Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Income Tax Accounting > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

Taxpayers can dispose of assets in what ways?

A

sell, trade, scrap, casualty, donation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

To calculate gain or loss must know …

A

amount realized and adjusted basis of each asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Every asset disposition triggers a…

A

realization event for tax purposes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

For every asset disposition what must be calculated?

A

a gain or loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is amount realized by a taxpayer from the sale or other disposition of an asset?

A

lis everything of value received from the buyer less any selling costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Taxpayers typically receive _____ when they sell property

A

Cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Besides cash, taxpayers may accept what other things in exchange for property?

A

marketable securities, notes receivable, similar assets, or any combination of these items as payment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Amount realized =

A

Cash received + Fair market value of other property + Buyer’s assumption of liabilities - Seller’s expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Scrap-Happy Inc., a scrapbooking retail chain, owns a warehouse which is subject to a $50,000 mortgage. A manufacturing company offers to purchase the warehouse for $15,000 cash and a $30,000 note receivable, as well as assume the mortgage. If Scraphappy accepts this offer, and pays $1,500 in selling expenses, what is the amount realized?

A

50,000 liability assumed

+ 15,000 cash

+ 30,000 note receivable

_ – 1,500 selling expenses_

$ 93,500 Amount Realized

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Adjusted Basis

A

Original basis reduced by depreciation or other types of cost recovery deductions taken against the property.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Adjusted basis =

A

Cost basis - Cost recovery deductions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Scrap-Happy owns a computer (5 yr MACRS recovery period ) which they purchased 2 years ago for $1,200. For financial statement purposes, they depreciate the computer over 3 years using the half-year convention and straight line method, with no salvage value. What is their adjusted book and tax bases for the computer (after 2 years of depreciation)?

A

Book Tax

Cost Basis: $1,200 $1,200

     Yr 1 Dep. (HY):    (200)              (240)

     Yr 2 Dep.:           _(400)_              _(384)_

  Adjusted Basis:    $600              $576
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

The amount of gain or loss taxpayers realize on a sale or other disposition of assets is…

A

the amount they realize minus their adjusted basis in the disposed assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Gain or (loss) realized =

A

Amount realized - Adjusted basis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Scrap-Happy sells the computer in the previous example (adjusted tax basis = $576) for $400. What is their realized gain or (loss) on the sale?

A

$400 Amount realized

(576) Adjusted basis

                       ($176)   (Loss) realized
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Gain (loss) realized =

A

Amount realized - Adjusted basis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Amount realized =

A

Cash received + Fair market value of other property + Buyer’s assumption of seller’s liabilities - Seller’s expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Adjusted basis =

A

Cost basis - Cost recovery deductions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Recognizing gains (losses) do what to gross income?

A

increase taxpayers’ (decrease) gross income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

When must taxpayers recognize the vast majority of realized gains and losses?

A

Immediately

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

T/F Taxpayers are not allowed to permanently exclude the gains from taxable income?

A

False: They may be allowed to permanently exclude the gains from taxable income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How does the trade or business of an asset depend on it’s holding period?

A

If the holding period is short-term (one year or less), it’s ordinary.

If the holding period is long-term (more than one year), it’s section 1231

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

A short-term asset is also known as what kind of investment or personal-use asset?

A

Short-term Capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Ordinary Assets

A
  • Assets created or used in a taxpayer’s trade or business.
  • Business assets held for less than a year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Examples of ordinary assets

A
  • Inventory
  • Accounts receivable
  • Machinery
  • Equipment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

If taxpayers sell ordinary assets at a gain, how do they recognize it?

A

They recognize an ordinary gain that is taxed at ordinary rates.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

If taxpayers sell ordinary assets at a loss, how do they recognize it?

A

They deduct the loss against other ordinary income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Capital assets

A

Assets held for investment, for the production of income, or for personal use

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Qualification as capital asset depends on what?

A

The purpose for which taxpayers use the asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Both individuals and corporate taxpayers prefer capital gains or ordinary income?

A

Capital gains

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

If the taxpayer type are idividuals, what are the preferential rates?

