Chapter 9
1. Intangible property lacks a physical existence; the rights exist only because of economic rights the property possesses.
a.
True
b.
False
True
2. Personal property consists of any property that is held by an individual.
a.
True
b.
False
False
3. Adjusted basis is equal to the initial basis, plus or minus the cumulative effects of adjustments.
a.
True
b.
False
True
4. General Telelpnone gave Wynonna $2,000 for an easement for power lines across her property. She must realize the
gain or loss on the receipt of cash.
a.
True
b.
False
False
5. An asset’s holding period normally begins on the day after it is acquired and ends on the day of its disposition.
a.
True
b.
False
True
6. Phyllis purchased an automobile for $3,000 down and a note for $15,000. During the year she paid interest of $1,000.
Her basis is $18,000.
a.
True
b.
False
True
7. Brad, an engineering consultant, was given stock valued at $3,000 for services rendered. His basis in the stock he
received for the services is zero since he received no cash.
a.
True
b.
False
False
8. Pedro purchased all of the stock of Regis Corporation. Since he purchased all of the stock the basis in all of the
corporation’s assets must be restated to fair market value.
a.
True
b.
False
False
9. Taxpayers who construct property for their own use must capitalize both the direct and indirect construction costs.
a.
True
b.
False
Chapter 9
True
10. The split basis rule for determining the basis of gifts allows for one basis for determining losses and another for
calculation of gains.
a.
True
b.
False
True
11. Whenever the donor’s adjusted basis is used to compute a gain or loss on the donee’s disposition of property received
by gift, the donee’s holding period is always the period of time the property was owned by the donee only.
a.
True
b.
False
False
12. The general rule for determining the basis of inherited property is that the basis in the hands of the heir is its fair
market value at the date of death or at the alternative valuation date.
a.
True
b.
False
True
13. The split basis rules for business property prevent the deduction of the disallowed personal loss through depreciation
or a loss from the sale of business property.
a.
True
b.
False
True
14. When a stock dividend is nontaxable, part of the basis of the original stock must be allocated to the new stock received
as a dividend.
a.
True
b.
False
True
15. When a security is sold at a loss and and a substantially identical security has been purchased within 30 days before
the sale date the loss is disallowed because it is classified as a wash sale.
a.
True
b.
False
True
16. Determine the proper classification(s) of the asset discussed in the following scenario: Jack bought a new table saw for
his home.
Personal use property.
IV.
Intangible property.
Business use property.
V.
Real estate.
Tangible property.
VI.
Personal property.
a.
Statements I and III are correct.
b.
Only statement VI is correct.
c.
Statements II and III are correct.
d.
Statements II, III, and VI are correct.
Chapter 9
e.
Statements I, III, and VI are correct.
e
17. Determine the proper classification(s) of the asset discussed in the following scenario: Victoria purchased a new show
case saw for her antique business.
Personal use property.
IV.
Intangible property.
Business use property.
V.
Real estate.
Tangible property.
VI.
Personal property.
a.
Statements I, III and VI are correct.
b.
Statements II and III are correct.
c.
Only statement VI is correct.
d.
Statements II, III, and VI are correct.
e.
Statements II, IV and VI are correct.
18. Determine the proper classification(s) of the asset discussed in the following scenario: Judge Ruiz purchased a new
brass-trimmed gavel to use in her courtroom.
Personal use property.
IV.
Intangible property.
Business use property.
V.
Real estate.
Tangible property.
VI.
Personal property.
a.
Statements I and III are correct.
b.
Only statement VI is correct.
c.
Statements II and III are correct.
d.
Statements II, III, and VI are correct.
e.
Statements II and VI are correct.
19. Determine the proper classification(s) of the asset discussed in the following scenario: Judge Marshall purchased a
new gold-trimmed gavel to decorate his living room.
Personal use property.
IV.
Intangible property.
Business use property.
V.
Real estate.
Tangible property.
VI.
Personal property.
a.
Statements I and III are correct.
b.
Only statement VI is correct.
c.
Statements II and III are correct.
d.
Statements II, III, and VI are correct.
e.
Statements I, III and VI are correct.
e
20. Determine the proper classification(s) of the asset discussed in the following scenario: “Cher receives a copyright for a
new song she has written”
Personal use property.
IV.
Intangible property.
Business use property.
V.
Real estate.
Tangible property.
VI.
Personal property.
a.
Statements I and III are correct.
