Chapter 13
II.
Based on the wherewithal-to-pay concept, each owner is taxed on the cash they
contributed to the corporation.
III.
Sergio will recognize a $70,000 gain and Chris will recognize a $20,000 gain.
IV.
No gain or loss is recognized on the exchange.
a.
Only statement IV is correct.
b.
Statements I and III are correct.
c.
Only statement II is correct.
d.
Only statement III is correct.
e.
None of the statements are correct.
61. Zeppo and Harpo are equal owners of the Marx Corporation. During the current year, they agree to admit Groucho as
a shareholder. Groucho will contribute $35,000 in cash and property worth $75,000 (adjusted basis of $55,000) for 40%
of Marx Corporation’s stock. How much gain will Groucho recognize from the transfer of the assets to the corporation?
a.
$-0-
b.
$20,000
c.
$35,000
d.
$55,000
e.
$75,000
62. Dewey and Louie agree to combine their sole proprietorships into one business. They will be equal partners in the
Dewlou Diner. Dewey will contribute a building worth $100,000 (adjusted basis of $80,000), and $10,000 in cash. Louie
will contribute inventory worth $80,000 (adjusted basis of $85,000) and $30,000 cash. What are Dewey and Louie’s basis
in the partnership?
Dewey Louie
a.
$80,000 $85,000
b.
$90,000 $115,000
c.
$90,000 $110,000
d.
$110,000 $110,000
63. Dewey and Louie agree to combine their sole proprietorships into one business. They will be equal partners in the
Dewlou Diner. Dewey will contribute a building worth $100,000 (adjusted basis of $80,000), and $10,000 in cash. Louie
will contribute inventory worth $80,000 (adjusted basis of $85,000) and $30,000 cash. What is Dewlou’s basis in the
assets?
Building Inventory
a.
$80,000 $85,000
b.
$80,000 $80,000
c.
$100,000 $85,000
d.
$100,000 $80,000
64. During 2015, Mercedes incorporates her accounting practice. Mercedes is the sole shareholder. The following assets
are transferred to the corporation:
Cash
$1,000
Chapter 13
Computer equipment:
Fair market value
10,000
Adjusted basis
6,000
Original cost
12,000
What is the corporation’s total basis in all of the transferred assets?
a.
$6,000
b.
$7,000
c.
$10,000
d.
$11,000
e.
$13,000
65. On January 5, 2015, Mike acquires a 50% interest in Precision Tools Partnership by contributing property with an
adjusted basis of $20,000 and a fair market value of $24,000, subject to a mortgage of $16,000. What is Mike’s basis in
Precision Tools Partnership as of January 5, 2015?
a.
$- 0 –
b.
$10,000
c.
$12,000
d.
$16,000
e.
$20,000
66. Milo contributes a building with a fair market value of $400,000 to a new partnership in exchange for a 25% interest.
His adjusted basis in the building is $125,000, which is subject to a $100,000 mortgage. The partnership assumes the
mortgage. What is Milo’s basis in his partnership interest?
a.
$50,000
b.
$75,000
c.
$100,000
d.
$125,000
e.
$400,000
67. Nick and Rodrigo form the NRC Partnership by combining the assets of their respective businesses. Nick contributes
$10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Rodrigo contributes $90,000 and assets
worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NRC also assumes $60,000 of debt on Rodrigo’s assets.
What is Rodrigo’s basis in his partnership interest?
a.
$180,000
b.
$220,000
c.
$240,000
d.
$300,000
e.
$360,000
68. Nick and Rodrigo form the NRC Partnership by combining the assets of their respective businesses. Nick contributes
$10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Rodrigo contributes $90,000 and assets
worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NRC also assumes $60,000 of debt on Rodrigo’s assets.
What is Nick’s basis in his partnership interest?
Chapter 13
a.
$70,000
b.
$90,000
c.
$100,000
d.
$120,000
e.