A

Preferential Rates

  • Most capital gains taxed at 15 percent (0 percent to the extent the gain would have been taxed at a 15 percent or lower rate if it were ordinary income).
  • Unrecaptured Sec. 1250 gains taxed at a maximum rate of 25 percent.
  • Gains on collectibles held for more than a year taxed at a maximum rate of 28 percent.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

If the taxpayer type are corporations, what are the preferential tax rates?

A

No preferential rates, taxed at ordinary income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

If the taxpayer type are individuals, what are the loss limitations?

A
  • Individuals may annually deduct up to $3,000 of net capital losses against ordinary income.
  • Losses carried forward indefinitely but not carried back.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

If the taxpayer type are corporations, what are the loss limitations?

A
  • No offset against ordinary income.
  • Net capital losses can generally be carried back three years and forward five years to offset gains in those years.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

§1231 Assets

A

Depreciable assets and land used in a trade or business (including rental property) held for more than one year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

If the taxpayer recognizes a nes Sec. 1231 gain, the net gain is treated as …

A

a long-term capital gain.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

If the taxpayer recognizes a net Sec. 1231 loss, the net loss is treated as…

A

an ordinary loss.

38
Q

Sec 1231 gains on individual depreciable assets may be recharacterized as…

A

ordinary income under the depreciation recaptue rules.

39
Q

Depreciation recapture potentially applies to…

A

gains (not losses) on the sale of depreciable or amortizable business property.

40
Q

When depreciation recapture is applied, it recharachterizes the gain on the sale of a…

A

Sec. 1231 asset.

41
Q

Depreciation recapture does not affect…

A

Sec. 1231 losses.

42
Q

Computation depends on the type of…

A

Sec. 1231 assets the taxpayer is selling (personal or real property).

43
Q

Depreciation recapture changes only the character but not the…

A

amount of gain that taxpayers recognize when they sell a depreciable asset.

44
Q

What are the three types of Sec. 1231 assets?

A
  • Pure Sec. 1231
  • Sec. 1245
  • Sec. 1250
45
Q

Pure Sec. 1231 consists of…

A

land.

46
Q

Sec. 1245 consists of…

A

Personal property and intangibles.

47
Q

Sec. 1250 consists of…

A

Depreciable real property.

48
Q

Personal property and amortizable intangible assets are ______ assets.

A

Sec. 1245

49
Q

For depreciation recapture concerning Sec. 1245, you will take the lesser of…

A
  • gain recognized or
  • accumulated depreciation is recaptured (characterized) as ordinary income under Sec. 1245.
50
Q

Any remaining gain from Sec. 1245 property for recapture is…

A

Sec. 1231 gain.

51
Q

For Sec. 1245 property, there is no depreciation recapture on…

A

assets sold at a loss.

52
Q

When taxpayers sell or dispose of §1245 property, they encounter one of the following three scenarios of gain or loss:

A
  • recognize a gain created solely through depreciation deductions
  • recognize a gain created through both depreciation deductions and actual asset appreciation
  • recognize a loss
53
Q

Scrap-Happy sells a machine with an adjusted basis of $6,000 for $10,000. Depreciation taken on the machine amounts to $2,500. What amount of gain is recaptured as ordinary and what amount is §1231 gain?

A

$10,000 Selling price

                    _–  6,000_     Adjusted basis

                      $4,000     Gain realized

Depreciation recapture = Lesser of:

  • Depreciation taken: $2,500
  • Gain realized: $4,000
Depreciation recapture (ordinary income) = $2,500
§1231 gain (capital gain) = $4,000  Gain realized
                                     _–  2,500_   Depr recapture

                                         $1,500  §1231 gain
54
Q

Depreciable real property (an office building or a warehouse), sold at a gain is subject to…

A

recapture called §1250 depreciation recapture

55
Q

A modified version of the recapture rules called §291 depreciation recapture applies to…

A

corporations but not to other types of taxpayers

56
Q

§291, corporations selling depreciable real property recapture as what as ordinary income?

A

20% of the lesser of the recognized gain or the accumulated depreciation.

57
Q

Depreciable real property sold at a gain is §1250 property, but is no longer subject to…

A

§1250 recapture

58
Q

The gain that would be §1245 recapture if the asset were §1245 property is called what?