Chapter 9
b.
Only statement IV is correct.
c.
Statements II and IV are correct.
d.
Statements II, IV, and VI are correct
e.
Statements II and VI are correct.
c
21. Determine the proper classification(s) of a house owned and used by John as his principal residence.
Personal use property.
IV.
Intangible property.
Business use property.
V.
Real estate.
Tangible property.
VI.
Personal property.
a.
Statements I, III, and V are correct.
b.
Statements I, III, and VI are correct.
c.
Only statement I and V are correct.
d.
Only statement V is correct.
e.
Only statement I is correct.
a
22. Determine the proper classification(s) of a house owned and used by Rhonda as her insurance agency office.
Personal use property.
IV.
Intangible property.
Business use property.
V.
Real estate.
Tangible property.
VI.
Personal property.
a.
Statements I, III, and V are correct.
b.
Statements II, III, and V are correct.
c.
Only statements I and V are correct.
d.
Only statement V is correct.
e.
Only statement II is correct.
23. Makemore Company purchases a factory for $800,000. The purchase price is properly allocated 90% to the building
and 10% to the land. In the first year, Makemore adds a storage shed to the building at a cost of $8,000. The utility
company pays Makemore $1,500 for an easement to run utility lines across the land. A total depreciation of $45,000 is
deducted over the 3 years. Determine the adjusted basis of the building and the land as of the end of year 3:
a.
$728,000 building; $78,500 land
b.
$683,000 building; $80,000 land
c.
$683,000 building; $78,500 land
d.
$728,000 building; $80,000 land
c
24. Tien purchases an office building for $400,000, paying a $75,000 cash down payment and borrowing $325,000 from
Atlantic Meridian Mortgage Co. The purchase price is properly allocated 90% to the building and 10% to the land. Two
years after the purchase, Tien remodeled one floor of the building at a cost of $25,000. Annual maintenance costs and
property taxes total $4,000. A total depreciation of $36,000 is deducted over the 3 years. Determine the adjusted basis of
the building and the land as of the end of year 3:
a.
$56,500 building; $7,500 land
b.
$89,000 building; $10,000 land
c.
$346,500 building; $42,500 land
Chapter 9
d.
$349,000 building; $40,000 land
e.
$353,000 building; $40,000 land
25. Which of the following is/are adjustment(s) to the basis of property after the initial basis is determined?
I.
Add the costs of protecting ownership of the property.
II.
Add the expenditures for painting the company name on the property.
III.
Subtract the capital recovery resulting from collections for easements.
IV.
Subtract the capital recovery resulting from depreciation deductions.
a.
Only statement IV is correct.
b.
Only statements I and III are correct.
c.
Only statements III and IV are correct.
d.
Only Statements II, and IV are correct.
e.
Statements I, II, III, and IV are correct.
e
26. David pays $35,000 cash and issues a mortgage note for $95,000 to purchase land. He pays $750 to his attorney for
reviewing the purchase agreement. David’s initial basis in the land is
a.
$- 0 –
b.
$35,000
c.
$35,750
d.
$130,000
e.
$130,750
e
27. Mary pays $25,000 and secures a mortgage note for $75,000 to purchase a vacation home. She pays $200 to her
attorney for reviewing the purchase agreement and $1,500 in points to the mortgage company. Mary’s initial basis in the
vacation home is
a.
$- 0 –
b.
$25,000
c.
$26,700
d.
$100,200
e.
$101,700
28. Juan and Dorothy purchase a new residence on May 1, 2015. Juan and Dorothy pay the full amount of the 2015
property taxes of $7,200 on their new house when the taxes became due in December of 2015. What amount of the taxes
that Juan and Dorothy pay in December 2015 can they deduct on their 2015 tax return?
a.
Zero, no amount is deductible.
b.
$2,400
c.
$4,800
d.
$7,200
c
29. Sammy buys a 20% interest in Duvall Corporation paying $100,000 cash on January 1, 2014. During 2014, Duvall
Corporation reports a loss of $60,000 and pays cash dividends to shareholders of $5,000. For 2015, Duvall Corporation
Chapter 9
has income of $200,000 and pays cash dividends of $40,000. If Duvall Company is organized as an S Corporation,
Sammy’s basis in the Duvall Corporation stock at the end of 2015 is:
a.
$88,000
b.
$89,000
c.
$100,000
d.
$119,000
e.
