Chapter 8

Question 1

What is a benefit of installment sales?

Answer 1

It permits deferral gain recognition until cash is received.

Question 2

How do you determine your gross profit percentage in an installment sale?

Answer 2

Divide gain amount by the amount of proceeds.

Question 3

T or F: Installment sale method is not allowed for publicly traded stock or sales of inventory.

Answer 3

True

Question 4

What makes two parties “related parties”?

Answer 4

They are members of the same family, an individual or corp owns 50% or more of the value of corp’s outstanding stock, or two corps controlled by the same shareholders.

Question 5

Are related parties deductible?

Answer 5

No, losses realized on the sale or exchange of property between related parties are nondeductible.

Question 6

Distinguish the character of capital, ordinary, and section 1231 gains/losses.

Answer 6

Capital - exchange of capital asset

Ordinary - exchange of any asset that isn’t capital

Section 1231 - exchange of depreciable property used in trade or business.

Question 7

Under Section 1231, which assets are not capital assets?

Answer 7

Inventory, accounts receivable, supplies, real property used in business, depreciable/amortizable personalty used in business.

Question 8

What are the limitations of capital losses for individuals and corporations?

Answer 8

(1) Individuals can deduct up to 3,000 per year against ordinary income and the rest is carried forward indefinitely

(2) Cannot deduct a net capital loss, but can carry back 3 years toward 5 years against capital gains.

Question 9

Sales of inventory or A/R results in _________ loss.

Answer 9

ordinary

Question 10

Define a section 1231 asset.

Answer 10

They are real, depreciable, or amortizable property used in the business and held more than 1 year (long term).

Question 11

What are the three general rules for gains/losses realized on sales?

Answer 11

(1) Gains and losses for the year are netted

(2) Net gain is treated as capital gain

(3) Net loss is ordinary (fully deductible

Question 12

What is the section 1245 recapture?

Answer 12

It requires that you recapture the depreciation taken against your basis on the asset sold.

Ex. Equipment
Purchase - 5000
Acc depr - 3000
Adj basis = 2000

If sold for 6,000, you would have to add back your 3,000 of depr into the basis for the sale.

Question 13

What are the depreciation recapture rules for real property?

Answer 13

(1) Only recapture depreciation taken in excess of S/L

(2) Corps must recapture 20% of the amount that would be ordinary under a full depreciation rule.