$160,000
69. Winston is the sole shareholder of Winston Inc, an S corporation. In 2014, he paid $50,000 for his shares of stock.
During the current year, he contributes a building and land to the corporation. No additional shares of stock are issued.
The basis of this property is $75,000, and its fair market value is $200,000. What is Winston’s basis in his Winston stock
at the end of 2015?
a.
$50,000
b.
$75,000
c.
$125,000
d.
$150,000
e.
$225,000
70. Zeppo and Harpo are equal owners of the Marx Corporation. During the current year, they agree to admit Groucho as
a shareholder. Groucho will contribute $25,000 in cash and property worth $50,000 (adjusted basis of $35,000) for 25%
of Marx Corporation’s stock. What is Groucho’s basis in the Marx Corporation stock?
a.
$45,000
b.
$50,000
c.
$60,000
d.
$75,000
e.
$90,000
71. Nigel and Frank form NFS, Inc. an electing S corporation, by combining the assets of their respective businesses.
Nigel contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Frank contributes
$90,000 and assets worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NFS also assumes $60,000 of debt on
Frank’s assets. What is Nigel’s basis in his stock?
a.
$70,000
b.
$90,000
c.
$100,000
d.
$120,000
e.
$160,000
72. Nigel and Frank form NFS, Inc. an electing S corporation, by combining the assets of their respective businesses.
Nigel contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Frank contributes
$90,000 and assets worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NFS also assumes $60,000 of debt on
Frank’s assets. What is Frank’s basis in his stock?
a.
$180,000
b.
$220,000
c.
$240,000
Chapter 13
d.
$300,000
e.
$360,000
73. Clark Exploration Corporation was organized and began operations on October 1, 2015. It incurs $41,000 in legal fees
to obtain the corporate charter. The corporation elects to expense its organizational costs over the shortest allowable
period. What amount will Clark report for organizational expenses for 2015?
a.
$2,050
b.
$4,100
c.
$5,000
d.
$5,600
e.
$41,000
74. A new corporation’s choice for its annual accounting period
I.
must be approved by the IRS.
II.
must be the same as its majority shareholder.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
75. A fiscal year can be
I.
a period of 12 months ending on any day during the month other than a Sunday.
II.
a period of 12 months ending on the last day of any month other than January
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
76. Which of the following statements regarding a partnership’s tax year is/are correct?
I.
A partnership formed on July 1 must adopt a tax year ending on June 30.
II.
A valid business purpose can no longer be claimed as a reason for adoption of a tax year
other than the generally required tax year.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
77. Which of the following taxable years are allowable by a newly formed partnership without obtaining prior approval
from the IRS?
I.
A January 31 year-end if it is a retail enterprise with a natural business year ending
Chapter 13
January 31 and all of its principal partners are on a calendar year.
II.
A calendar year if majority partners and principal partners have varied year-ends.
III.
A taxable year that is the same as that of its majority partners.
a.
Only statement I is correct.
b.
Only statement III is correct.
c.
Only statement II is correct.
d.
Statements II and III are correct.
e.
Statements I, II, and III are correct.
78. Dogg Corporation, Katt Corporation, and Rabitt Corporation are equal partners in Critter Partnership. The partner’s
fiscal year ends follow:
Dogg Corporation
February 28
Katt Corporation
May 31
Rabitt Corporation
August 31
Which of the following statements is (are) correct?
I.
Critter Partnership may elect to use any of the three dates that the partners use.
II.
Critter Partnership must use the tax year of the partner that creates the least amount of
deferral.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
79. Snoopy Corporation, Garfield Corporation, and Dogbert Corporation are partners in Comic Partnership. The partners’
fiscal year ends and ownership interests follow:
Snoopy Corporation
March 31 FYE
15% Interest
Garfield Corporation
May 31 FYE
30% Interest
Dogbert Corporation
October 31 FYE
55% Interest
I.
Comic Partnership must use a calendar year end, unless the IRS approves an election for
a different tax year.
II.