$128,000
30. Oscar buys a 10% interest in Britanny Corporation paying $92,000 cash on January 1, 2014. During 2014, Britanny
Corporation reports a loss of $30,000 and pays cash dividends to shareholders of $10,000. For 2015, Britanny Corporation
has a loss of $60,000 and pays cash dividends of $20,000. If Britanny Company is organized as an S Corporation, Oscar’s
basis in the Britanny Corporation stock at the end of 2015 is:
a.
$80,000
b.
$86,000
c.
$92,000
d.
$98,000
e.
$104,000
a
31. Determine the year-end adjusted basis of Roberto’s 1/2 interest in the Halifax Partnership. At the beginning of the
year, Roberto’s adjusted basis is $80,000. The net operating profit of the partnership is $90,000. Also, Halifax distributes
$15,000 of cash to Roberto.
a.
$65,000
b.
$110,000
c.
$140,000
d.
$155,000
e.
$185,000
32. Buffey operates a delivery service. She purchased a van in 2013 for $25,000, and she sold it in 2015 for $15,000.
Buffey did not deduct any depreciation on the van from 2013 through 2015, although total allowable depreciation on the
van would have been $17,000. What is the amount of Buffey ‘s recognized gain or loss on the sale of the van?
a.
$10,000 loss
b.
$7,000 gain
c.
$8,000 gain
d.
$15,000 gain
e.
$17,000 gain
33. Morrris, an attorney, performs 5 hours of legal work for Andy. Morrris ‘s normal billing rate is $120 per hour. Andy, a
software consultant, gives Morrris a new computer for his office in payment of the bill. The computer’s adjusted basis was
$500 and its fair market value is $550 Morrris ‘ basis in the computer is
a.
$- 0 –
b.
$500
c.
$550
Chapter 9
d.
$600
e.
$1,150
34. Harold purchases land and a building by paying cash of $35,000, and assuming the seller’s $82,000 mortgage. In
addition, Harold pays $3,000 of legal fees related to the purchase. For property tax purposes, the land is valued at $17,000
and the building at $34,000. Harold’s basis in the building is
a.
$17,000
b.
$34,000
c.
$40,000
d.
$80,000
e.
$120,000
35. Ted purchases some forest land in 2013 with the intention of building a log cabin to use as a vacation home. To obtain
the land, Ted pays $10,000 cash, assumes the seller’s $19,000 mortgage on the land and pays $3,000 in commissions and
legal fees related to the purchase. In 2014, Ted pays a contractor $4,000 to bulldoze and level the site of the log cabin. In
2015, Ted has a well dug and water and sewer lines laid in the ground at a cost of $6,000. Ted paid $2,000 of property
taxes in 2013 and $5,000 of property taxes in 2014 and 2015 on the land. What is Ted’s basis in the land at the end of
2015?
a.
$54,000
b.
$42,000
c.
$38,000
d.
$36,000
e.
$32,000
36. Janet is the business manager for Greenville Auto Mart. She buys a new car from the dealership for $35,000. The basis
of the car to the dealership was $30,000. The car lists for $42,00, but the dealer would sell the car for $40,000. What is
Janet’s basis in the new car?
a.
$30,000
b.
$35,000
c.
$40,000
d.
$42,000
e.
$47,000
c
37. Lu is interested in purchasing the assets of Idaho Potato Chip Company. Idaho’s assets are:
Adjusted Basis
Fair Market Value
Cash
$2,300
$2,300
Inventory
$16,500
$19,200
Equipment
$13,000
$ 9,000
Land
$10,000
$40,500
Building
$76,600
$129,000
$118,400
$200,000
All of the following statements are correct except:
Chapter 9
a.
If Lu pays $225,000 for the assets, Lu’s basis in the tangible assets will be $200,000.
b.
If Lu buys the stock of Idaho for $225,000, the basis in the assets will be $118,400.
c.
If Lu pays $225,000 for the assets, Lu will have a basis in the building of $129,000.
d.
If Lu buys the stock of Idaho for $225,000, he will recognize goodwill of $25,000.
38. Nanci purchases all of the assets of Michael’s Security Service for $200,000. The assets are as follows:
Asset
Adjusted Basis
Fair Market Value
Inventory
$25,000
$50,000
Equipment
60,000
40,000
Supplies
20,000
20,000
Building
80,000
95,000
Land
10,000
20,000
$195,000
$225,000
What is Nanci’s basis in the equipment?
a.
$17,776
b.