A

Unrecaptured §1250 gain

59
Q

Unrecaptured §1250 gain is §1231 gain that, if ultimately characterized as a long-term capital gain, is taxed at a maximum rate of…

A

25%

60
Q

All gain recognized from selling property i.e., a depreciable asset to a related-party buyer is…

A

ordinary income.

61
Q

T/F: Seller is required to recognize ordinary income for depreciation deductions the buyer will receive in the future

A

True

62
Q

The tax laws are designed to provide symmetry between the character of deductions an asset generates and the character of income the asset generates when…

A

it is sold

63
Q

What are other provisions affecting the rate at which gains are taxed concerning relatives?

A

Includes family relationships including siblings, spouses, ancestors, and lineal descendants

64
Q

What’s a provision affecting the rate at which gains are taxed concerning individuals and a corporation?

A

Also includes an individual and a corporation if the individual owns more than 50 percent of the stock of the corporation, a partnership and any of its partners, and an S corporation and any of its shareholders

65
Q

What are 3 ways taxpayers could benefit from Calculating Net §1231 Gains or Losses?

A
  • accelerating losses into year 1
  • deferring gains until year 2
  • characterizing the gains and losses due to the §1231 netting process
66
Q

§1231 Look-Back Rule

A
  • A nondepreciation recapture rule
  • Affects the character but not the amount of gains on which a taxpayer is taxed
67
Q

T/F: Gains and losses from individual asset dispositions are annually netted together?

A

True

68
Q

Net §1231 gains may be recharacterized as ordinary income under the…

A

§1231 look-back rule

69
Q

Illustrate the Sec. 1231 netting process.

A

See picture:

70
Q

For an exchange to qualify as a like-kind exchange for tax purposes, the transaction must meet the following three criteria

A
  • The property is exchanged “solely for like-kind” property.
  • Both the property given up and the property received in the exchange by the taxpayer are either “used in a trade or business” or are “held for investment,” by the taxpayer
  • The “exchange” must meet certain time restrictions
71
Q

Definition for like-kind property for Real Property

A

Used in a trade or business or held for investment is considered “like- kind” with other real property used in a trade or business or held for investment

72
Q

Definition of like-kind property for personal property

A

Considered “like-kind” if it has the same general use and is used in a business or held for investment

73
Q

Property Ineligible for Like-Kind Treatment includes:

A

Includes inventory, most financial instruments, partnerships interests, domestic property exchanged for property used in a foreign country and all property used in a foreign country

74
Q

What are the property use and timing requirements for a like-kind exchange?

A
  • Like-kind property exchanges may involve intermediaries
  • Taxpayers must identify replacement “like-kind” property within 45 days of giving up their property
75
Q

“Like-kind” property must be received within ___ days of when the taxpayer transfers property in a “like-kind” exchange

A

180

76
Q

Make a diagram of deferred or starker exchange.

A

See picture:

77
Q

Non-like-kind property is known as ____

A

boot

78
Q

What happens when boot is given as part of a like-kind transaction?

A

The asset received is recorded in two parts: property received in exchange for like-kind property and property received in a sale (bought by the boot)

79
Q

What happens when a boot is received?

A
  • Boot received usually creates recognized gain
  • Gain recognized is lesser of gain realized or boot received
80
Q

The basis of the boot received is the ____ ______ _____ of the boot.

A

fair market value

81
Q

Basis in like-kind property =

A

Fair market value of like-kind property received - deferred gain + deffered loss

82
Q

Gain is deferred when appreciated property is involuntarily converted in an…

A

accident or natural disaster.

83
Q

Basis of property directly converted is carried over from…

A

the old property to the new property.

84
Q

In an indirect conversion, gain recognized is the lesser of:

A

Gain realized, or Amount of reimbursement the taxpayer does not reinvested in qualified property

85
Q

Qualified replacement property must be of a similar or related use to the…

A

original property

86
Q

Installment Sales

A

Sale of property where the seller receives the sale proceeds in more than one period

87
Q

T/F: Concerning installment sales, you must recognize a portion of gain on each installment payment received.

A

True

88
Q

Gross profit percentage =

A

Gain realized/Amount realized

89
Q

Inventory, marketable securities, and depreciation recapture cannot be accounted for under…

A

installment sale rules.

90
Q

Installment sale rules do not apply to…

A

losses.

Income Tax Accounting (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions