 Easy
Topic: Other Provisions Affecting the Rate at which Gains are Taxed
Learning Objective: 11-04 Describe the tax treatment of unrecaptured §1250 gains.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

20) Unrecaptured §1250 gains apply only to individuals.

21) §1239 recharacterizes 50 percent of the gain on sales to a related party as ordinary income.

Answer: FALSE
Explanation: 100 percent of the gain is recharacterized as ordinary income.
Difficulty: 2 Medium
Topic: Other Provisions Affecting the Rate at which Gains are Taxed
Learning Objective: 11-04 Describe the tax treatment of unrecaptured §1250 gains.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

22) A net §1231 gain becomes ordinary while a net §1231 loss becomes long-term capital gain.

Answer: FALSE
Difficulty: 2 Medium
Topic: Calculating Net section 1231 Gains or Losses
Learning Objective: 11-05 Describe the tax treatment of §1231 gains or losses, including the §1231 netting process.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

23) The §1231 look-back rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last five years.

Answer: TRUE
Difficulty: 2 Medium
Topic: Calculating Net section 1231 Gains or Losses
Learning Objective: 11-05 Describe the tax treatment of §1231 gains or losses, including the §1231 netting process.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

24) The §1231 look-back rule applies whether there is a net gain or loss.

25) Realized gains are recognized unless there is specific exception.

Answer: TRUE
Difficulty: 1 Easy
Topic: Nonrecognition transactions
Learning Objective: 11-06 Explain common exceptions to the general rule that realized gains and losses are recognized currently.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

26) For a like-kind exchange, realized gain is deferred if the exchange is solely for like-kind property.

27) Residential real property is not like-kind with nonresidential real property.

Answer: FALSE
Difficulty: 1 Easy
Topic: Nonrecognition transactions
Learning Objective: 11-06 Explain common exceptions to the general rule that realized gains and losses are recognized currently.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

28) A simultaneous exchange must take place for a transaction to qualify as a like-kind exchange.

29) Boot is not like-kind property involved in a like-kind exchange.

30) In a deferred like-kind exchange, the like-kind property to be received must be identified within 45 days and acquired within 180 days from the initial exchange.

Answer: TRUE
Difficulty: 2 Medium
Topic: Nonrecognition transactions
Learning Objective: 11-06 Explain common exceptions to the general rule that realized gains and losses are recognized currently.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

31) A taxpayer that receives boot in a like-kind exchange resulting in a gain recognizes as gain the lesser of the fair market value of the boot received or the gain realized.

32) A loss realized for property destroyed in a hurricane is deferred under the involuntary conversion rules.

Answer: FALSE
Difficulty: 2 Medium
Topic: Nonrecognition transactions
Learning Objective: 11-06 Explain common exceptions to the general rule that realized gains and losses are recognized currently.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

33) An installment sale is any sale where at least a portion of the sale proceeds is received in a subsequent taxable year.

34) For an installment sale, the gross profit percentage is the gain recognized divided by the gain realized.

Answer: FALSE
Explanation: The gross profit percentage is the gain realized divided by the contract price.
Difficulty: 2 Medium
Topic: Nonrecognition transactions
Learning Objective: 11-06 Explain common exceptions to the general rule that realized gains and losses are recognized currently.
Bloom’s: Understand
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

35) Losses on sales between related parties are realized but not recognized.

36) Which of the following is not used in the calculation of the amount realized:
A) Cash.
B) Adjusted basis.
C) Fair market value of other property received.
D) Buyer’s assumption of liabilities.
E) All of the choices are used.

Answer: B
Explanation: The amount realized is everything of value received (cash, fair market value of other property, and the buyer’s assumption of liabilities) less selling costs.
Difficulty: 1 Easy
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

37) Which of the following is not true regarding an asset’s adjusted basis?
A) Tax-adjusted basis is usually greater than book-adjusted basis.
B) Tax-adjusted basis is usually less than book-adjusted basis.
C) Adjusted basis is cost basis less cost recovery deductions.
D) Tax-adjusted basis may change over time.

Answer: A
Explanation: The tax-adjusted basis is usually less than book-adjusted basis because tax depreciation usually exceeds book depreciation.
Difficulty: 1 Easy
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking

38) Which of the following is not usually included in an asset’s tax basis?
A) Purchase price.
B) Sales tax.
C) Shipping costs.
D) Installation costs.
E) None of the choices are correct.

Answer: E
Explanation: The purchase price, sales tax, shipping, and installation costs are all included in an asset’s tax basis.
Difficulty: 1 Easy
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Reflective Thinking; Analytical Thinking

39) Which of the following is how gain or loss realized is calculated?
A) Cash less selling costs.
B) Cost basis less cost recovery.
C) Cash less cost recovery.
D) Amount realized less adjusted basis.
E) None of the choices are correct.

Answer: D
Explanation: Gain or loss realized is the amount realized less adjusted basis.
Difficulty: 1 Easy
Topic: Dispositions
Learning Objective: 11-01 Calculate the amount of gain or loss recognized on the disposition of assets used in a trade or business.
Bloom’s: Remember
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking

40) Which of the following realized gains results in a recognized gain?
A) Farmland traded for an office building.
B) Sale to a related party.
C) Involuntary conversion.
D) Iowa cropland exchanged for a Minnesota warehouse.

Answer: B
Explanation: Realized gains, but not losses, on sales to a related party are recognized.
Difficulty: 1 Easy
Topic: Nonrecognition transactions
Learning Objective: 11-06 Explain common exceptions to the general rule that realized gains and losses are recognized currently.
Bloom’s: Analyze
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking

41) Leesburg sold a machine for $2,200 on November 10th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions on the machine through the date of the sale. What is Leesburg’s gain or loss realized on the machine?
A) $800 gain.
B) $1,000 gain.
C) $1,200 loss.
D) $1,400 loss.
E) None of the choices are correct.

Answer: A
Explanation: The gain realized is the $2,200 amount realized less the $1,400 ($2,600 − $1,200) adjusted basis.
Difficulty: 1 Easy
Topic: Character of Gain or Loss
Learning Objective: 11-02 Describe the general character types of gain or loss recognized on property dispositions.
Bloom’s: Analyze
Accessibility: Keyboard Navigation; Screen Reader Compatible
AICPA/AACSB: BB Critical Thinking / Analytical Thinking

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