$35,556
c.
$40,000
d.
$60,000
e.
$61,538
39. John purchases all of the common stock of Clarke Corporation for $280,000. The assets of the corporation are:
Asset
Adjusted Basis
Fair Market Value
Inventory
$25,000
$50,000
Equipment
60,000
40,000
Supplies
20,000
20,000
Building
80,000
95,000
Land
10,000
20,000
$195,000
$225,000
What is John’s basis in the common stock he acquired?
a.
$195,000
b.
$215,000
c.
$225,000
d.
$250,000
e.
$280,000
e
40. Courtney is interested in purchasing The Matrix Company. Matrix’s assets are:
Adjusted Basis
Fair Market Value
Cash
$2,300
$2,300
Inventory
16,500
19,200
Equipment
13,000
9,000
Land
25,000
40,500
Building
66,600
$129,000
Chapter 9
Totals
$123,400
$200,000
I.
If Courtney buys the stock of The Matrix for $225,000, the total basis in the assets will be
$200,000.
II.
If Courtney pays Matrix $240,000 for the Matrix assets, Courtney’s total basis in all of the
assets of the business will be $123,400.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
41. Tillman is building a warehouse for use in his business. The construction costs include the following:
Direct labor
$35,000
Direct materials
20,000
Architect fees
5,000
Interest on construction loan
3,000
Depreciation of equipment used in construction
1,500
Indirect Administrative costs during construction
2,000
What is Tillman’s basis in the warehouse?
a.
$60,000
b.
$61,500
c.
$63,500
d.
$64,500
e.
$66,500
e
42. Kobe receives a gift of rare books valued at $10,000. The books have an adjusted basis of $6,000 to the donor. Several
months later, Kobe sells the books to a professional collector for $7,000. What is Kobe‘ gain or (loss) on the sale?
a.
No gain or (loss) is recognized
b.
$1,000 gain
c.
$4,000 gain
d.
$1,000 loss
e.
$3,000 loss
43. Hector receives a gift of rare books valued at $7,000. The books have an adjusted basis of $11,000 to the donor.
Several months later, Hector sells the books to a professional collector for $8,000. What is Hector’s gain or (loss) on the
sale?
a.
$1,000 gain
b.
$4,000 gain
c.
No gain or loss is recognized
d.
$1,000 loss
e.
$3,000 loss
c
44. On July 3, 2015, Cynthia receives a gift of a collection of books valued at $10,000. The books have an adjusted basis
of $6,000 to the donor. They had been purchased in 2005. Several months after receiving the gift, Cynthia sells the books
to a professional collector for $9,000. How is Cynthia’s holding period for the books determined?
a.
It depends on whether a gift tax was paid at the time of the gift.
b.
It begins in 2005.
c.
It begins in 2015.
d.
It is irrelevant because the transfer was a gift. Gifts are always considered to be held long-term.
45. Sarah purchased a diamond bracelet for $3,000 while vacationing in Hong Kong during 2008. Sarah gives the bracelet
to her daughter Amy when she graduates from college in 2015. The bracelet is appraised at $8,000 on that date. In
October 2015, Amy sells the bracelet for $9,000. What is the amount of gain Amy should recognize on the sale?
a.
No gain or (loss) is recognized
b.
$1,000
c.
$4,000
d.
$5,000
e.
$6,000
e
46. Lydia purchased a sapphire bracelet for $3,000 while vacationing in Hong Kong during 2005. Lydia gives the bracelet
to her daughter Amy when she graduates from college in 2015. The bracelet is appraised at $8,000 on that date. In
October 2015, Amy sells the bracelet for $9,000. How is Amy’s holding period for the bracelet determined?
a.
It depends on whether a gift tax was paid at the time of the gift.
b.
It begins in 2005.
c.
It begins in 2015.
d.
It is irrelevant because the transfer was a gift and gifts are always considered to be held long-term.
47. Diane receives a gift of stock from Sue on July 2, 2015, when the stock was trading for $20,000. Sue paid $4,000 for
the stock several years ago. Sue pays a gift tax of $500 on the transfer. Diane’s basis in the stock is:
a.
$4,000
b.
$4,100
c.
$4,400
d.
$20,000
e.
$20,400
c
48. On June 10, 2014, Wilhelm receives a gift of gold coins with a fair market value of $10,000. The gold coins had an
adjusted basis of $12,000 to the donor. Wilhelm sells the gold coins August 1, 2015, for $8,000. What is the amount of the
recognized gain or loss on the sale?
a.
