ACC_4301_Solutions_to_Problems_(Chapter_16) - PROBLEMS 19....

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PROBLEMS 19. All the assets are capital assets because they do not fit any of the items listed in § 1221 as not capital assets. The antique truck is a ‘‘collectible. Therefore, the $12,000 loss ($35,000 sale price – $47,000 basis) is a long-term capital loss that would first be netted against any 28% long-term capital gain. The Blue Growth Fund $11,000 gain ($23,000 sale price – $12,000 basis) is a long-term capital gain that is potentially taxable at 0% and/or 15%. The Orange bonds are sold for a $7,250 gain ($42,000 proceeds – $750 interest income – $34,000 basis). The gain is a long-term capital gain potentially taxable at 0% and/or 15%. The sale of the Green stock results in a $2,000 ($11,000 sale price – $13,000 basis) short-term capital loss because the stock was held one year or less. The $750 interest income is includible in Eric’s gross income pp. 16-4, 16-5, and 16-20 to 1625 20. Since Revez is a dealer in antiques, the clock is presumed to be an item of inventory and, therefore, an ordinary asset. The $2,750 gain [$4,000 (amount realized) – $1,250 (basis)] would be an ordinary gain. If Revez wants the $2,750 gain to be a long-term capital gain, he would have to show objective evidence that he held the clock as an investment and, therefore, a capital asset. Such objective evidence might include not listing it as an inventory item on his books and records and not having a sale price on it in his shop. Nonetheless, achieving Revez’s objective would be quite difficult in these circumstances. pp. 16-4 to 16-7 21. Section 1221 defines what is not a capital asset. Included on the list is depreciable property or real estate used in a business. Renting real estate is treated as a business. Therefore, even though Gladwin is holding the property for appreciation (an investment motive), it is not a capital asset. See Chapter 17 for further details on the proper characterization of the $2,500,000 gain from disposition of the building. pp. 16-4 and 16- 5 22. All of the assets are capital assets because they are all either personal use or investment activity assets. The common stock (a.) is a typical investment activity capital asset. The note (b.) to Charisa received from a friend is not a business asset because Charisa is not in the business of lending money. The personal use automobile (c.) is a capital asset, but most likely will be sold at a loss and the loss will not be usable. The letter written by Teddy Roosevelt (d.) was not written to Charisa, so it is not excluded from being a capital asset by § 1221. pp. 16-4 to 16-6 23. Since the steam engine was originally depreciated, it was a fixed asset used in Brown’s business and, therefore, is not a capital asset. The gain of $330,000 ($330,000 proceeds – $0 adjusted basis) is not a long-term capital gain and cannot be used to offset the company’s capital losses. However, part of the gain may qualify for beneficial long-term capital gain treatment as § 1231 gain. p. 16-5 and Chapter 17
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This note was uploaded on 02/19/2010 for the course ACC 3300 taught by Professor Lae during the Spring '10 term at Alabama A&M University.

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ACC_4301_Solutions_to_Problems_(Chapter_16) - PROBLEMS 19....

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