Homework answers / question archive / Chapter 13 Homework 1) On July 1, 2018, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000

Chapter 13 Homework 1) On July 1, 2018, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000

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Chapter 13 Homework

1) On July 1, 2018, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000. The bonds mature in five years, and the annual interest rate is 6%. The market rate of interest is 2%.

1. How much interest income and/or interest expense must Katrina report in 2018, assuming that straight-line amortization is appropriate?

 

2. What is Katrina’s adjusted basis for the bonds on January 1, 2019?

 

 

2. Juliana purchased land three years ago for $50,000. She gave the land to Tom, her brother, in the current year, when the fair market value was $70,000. No gift tax is paid on the transfer. Tom subsequently sells the property for $63,000.

1. What is Tom’s basis in the land, and what is his realized gain or loss on the sale?
2. Assume instead that the land has a fair market value of $45,000 and that Tom sold the land for $43,000. Now what is Tom’s basis in the land, and what is his realized gain or loss on the sale?

 

 

 

 

 

3. Lisa sells business property with an adjusted basis of $130,000 to her son, Alfred, for its fair market value of $100,000.

1. What is Lisa’s realized and recognized gain or loss?

 

2. What’s Alfred’s recognized gain/loss if he subsequently sells the property for $138,000? For $80,000?

4. Peyton sells an office building and the associated land on May 1 of the current year. Under the terms of the sales contract, Peyton is to receive $1,600,000 in cash. The purchaser is to assume Peyton’s mortgage of $950,000 on the property. To enable the purchaser to obtain adequate financing, Peyton is to pay the $9,000 in points charged by the lender. The broker’s commission on the sale is $75,000. What is Peyton’s amount realized?

                                                                                                         

 

 

 

 

 

 

 

 

 

5. Logan and Johnathan exchange land, and the exchange qualifies as like kind under § 1031. Because Logan’s land (adjusted basis of $85,000) is worth $100,000 and Johnathan’s land has a fair market value of $80,000, Johnathan also gives Logan cash of $20,000.

1. What is Logan’s recognized gain?
2. Assume instead that Johnathan’s land is worth $90,000 and he gives Logan $10,000 cash. Now what is Logan’s recognized gain?

 

6. Camilo’s property, with an adjusted basis of $155,000, is condemned by the state. Camilo receives property with a fair market value of $180,000 as compensation for the property taken.

1. What is Camilo’s realized and recognized gain?

 

2. What is the basis of the replacement property?

 

7. Norm is negotiating the sale of a tract of his land to Pat. Use the following classification scheme to classify each of the items contained in the proposed sales contract:

Legend

DARN = Decreases amount realized by Norm IARN = Increases amount realized by Norm DABN = Decreases adjusted basis to Norm IABN = Increases adjusted basis to Norm DABP = Decreases adjusted basis to Pat IABP = Increases adjusted basis to Pat

 

1. Norm is to receive cash of $50,000.
2. Norm is to receive Pat’s note payable for $25,000, payable in three years.
3. Pat assumes Norm’s mortgage of $5,000 on the land.
4. Pat agrees to pay the realtor’s sales commission of $8,000.
5. Pat agrees to pay the property taxes on the land for the entire year. If each party paid his or her respective share, Norm’s share would be $1,000 and Pat’s share would be $3,000.
6. Pat pays legal fees of $500.
7. Norm pays legal fees of $750.

 

 

 

8. Chee purchases Tan, Inc. bonds for $108,000 on January 2, 2018. The face value of the bonds is $100,000; the maturity date is December 31, 2022; and the annual interest rate is 5%. Chee will amortize the premium only if he is required to do so. Chee sells the bonds on July 1, 2020, for $106,000.

1. Determine the interest income Chee should report for 2018.
2. Calculate Chee’s recognized gain or loss on the sale of the bonds in 2020

 

9.  Which of the following results in a recognized gain or loss?

1. Kay sells her vacation cabin (adjusted basis of $100,000) for $150,000.
2. Adam sells his personal residence (adjusted basis of $150,000) for $100,000.
3. Carl’s personal residence (adjusted basis of $65,000) is condemned by the city. He receives condemnation proceeds of $55,000.
4. Olga’s land is worth $40,000 at the end of the year. She had purchased the land six months earlier for $25,000.
5. Vera’s personal vehicle (adjusted basis of $22,000) is stolen. She receives $23,000 from the insurance company and does not plan to replace the automobile.
6. Jerry sells used clothing (adjusted basis of $500) to a thrift store for $50.