$- 0 –
b.
$2,000 loss
c.
$3,000 loss
d.
$4,000 loss
e.
$5,000 loss
Chapter 9
49. On June 10, 2014, Akira receives a gift of a rare marble statue with a fair market value of $9,000. The marble statue
had an adjusted basis of $12,000 to the donor and was purchased in 2013. Akira sells the marble statue July 5, 2015, for
$8,000. When does Akira’s holding period for the rare marble statue begin?
a.
It begins in 2013.
b.
It begins in 2015.
c.
It is irrelevant because the transfer was a gift and gifts are always considered to be held long-term.
d.
It depends on whether a gift tax was paid at the time of the gift.
e.
It begins in 2014.
e
50. Robert receives a car as a gift from his mother. The car’s purchase price was $20,000, and it was used personally prior
to the gift. Robert uses the car 80% of the time in his pizza business. The car’s value at the date of the gift is $9,000. What
is Robert’s basis in the car for depreciation purposes?
a.
$- 0 –
b.
$7,200
c.
$9,000
d.
$16,000
e.
$20,000
51. Valerie receives a painting as a gift from her aunt. The painting is valued at $6,000 on the date of the gift. Valerie’s
aunt’s basis in the painting is $13,000. Three years later Valerie sold the painting for $8,000. What is the amount of gain
or (loss) recognized by Valerie on the sale?
a.
No gain or (loss) is recognized
b.
$5,000 loss
c.
$2,000 gain
d.
$7,000 loss
e.
$2,000 loss
a
52. Sanford gives Mitchell 100 shares of stock that cost Sanford $5,000 several years ago. On the date of the gift, the
stock is valued at $3,000. Mitchell holds the stock until the value increases and sells it for $4,000. What is Mitchell’s
recognized gain or loss on the sale?
a.
No gain or (loss) is recognized
b.
$1,000 loss
c.
$1,000 gain
d.
$2,000 loss
e.
$4,000 gain
a
53. Sarah gave her granddaughter, Alice, some Eli Lilly Co. stock last year when its fair market value was $25,000. Gift
taxes of $4,000 were paid on this transfer. Sarah acquired the stock in 2004 at a cost of $35,000. Alice sold the Eli Lilly
stock this year for $32,000. What amount of gain (loss) will Alice recognize from her sale of the stock?
a.
No gain or loss is recognized.
b.
$7,000
Chapter 9
c.
($7,000)
d.
($3,000)
a
54. Hilliard receives a gift of stock from Martha on June 1 of the current year. Martha paid $15,000 for the stock several
years ago. Martha pays a gift tax of $400 on the transfer.
I.
If the fair market value of the stock on June 1 of the current year is $20,000, Hilliard has a
basis in the stock of $15,100.
II.
If the fair market value of the stock on June 1 of the current year is $14,000, and Hilliard
sells the stock for $13,000 on June 2 of the current year, Hilliard realizes a loss on the sale
of $1,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
55. Larry gives Linda 300 shares of stock he had purchased several years ago for $8,000. On the date of the gift, the stock
has a fair market value of $6,000. Linda sells the 300 shares for $5,500 one month after the gift, Linda realizes a
a.
$- 0 – gain or loss
b.
$500 short-term capital loss
c.
$500 long-term capital loss
d.
$2,500 short-term capital loss
e.
$2,500 long-term capital loss
56. Terry gives Brenda 1,000 shares of stock he had purchased several years ago for $5,000. On the date of the gift, the
stock has a fair market value of $4,000. Brenda sells the 1,000 shares for $5,500 one month after the gift, Brenda realizes
a
a.
$- 0 – gain or loss
b.
$500 short-term capital gain
c.
$500 long-term capital gain
d.
$1,500 short-term capital gain
e.
$1,500 long-term capital gain
c
57. Rosie inherits 1,000 shares of Northern Skies Airline Corporation stock from the estate of her Uncle Tony. Tony died
on July 2, 2015. The stock’s value on July 2, 2015, is $4,000. Tony’s basis in the stock was $3,000. The stock has a fair
market vale of $7,000 on October 1, 2015, when it is transferred to her. Rosie sells the stock October 11, 2016. What is
Rosie’s basis in the stock?
a.
$- 0 –
b.
$1,000
c.
$3,000
d.
$4,000
e.
$7,000