Comic Partnership must use a October 31 fiscal year end.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
80. Doug, Kate, and Gabe own Refiner Group, Inc., an electing S corporation. The shareholder’s ownership percentages
and fiscal year ends follow:
Ownership
Year End
Doug
60%
January 31
Kate
20%
May 31
Gabe
15%
September 30
Which of the following statements is (are) correct?
Chapter 13
I.
Refiner Group, Inc. must use a calendar year.
II.
Refiner Group, Inc. may elect to use a fiscal year ending January 31.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
81. Which of the following businesses must use the accrual method of accounting?
I.
Champion Mortgage Corporation, which has annual gross receipts of $10,000,000.
II.
The Happy Bookworm, a local bookstore with annual gross receipts of $950,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
82. Which of the following businesses must use the accrual method of accounting?
I.
Pryor and Ransom, a local law firm with annual gross receipts of $650,000.
II.
Mayson Manufacturing, which has annual gross receipts of $20,000,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
83. Which of the following businesses can use the cash method?
I.
The Hateris Group, a partnership with 3 equal partners, of which one is The Hillard
Corporation. Average revenues for the Hateris Group, a financial planning firm, over the
last three years are $4,000,000.
II.
The Glidder Corporation, a clothing retailer that has average annual sales over the last
three years are $2,100,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
84. Which of the following businesses can use the cash method?
I.
The Donner Group, a partnership with 3 equal partners, of which one is The Garden
Corporation. Average revenues for the Donner Group, a consulting firm, over the last
three years are $4,000,000.
II.
The Mongoose Corporation, a computer software consultant that has average annual
fees from services over the last three years are $2,100,000.
Chapter 13
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
85. Franco and Melanie start a new business called F&M Delivery. Franco contributes $50,000 in cash and Melanie
contributes a fleet of vans worth $80,000. The business assumes Melanie’s $30,000 debt on the van. The business borrows
$500,000 to purchase necessary buildings and for working capital. They anticipate that the business will suffer losses for
at least three years before it becomes profitable. Which entity forms would be appropriate for Franco and Melanie’s new
business?
86. Discuss what limited liability means. What type of entity (or entities) offers this characteristic to its owners? What
type(s) of entity (or entities) do not provide this characteristic?
87. Does the selection of a corporate entity ever make sense based on a desire for lower marginal tax rates? Discuss.
39.6%.
88. Martina, an unmarried individual with no dependents, owns and operates an office supply store as a sole
proprietorship. The net income from the business is consistently $100,300 annually. Based solely on income taxes,
consider whether the corporate form of business will produce tax savings. Assume Martina uses the standard deduction
amount.
89. Determine the amount of income that Sarah would have from Micon Company in each of the following situations.
Sarah is a 50% owner and receives a salary of $40,000 from Micon Company. The salaries are not included in the Micon
Company’s $250,000 taxable income.
a.
Micon Company is a corporation and pays $50,000 in dividends.
b.
Micon Company is an S corporation and pays $50,000 in dividends.
c.
Micon Company is a partnership and it distributes $50,000 in cash to the partners. Sarah’s
salary is not a guaranteed payment.
d.
Micon Company is a partnership and it distributes $50,000 in cash to the partners. Sarah’s
salary is a guaranteed payment.
Sarah’s income is $65,000. She is taxed on her $40,000 salary and the $25,000 in dividends she
income. Sarah is not taxed on the $25,000 in dividends she receives.
not deductible by the partnership and are not income to the partners. Sarah is taxed on her
90. Janine and Johnny are single taxpayers who own the Queen’s Inn Tavern. Janine owns 70% and Johnny owns 30% of
Crossbow. Janine receives a payment of $40,000 and Johnny receives a payment of $60,000. Crossbow’s taxable income
is $200,000 before considering the payments to Janine and Johnny. Janine’s net taxable income from other sources is
$30,000 and Johnny’s net taxable income from other sources is $10,000. Determine the total income tax liability for each
of the following entity forms.
a.
Queen’s Inn Tavern is organized as a partnership. The payments are guaranteed payments.
b.