 

10. Yancy’s personal residence is condemned as part of an urban renewal project. His adjusted basis for the residence is $480,000. He receives condemnation proceeds of $460,000 and invests the proceeds in stocks and bonds.

1. Calculate Yancy’s realized and recognized gain or loss.

 

2. If the condemnation proceeds are $505,000, what are Yancy’s realized and recognized gain or loss?
3. What are Yancy’s realized and recognized gain or loss in part (a) if the house was rental property?

 

11. Kevin purchases 1,000 shares of Bluebird Corporation stock on October 3, 2018, for $300,000. On December 12, 2018, Kevin purchases an additional 750 shares of Bluebird stock for $210,000. According to market quotations, Bluebird stock is selling for $285 per share on December 31, 2018. Kevin sells 500 shares of Bluebird stock on March 1, 2019, for $162,500.

1. What is the adjusted basis of Kevin’s Bluebird stock on December 31, 2018?
2. What is Kevin’s recognized gain or loss from the sale of Bluebird stock on March 1, 2019, assuming that the shares sold are from the shares purchased on December 12, 2018?
3. What is Kevin’s recognized gain or loss from the sale of Bluebird stock on March 1, 2019, assuming that Kevin cannot adequately identify the shares sold?

 

12.  On September 18, 2018, Gerald received land and a building from Frank as a gift. Frank’s adjusted basis and the fair market value at the date of the gift are as follows:

Asset	Adjusted Basis	FMV
Land	$100,000	$212,000
Building	80,000	100,000

No gift tax was paid on the transfer.

1. Determine Gerald’s adjusted basis for land and building.
2. Assume instead that the fair market value of the land was $87,000 and that of the building was $65,000. Determine Gerald’s adjusted basis for the land and building.

 

 

 

 

 

13. Dan bought a hotel for $2,600,000 in January 2014. In May 2018, he died and left the hotel to Ed. While Dan owned the hotel, he deducted $289,000 of cost recovery. The fair market value in May 2018 was $2,800,000. The fair market value six months later was $2,850,000.

1. What is the basis of the property to Ed?
2. What is the basis of the property to Ed if the fair market value six months later was $2,500,000 (not $2,850,000) and the objective of the executor was to minimize the estate tax liability?

 

14. Louis owns three pieces of land with an adjusted basis as follows: parcel A, $75,000; parcel B, $125,000; and parcel C, $175,000. Louis sells parcel A to his uncle for $50,000, parcel B to his partner for $120,000, and parcel C to his mother for $150,000.

1. What is the recognized gain or loss from the sale of each parcel?
2. If Louis’s uncle eventually sells his land for $90,000, what is his recognized gain or loss?
3. If Louis’s partner eventually sells his land for $130,000, what is his recognized gain or loss?
4. If Louis’s mother eventually sells her land for $165,000, what is her recognized gain or loss?

 

15. Tanya Fletcher owns undeveloped land (adjusted basis of $80,000 and fair market value of $92,000) on the East Coast. On January 4, 2018, she exchanges it with Lisa Martin (an unrelated party) for undeveloped land on the West Coast and $3,000 cash. Lisa has an adjusted basis of $72,000 for her land, and its fair market value is $89,000. As the real estate market on the East Coast is thriving, on September 1, 2019, Lisa sells the land she acquired for $120,000.

1. What are Tanya’s recognized gain/loss and adjusted basis for the West Coast land on January 4, 2018?
2. What are Lisa’s recognized gain/loss and adjusted basis for the East Coast land on January 4, 2018?
3. What is Lisa’s recognized gain or loss from the September 1, 2019 sale?
4. What effect does Lisa’s 2019 sale have on Tanya?

16. In two unrelated transactions, Laura exchanges property that qualifies for like-kind exchange treatment. In the first exchange, Laura gives up land purchased in May 2016 (adjusted basis of $20,000; fair market value of $17,000) in exchange for a different parcel of land (fair market value of $15,000) and $2,000 cash. In the second exchange, Laura receives a parking garage (to be used in her business) with a fair market value of $50,000 in exchange for a plot of land she had held for investment. The land was purchased in April 2010 for $12,000 and has a current fair market value of $48,000. In addition to transferring the land, Laura pays an additional $2,000 to the other party.

1. What is Laura’s adjusted basis for the new parcel of land?
2. When does the holding period begin?
3. What is Laura’s adjusted basis for the parking garage?
4. When does the holding period begin?

 

17. Stephanie owns land (adjusted basis of $90,000; fair market value of $125,000) that she uses in her business. She exchanges it for another parcel of land (worth $100,000) and stock (worth $25,000). Determine Stephanie’s:

1. Realized and recognized gain or loss on the exchange.
2. Basis in the new land.
3. Basis in the stock she received.

18. Determine the realized, recognized, and postponed gain or loss and the new basis for each of the following like-kind exchanges:

	Adjusted Basis of Old Machine	Boot Given	Fair Market Value of New Asset	Boot Received
a.	$7,000	$ 0	$12,000	$4,000
b.	14,000	2,000	15,000	0
c.	3,000	7,000	8,000	500
d.	15,000	0	29,000	0
e.	10,000	0	11,000	1,000
f.	17,000	0	14,000	0

 

 

 

 

 

 

19. Edith’s warehouse (adjusted basis of $450,000) is destroyed by a hurricane in October 2018. Edith, a calendar year taxpayer, receives insurance proceeds of $525,000 in January 2019. Calculate Edith’s realized gain or loss, recognized gain or loss, and basis for the replacement property if she:

1. Acquires a new warehouse for $550,000 in January 2019.
2. Acquires a new warehouse for $500,000 in January 2019.

 

3. Does not acquire replacement property.  

 

20. What are the maximum postponed gain or loss and the basis for the replacement property for the following involuntary conversions?

	Property	Type of Conversion	Amount Realized	Adjusted Basis	Amount Reinvested
a.	Drugstore (business)	Casualty	$ 160,000	$ 130,000	$ 110,000
b.	Apartments (Investment)	Condemned	100,000	125,000	175,000
c.	Grocery Store (Business)	Casualty	400,000	300,000	450,000
d.	Residence (personal)	Casualty*	16,000	18,000	17,000
e.	Vacant Lot (Investment)	Condemned	240,000	160,000	220,000
f.	Residence (Personal)	Casualty*	20,000	18,000	19,000
g.	Residence (Personal)	Condemned	18,000	20,000	26,000
h.	Apartments (Investment)	Condemned	150,000	100,000	200,000

 

 

 

 

 

 

 

 

 

 

 

 

21. Pedro, age 57, is the sole owner of his principal residence, which he has owned and occupied for 10 years. Maria, his spouse, has also lived there 10 years. He sells the house for a realized gain of $340,000.

1. Can Pedro use the § 121 exclusion if he and Maria file a joint return? If so, what are the available amount of the exclusion and the recognized gain?
2. Can Pedro use the § 121 exclusion if he files a separate return? If so, what are the available amount of the exclusion and the recognized gain?
3. Assume instead that the realized gain is $550,000 and a joint return is filed.
4. Assume instead that the realized gain is $550,000 and separate returns are filed.
5. Assume instead that Maria and Pedro have been married for only 18 months and that she has lived in his house only since their marriage. They file a joint return.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Becker Questions

 

1. Jasmin purchased 100 shares of Pinkstey Corporation (publicly traded company) on 1/1 of Y1 for $5,000. The FMV of the shares at the end of Y1 was $6,000. On 1/1 Y4, Pinkstey Corporation declared a 2-for-1 stock split when the FMV of the stock was $65 per share. On 1/1 Y5, Jasmin sold all of her Pinkstey Corporation stock when the FMV was $40 per share. Which of the following statements is true?

1. Jasmin reports $6,500 in gross income for the 2-for-1 stock split in year 4.
2. Jasmin’s basis in the Pinkstey Corporation stock at the end of year 4 is $65 per share.
3. Jasmin has no taxable income for the Pinkstey Corporation stock in year 4.
4. Jasmin owns 100 shares in Pinkstey Corporation stock at the end of year 4.

