Question 1

Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium.On the later sale of the bond for $10,800,she has amortized $300 of the premium.Helen has a recognized gain of $800 ($10,800 amount realized - $10,000 adjusted basis).

Accepted Answer

The recognized gain is actually $500 ($10,800 amount realized - $10,300 adjusted basis). The premium of $1,000 was amortized over the life of the bond, so after the amortization of $300, the adjusted basis would be $10,300, not $10,000.

Question 2

In computing the amount realized when the fair market value of the property received cannot be determined,the fair market value of the property surrendered may be used.

Accepted Answer

According to the IRS guidelines, if the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used to compute the amount realized.

Question 3

If the buyer assumes the seller's liability on the property acquired,the seller's amount realized is decreased by the amount of the liability assumed.

Accepted Answer

The seller's amount realized is increased by the amount of the liability assumed by the buyer, as it effectively adds to the total consideration received for the property.

Question 4

The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

Accepted Answer

This is the definition of fair market value according to the IRS.

Question 5

A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Accepted Answer

A realized loss whose recognition is postponed does not result in the recovery of more than the taxpayer's cost or other basis; it merely delays the recognition of the loss for tax purposes, not allowing for any recovery beyond the original investment.

Question 6

The amount received for a utility easement on land is included in the gross income of the taxpayer.

Accepted Answer

The answer of The amount received for a utility easement...

Question 7

Reggie owns all the stock of Amethyst,Inc.(adjusted basis of $100,000).If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000,Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.

Accepted Answer

The correct answer is false because if Reggie receives a distribution of $90,000 and the corporation has earnings and profits of $15,000, his capital gain would be $5,000 but his adjusted basis for his Amethyst stock would be reduced to $85,000 ($100,000 - $15,000).

Question 8

If insurance proceeds are received for property used in a trade or business,a casualty transaction can result in recognized gain,but cannot result in a recognized loss.

Accepted Answer

If insurance proceeds received for property used in a trade or business are less than the adjusted basis of the property, a recognized loss can be claimed. However, if the insurance proceeds exceed the adjusted basis, any excess can result in recognized gain.

Question 9

Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the determination of the property's adjusted basis whereas capital expenditures are added to the original basis.

Accepted Answer

This is the correct statement regarding the treatment of expenditures for ordinary repairs and maintenance versus capital expenditures in determining the adjusted basis of a property.

Question 10

Monroe's delivery truck is damaged in an accident.Monroe's adjusted basis for the delivery truck prior to the accident is $20,000.If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000,his adjusted basis for the delivery truck after the accident is $21,000.

Accepted Answer

The answer of Monroe's delivery truck is damaged in an...

Question 11

The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is made.The amount of the amortized premium is treated as an interest deduction.

Accepted Answer

The statement is true. When the amortization election is made, the adjusted basis of a taxable bond purchased at a premium is reduced by the amount of the amortized premium. This reduced basis is used to calculate any gain or loss upon disposition of the bond. The amount of the amortized premium is also treated as an interest deduction and can reduce taxable income.

Question 12

A realized gain on the sale or exchange of a personal use asset is recognized,but a realized loss on the sale,exchange,or condemnation of a personal use asset is not recognized.

Accepted Answer

This is true according to the tax laws in the United States. Personal use assets, such as a primary residence, are not considered investments and therefore any losses incurred on their sale cannot be recognized for tax purposes. However, gains can still be subject to capital gains taxes.

Question 13

If the amount of a corporate distribution is less than the amount of the corporate earnings and profits,the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.

Accepted Answer

This is true. When the distribution is less than the earnings and profits, it is considered a non-taxable return of capital and the shareholders' adjusted basis for the stock remains unchanged.

Question 14

If a seller assumes the buyer's liability on the property acquired,the buyer's adjusted basis for the property is increased by the amount of the liability assumed.

Accepted Answer

The answer of If a seller assumes the buyer's liability...

Question 15

Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis at the date of disposition.

Accepted Answer

This statement is true. Realized gain or loss is calculated by subtracting the adjusted basis of the property from the amount realized from its sale or disposition.

Question 16

A realized gain whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.

Accepted Answer

This is true because if a gain is realized but its recognition is postponed, the taxpayer continues to hold the asset and therefore may see the value of the asset increase even further, leading to a temporary recovery of more than their original cost or basis.

Question 17

The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the shareholder-recipient's basis in the stock investment is treated as a capital gain.

Accepted Answer

This statement is true. The excess amount of a corporate distribution that exceeds the shareholder's basis in the stock investment is treated as a capital gain for tax purposes. This is commonly known as a taxable portion of the distribution. It is important for shareholders to keep track of their basis in their stock investments to accurately calculate any capital gains that may result from corporate distributions.

Question 18

If Wal-Mart stock increases in value during the tax year by $6,000,the amount realized is a positive $6,000.

Accepted Answer

The amount realized refers to the total amount received from a sale transaction. If Wal-Mart stock increases in value but is not sold, there is no transaction, and thus no amount realized. The $6,000 increase is an unrealized gain, not an amount realized.

Question 19

In a casualty or theft,the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.

Accepted Answer

This statement is true. When property is involved in a casualty event or theft, the basis of the property is reduced by any insurance proceeds received and any recognized loss as a result of the incident. This is commonly used for tax purposes, as the adjusted basis affects the amount of gain or loss that will be recognized if the property is sold later on.

Question 20

Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land.During the first year,Milton deducts cost recovery of $4,922.Milton's adjusted basis for the building at the end of the first year is $195,078 ($200,000 - $4,922).

Accepted Answer

This is correct as the adjusted basis for the building after the first year would be the initial cost of the building ($200,000) minus the cost recovery deduction ($4,922), which equals $195,078.

Quiz 14: Property Transactions Determination of Gain and Loss and Basic Considerations