Queen’s Inn Tavern is organized as a corporation. The payments are salaries.
lower rates of both tax-paying entities creates the income tax savings.
91. Orville and Olivia are single taxpayers who own and operate Brimstone Company. Orville owns 60% and Olivia owns
40% of Brimstone. Orville receives a salary of $30,000 and Olivia receives a salary of $70,000. Brimstone Company’s
taxable income is $150,000 before considering the salary payments to the owners. Brimstone pays a $50,000 dividend
during the current year. Orville’s net taxable income from other sources is $40,000 and Olivia’s net taxable income from
other sources is $10,000. Determine the total income tax liability for each of the following entity forms.
a.
Brimstone Company is a corporation.
b.
Brimstone Company is an S corporation.
92. Discuss the characteristics of a personal service corporation (PSC).
93. Monica acquires a 25% interest in Terrapin Partnership during 2012 by contributing land with a fair market value of
$35,000, an adjusted basis of $18,000, and subject to a mortgage of $12,000. The partnership assumes the mortgage. What
is Monica’s adjusted basis in her partnership interest? Discuss how you arrived at that adjusted basis amount, and the
Chapter 13
underlying reasoning behind the rules you applied.
94. Terry and Elsa form Egret Company by contributing assets of their respective businesses. Terry contributes $5,000
cash and land with a fair market value of $35,000 (adjusted basis of $20,000) for a 40% interest. Elsa will contribute
services in organizing the startup of the company worth $20,000 and contributes $15,000 cash and inventory worth
$75,000 (adjusted basis of $80,000) for a 60% interest. Determine the amount of gain or loss recognized on the transfer of
the assets, each owner’s basis in the ownership interest, and Egret Company’s basis in the assets received for each of the
following entities.
a.
Egret Company is a partnership.
b.
Egret Company is a corporation.
95. Kim and Martina are equal owners of Roundball Company. They agree to admit Darcy as an equal owner. Darcy will
contribute $10,000 in cash and property worth $40,000 (adjusted basis of $25,000) for a 1/3 interest in Roundball. How
much gain (loss) will Darcy recognize and what is her basis in Roundball Company if Roundball is organized as a
a.
Partnership
b.
Corporation
96. Shannon and Art are each 10% partners in the Such-A-Deal Partnership. Due to several years of partnership operating
losses, both Shannon and Art have a zero basis in their partnership interests. For the current year, the partnership is
incurring a loss of $100,000. When he hears the news about the loss, Shannon tells Art he wishes the partnership
management would go to the local bank and borrow “a couple of hundred thousand dollars.” Art does not understand why
Shannon would want the partnership to go into debt. The concept of debt makes Art very nervous; Art personally does not
borrow money. In fact, Art does not even use credit cards. Explain to Art why Shannon wants the partnership to incur
more debt. Also, comment on why Art’s general concerns about debt have merit, specifically focusing on the partnership
debt.
97. Carson and Dan agree to become equal owners in ProClothing, a retailer of golf apparel. Dan will contribute $5,000
cash and a building worth $85,000 (adjusted basis of $60,000). The building is encumbered by a $40,000 mortgage that
ProClothing will assume. Carson will contribute $10,000 cash and inventory worth $40,000 (adjusted basis of $30,000).
What are Carson and Dan’s bases in ProClothing if the business is organized as a
a.
Partnership
b.
Corporation
Chapter 13
Match each statement with the correct term below.
a.
An entity with conduit tax characteristics that provides limited liability to its owners.
b.
An organization of two or more persons operating a business that is not taxed.
c.
A general partnership that offers limited liability to the partners.
d.
An association created under the laws of a state giving owners limited liability.
e.
Retains legal characteristics while obtaining tax characteristics of a conduit.
f.
A partnership in which the liability of at least one partner is limited.
98. Corporation
99. Limited Liability Company
100. Limited Liability Partnership
101. Limited Partnership
102. Partnership
103. S corporation