Question 1

Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a new asset worth $20,000.Which of the following statements is false?
A)The old asset's FMV is $20,000.
B)If the exchange is nontaxable,Berly's tax basis in the new asset is $12,300.
C)If the exchange is taxable,Berly's recognized gain is $7,700.
D)None of the statements is false.

Accepted Answer

The answer of Berly Company transferred an old asset with...

Question 2

Kornek Inc.transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in exchange for a new asset worth $260,000.Which of the following statements is false?
A)If the exchange is taxable,Kornek recognizes a $48,000 gain.
B)If the exchange is nontaxable,Kornek recognizes a $12,000 gain.
C)If the exchange is nontaxable,Kornek's tax basis in the new asset is $212,000.
D)None of the statements is false.

Accepted Answer

If the exchange is nontaxable, Kornek does not recognize a gain. The tax basis in the new asset would be $212,000, which is the adjusted tax basis of the old asset plus the cash paid. Therefore, statement B is false. The other statements are true. If the exchange is taxable, Kornek recognizes a $48,000 gain ($260,000 - $200,000 - $12,000). If the exchange is nontaxable, Kornek's tax basis in the new asset is $212,000.

Question 3

Teco Inc.and MW Company exchanged like-kind production assets.Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis,and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis.Teco paid $7,500 cash to MW as part of the exchange.Which of the following statements is false?
A)Teco's realized gain is $26,100 and recognized gain is -0-.
B)MW's realized gain is $59,400 and recognized gain is $7,500.
C)Teco's basis in its newly acquired asset is $61,400.
D)MW's basis in its newly acquired asset is $35,600.

Accepted Answer

The answer of Teco Inc.and MW Company exchanged like-kind production...

Question 4

Which of the following statements about like-kind exchanges is false?
A)Like-kind property must be held for either business or investment use.
B)Businesses cannot engage in like-kind exchanges of inventory.
C)The definition of like-kind property for tangible personalty is determined by the IRS.
D)Business cannot exchange undeveloped land for developed real estate.

Accepted Answer

Businesses can exchange undeveloped land for developed real estate as long as both properties are held for business or investment purposes, making statement D false.

Question 5

Eliot Inc.transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000.Which of the following statements is false?
A)The old asset's FMV is $70,000.
B)If the exchange is nontaxable,Eliot's recognized gain is $5,000.
C)If the exchange is nontaxable,Eliot's tax basis in the new asset is $58,100.
D)None of the statements is false.

Accepted Answer

The answer of Eliot Inc.transferred an old asset with a...

Question 6

Nagin Inc.transferred an old asset in exchange for a new asset worth $84,000 and $6,000 cash.The old asset and new asset were like-kind properties.Which of the following statements is true?
A)If Nagin's basis in the old asset was $95,000,Nagin can recognize a $5,000 loss.
B)If Nagin's basis in the old asset was $85,000,Nagin must recognize a $6,000 gain.
C)If Nagin's basis in the old asset was $79,200,Nagin must recognize a $6,000 gain.
D)None of the above is true.

Accepted Answer

In a like-kind exchange, the new asset's basis is the same as the old asset's basis. Since the old and new assets are like-kind, Nagin's basis in the new asset is $95,000. The total value of the new asset and cash received is $90,000, which is less than the old asset's basis of $95,000. Therefore, Nagin must recognize a gain of the difference, which is $5,000. Thus, if Nagin's basis in the old asset was $79,200, then the recognized gain would be $5,800 ($84,000 + $6,000 cash - $79,200 basis), and if Nagin's basis in the old asset was $85,000, then Nagin would not recognize any gain or loss as the total consideration received is equal to the old asset's basis.

Question 7

Eight years ago,Prescott Inc.realized a $16,200 gain on the exchange of old equipment for new equipment.Prescott included the gain in book income,but the exchange was nontaxable.This year,Prescott sold the new equipment for $2,500.At date of sale,the equipment's book basis and tax basis had both been depreciated to zero.Which of the following statements is true?
A)The nontaxable exchange had no effect on Prescott's deferred tax accounts.
B)The nontaxable exchange resulted in a deferred tax asset.
C)The sale of the new equipment had no effect on Prescott's deferred tax accounts.
D)None of the above is true.

Accepted Answer

The sale of the new equipment had no effect on Prescott's deferred tax accounts because both the book basis and tax basis were zero, meaning there was no gain or loss to recognize for tax purposes.