 

2. Alice gifted stock to her son, Bob, in year 5. Alice bought the stock in year 1 for $8,300. The value of the stock on the date of gift was $6,400. Bob sold the stock in year 7 for $15,800. What is Bob’s recognized gain or loss on the sale in year 7?
   1. $0
   2. $7,500 gain   [$15,800 - $8,300]
   3. $9,400 gain
   4. $15,800 gain

 

3. Jerry inherits an asset from his uncle, who purchased the asset five days before he died. Which of the following statements is correct?
   1. If Jerry sells the asset a few days after receiving it, any gain or loss on the sale will be short term.
   2. Jerry’s basis in the asset is the carryover basis from his uncle.
   3. Jerry’s basis is the FMV on the alternate valuation date or date it is distributed to him.
   4. Jerry’s basis is the FMV on his uncle’s date of death.

 

4. Which of the following statements is not correct?
   1. The basis of an asset that is purchased must be adjusted for depreciation allowable.
   2. The general rule for the basis of property acquired by gift is a carryover of basis from the donor. TRUE
   3. If an asset is acquired by gift and the FMV on the date of gift is lower than the donor’s carryover basis, the recipient’s basis cannot be determined until the asset is disposed of.
   4. The basis of property acquired from a decedent is always the FMV on the date of death. – not always

 

5. Rick purchased 100 shares of XYZ stock on 4/4, Y4, for $8,600. He sold 50 shares on 2/8, Y5, for $3,000. He then bought another 50 shares of XYZ on 3/1, Y5, for $3,200. How much loss will Rick realize in Y5?
   1. $0
   2. $1,300
   3. $3,000
   4. $5,600

 

6. Agnes sold 50 shares of ABC stock to her son, Steve, in Y4 for $42,000. She bought the stock eight years ago for $50,000. Steve sold the stock to an unrelated party in year 6 for $60,000. How much gain will Steve recognize from the sale in year 6?
   1. $0
   2. $10,000
   3. $18,000
   4. $60,000

 

7. John purchased a primary residence on 10/15, Y2, for $240,000. On 6/10, Y4, he married Karen, and she moved in. Karen was not added to the deed. On 10/15, Y6, they moved out of the house. John sold the home on 10/15, Y7 for $850,000. What amount of gain from the sale is recognized on their Y7 joint income tax return?
   1. $110,000
   2. $122,000
   3. $360,000
   4. $610,000
8. Chad owned an office building that was destroyed in a tornado. The adjusted basis of the building at the time was $890,000. After the deductible, Chad received an insurance check for $850,000. He used the $850,000 to purchase a new building that same year. How much is Chad’s recognized loss, and what is his basis in the new building?

	Recognized Loss	New Basis
a.	$0	$850,000
b.	$0	$890,000
c.	$40,000	$850,000
d.	$40,000	$890,000

 

 

 

 

 

 

9. Chad owned an office building that was destroyed in a tornado. The adjusted basis of the building at the time was $890,000. After the deductible, Chad received an insurance check for $950,000. He used $900,000 of the insurance proceeds to purchase a new building that same year. How much is Chad’s recognized gain, and what is his basis in the new building?

	Recognized Gain	New Basis
a.	$0	$890,000
b.	$0	$900,000
c.	$50,000	$890,000
d.	$60,000	$900,000

 

 

 

 

 

 

10.  Marsha exchanged land in Florida with an FMV of $72,700 and an adjusted basis of $40,000 for land in Iowa with an FMV of $57,700. Marsha also paid $5,000 cash in the transaction and received an automobile worth $20,000 [boot]. What is Marsha’s recognized gain on the transaction?
    1. $0
    2. $15,000
    3. $20,000
    4. $32,700

 

11.  Marsha exchanged land in Florida with an FMV of $72,700 and an adjusted basis of $40,000 for land in Iowa with an FMV of $57,700. Marsha also assumed a $5,000 liability on the land received in the transaction and was relieved of a $20,000 liability on the land that was given up. What is Marsha’s recognized gain on the transaction?
    1. $0
    2. $15,000
    3. $20,000
    4. $32,700

 

 

 

12.  Marsha exchanged land in Florida with an FMV of $52,700 and an adjusted basis of $60,000 for land in Iowa with an FMV of $57,700. Marsha also paid $5,000 cash in the transaction. What is Marsha’s basis in the land received?
    1. $55,000
    2. $57,700
    3. $60,000
    4. $65,000