ACC_4301_Solutions_to_Problems_(Chapter_7)

ACC_4301_Solutions_to_Problems_(Chapter_7) - PROBLEMS 32....

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PROBLEMS 32. Hoffman, Smith, and Willis, CPAs 5191 Natorp Boulevard Mason, OH 45040 January 29, 2009 Mr. John Johnson 100 Tyler Lane Erie, PA 16563 Dear Mr. Johnson: This letter is to inform you of the possibility of taking a bad debt deduction. Your loan to Sara is a nonbusiness bad debt; therefore, you are not allowed to take a bad debt deduction for partial worthlessness. You will be able to take a bad debt deduction in the year in which the debt becomes wholly worthless. Should you need more information or need to clarify anything, please contact me. Sincerely, John J. Jones, CPA Partner TAX FILE MEMORANDUM January 29, 2009 From: John J. Jones Subject: Bad Debt Deduction John Johnson’s $30,000 loan to Sara is a nonbusiness bad debt. Therefore, a bad debt deduction is not allowed for partial worthlessness. John will be able to claim a bad debt deduction in the year when the debt becomes wholly worthless. pp. 7-4 and 7-5 33. Sue must include the $5,000 in gross income, but only to the extent of a tax benefit in the prior year. Because the debt is a nonbusiness bad debt, the $8,000 would have been treated as a short-term capital loss. As such, $1,000 of the bad debt would have applied against the $1,000 of long-term capital gain. An additional $3,000 would have offset ordinary income. Therefore, the tax benefit would have been $4,000 and hence, $4,000 of the $5,000 collected would be included in Sue’s gross income. pp. 7-3 to 7-5 34. The potential bad debt is limited to Sally’s basis in the debt. Because she paid $60,000 for the account and collected $65,000, she has no bad debt. In fact, she must recognize income of $5,000 ($65,000 – $60,000). p. 7-4 35. Salary $180,000 § 1244 ordinary loss (limit of $100,000) (100,000) Short-term capital gain on § 1244 stock $20,000
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(19,000) Net short-term capital gain 1,000 Net long-term capital loss (remaining § 1244 loss) (5,000) Net capital loss (limit) (3,000) Adjusted gross income $ 77,000 pp. 7-4 to 7-7 36. Sell all of the stock in the current year: Current year’s AGI Salary $ 80,000 Ordinary loss (§ 1244 limit) (50,000) Long-term capital gain $8,000 Long-term capital loss ($80,000 – $50,000) (30,000) Long-term capital loss (limit) (3,000) AGI $ 27,000 Next year’s AGI Salary $ 90,000 Long-term capital gain $10,000 Long-term capital loss carryover ($30,000 – $11,000) (19,000) Long-term capital loss (limit) (3,000) AGI $ 87,000 Total AGI Current year $ 27,000 Next year 87,000 Total $114,000 Sell half of the stock this year and half next year: Current year’s AGI Salary $ 80,000 Ordinary loss (§ 1244 stock) (40,000) Long-term capital gain 8,000 AGI $ 48,000 Next year’s AGI Salary $ 90,000 Ordinary loss (§ 1244 stock) (40,000) Long-term capital gain 10,000 AGI $ 60,000 Total AGI Current year $ 48,000 Next year 60,000 Total $108,000 Mary’s combined AGI for the two years is lower if she sells half of her § 1244 stock this year and half next year. pp. 7-6 and 7-7
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ACC_4301_Solutions_to_Problems_(Chapter_7) - PROBLEMS 32....

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