Question 8

Denali,Inc.exchanged equipment with a $230,000 adjusted basis for like-kind equipment with a $200,000 FMV and $5,000 cash.How much loss may Denali recognize?
A)$5,000
B)$25,000
C)$30,000
D)$0

Accepted Answer

In a like-kind exchange, losses are not recognized. Denali cannot recognize a loss even though the adjusted basis of the equipment given up exceeds the fair market value of the equipment received plus cash.

Question 9

Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash.Which of the following statements is false?
A)If the exchange is taxable,Itak recognizes a $6,700 gain.
B)If the exchange is nontaxable,Itak recognizes a $3,000 gain.
C)If the exchange is nontaxable,Itak's tax basis in the new asset is $44,300.
D)None of the statements is false.

Accepted Answer

The answer of Itak Company transferred an old asset with...

Question 10

Rydell Company exchanged business equipment (initial cost $55,250; accumulated depreciation $25,450)for like-kind equipment worth $44,000 and $2,000 cash.As a result,Rydell must recognize:
A)$2,000 ordinary gain
B)$2,000 Section 1231 gain
C)No gain or loss
D)None of the above

Accepted Answer

Rydell Company received $2,000 cash in addition to the like-kind equipment, which is considered "boot" in a like-kind exchange. The receipt of boot requires recognition of gain to the extent of the lesser of the boot received or the realized gain. Here, the realized gain is $14,200 ($44,000 + $2,000 - $29,800), and the boot is $2,000, so Rydell must recognize a $2,000 ordinary gain.

Question 11

Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for a new asset worth $90,000 and $10,000 cash.Which of the following statements is false?
A)The old asset's FMV is $100,000.
B)If the exchange is nontaxable,Doppia's recognized gain is $10,000.
C)If the exchange is nontaxable,Doppia's tax basis in the new asset is $78,750.
D)None of the statements is false.

Accepted Answer

The answer of Doppia Company transferred an old asset with...

Question 12

Which of the following statements about boot included in a nontaxable exchange is false?
A)The purpose of boot is to equalize the values of the exchanged properties.
B)The payment of boot triggers recognition of realized gain to the payer.
C)The receipt of boot triggers recognition of realized gain to the recipient.
D)The receipt of boot does not trigger recognition of realized loss to the recipient.

Accepted Answer

The payment of boot triggers recognition of realized gain to the **recipient** (not the payer).

Question 13

Five years ago,Q&J Inc.transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000.Q&J included its $127,000 realized gain in book income,but the exchange was nontaxable.This year,Q&J sold the parcel of land received in the exchange for $533,000 cash.Compute Q&J's book and tax gain on sale.
A)$188,000 book and tax gain
B)$188,000 book gain and $61,000 tax gain
C)$61,000 book and tax gain
D)None of the above

Accepted Answer

The answer of Five years ago,Q&J Inc.transferred land with a...

Question 14

Luce Company exchanged the copyright on a software application for a copyright on a different software application.Luce's gain on the exchange was nontaxable (because the copyrights were like-kind)but was included in financial statement income.Which of the following statements is false?
A)Luce's book basis in the copyright received is the copyright's cost (FMV).
B)Luce's tax basis in the copyright received equals its tax basis in the copyright surrendered.
C)Luce's future amortization deductions with respect to its tax basis in the copyright will be different from future amortization expense for financial statement purposes.
D)None of the statements is false.

Accepted Answer

The answer of Luce Company exchanged the copyright on a...

Question 15

YCM Inc.exchanged business equipment (initial cost $114,800; accumulated depreciation $63,400)for like-kind equipment worth $110,000 and $10,000 cash.As a result,Rydell must recognize:
A)No gain or loss
B)$10,000 Section 1231 gain
C)$10,000 ordinary gain
D)None of the above

Accepted Answer

The answer of YCM Inc.exchanged business equipment (initial cost $114,800;...

Question 16

Which of the following statements about nontaxable exchanges is true?
A)The parties to the exchange agree that the properties exchanged are of equal value.
B)The parties to the exchange both realize gain on the exchange.
C)No cash can change hands in a nontaxable exchange.
D)Any gain realized on the exchange is not included in financial statement income.

Accepted Answer

In a nontaxable exchange, the parties agree that the properties exchanged are of equal value. This means that no gain or loss is recognized for tax purposes. However, financial statement income will still reflect any gain or loss realized on the exchange.

Question 17

LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash.Which of the following statements is false?
A)If the exchange is taxable,LiO recognizes an $1,100 loss.
B)If the exchange is nontaxable,LiO recognizes no loss.
C)If the exchange is nontaxable,LiO's tax basis in the new asset is $12,100.
D)None of the statements is false.

Accepted Answer

The answer of LiO Company transferred an old asset with...

Question 18

Five years ago,Q&J Inc.transferred land with a $345,000 book and tax basis for a different parcel of land worth $472,000.Q&J included its $127,000 realized gain in book income,but the exchange was nontaxable.This year,Q&J sold the parcel of land received in the exchange for $533,000 cash.Which of the following statements is true?
A)The nontaxable exchange had no effect on Q&J's deferred tax accounts.
B)The nontaxable exchange resulted in a deferred tax liability that reversed this year.
C)The nontaxable exchange resulted in a deferred tax asset that reversed this year.
D)The sale of the parcel of land had no effect on Q&J's deferred tax accounts.

Accepted Answer

When Q&J transferred land in a nontaxable exchange, it deferred the recognition of gain and loss. The difference between the basis of the land transferred and the fair market value of the land received created a deferred tax liability. When Q&J sold the land received in the exchange, it realized the deferred gain and recognized the deferred loss, which reversed the deferred tax liability. Therefore, the nontaxable exchange resulted in a deferred tax liability that reversed this year.

Question 19

G&G Inc.transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000.Which of the following statements is false?
A)The old asset's FMV is $150,000.
B)If the exchange is nontaxable,G&G's recognized gain is -0-.
C)If the exchange is nontaxable,G&G's tax basis in the new asset is $130,300.
D)None of the statements is false.

Accepted Answer

The old asset's FMV is not necessarily $150,000. The FMV of the new asset is $150,000 but the FMV of the old asset is not given and may be different.

Question 20

Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no cash was included in the exchange).The assets were like-kind properties.Oxono reported the gain as revenue on its financial statements.Which of the following is true?
A)The exchange resulted in a favorable temporary book/tax difference.
B)The exchange resulted in a favorable permanent book/tax difference.
C)The exchange resulted in an unfavorable temporary book/tax difference.
D)The exchange resulted in an unfavorable permanent book/tax difference.

Accepted Answer

The exchange resulted in a favorable temporary book/tax difference because the gain recognized for financial reporting purposes does not immediately affect taxable income due to the like-kind exchange deferral provisions under tax laws, creating a temporary difference that will reverse in the future.

Quiz 9: Nontaxable Exchanges

Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a new asset worth $20,000.Which of the following statements is false?

Kornek Inc.transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in exchange for a new asset worth $260,000.Which of the following statements is false?

Teco Inc.and MW Company exchanged like-kind production assets.Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis,and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis.Teco paid $7,500 cash to MW as part of the exchange.Which of the following statements is false?

Which of the following statements about like-kind exchanges is false?

Eliot Inc.transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000.Which of the following statements is false?

Nagin Inc.transferred an old asset in exchange for a new asset worth $84,000 and $6,000 cash.The old asset and new asset were like-kind properties.Which of the following statements is true?

Denali,Inc.exchanged equipment with a $230,000 adjusted basis for like-kind equipment with a $200,000 FMV and $5,000 cash.How much loss may Denali recognize?

Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash.Which of the following statements is false?

Rydell Company exchanged business equipment (initial cost $55,250; accumulated depreciation $25,450) for like-kind equipment worth $44,000 and $2,000 cash.As a result,Rydell must recognize:

Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for a new asset worth $90,000 and $10,000 cash.Which of the following statements is false?

Which of the following statements about boot included in a nontaxable exchange is false?

Luce Company exchanged the copyright on a software application for a copyright on a different software application.Luce's gain on the exchange was nontaxable (because the copyrights were like-kind) but was included in financial statement income.Which of the following statements is false?

YCM Inc.exchanged business equipment (initial cost $114,800; accumulated depreciation $63,400) for like-kind equipment worth $110,000 and $10,000 cash.As a result,Rydell must recognize:

Which of the following statements about nontaxable exchanges is true?

LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a new asset worth $11,000 and $1,500 cash.Which of the following statements is false?

G&G Inc.transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000.Which of the following statements is false?

Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no cash was included in the exchange) .The assets were like-kind properties.Oxono reported the gain as revenue on its financial statements.Which of the following is true?