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Unformatted text preview: 1. Robert sold his ranch which was his principal residence during the current taxable year. At the date of the sale, the ranch had an adjusted basis of $460,000 and was encumbered by a mortgage of $200,000. The buyer paid him $500,000 in cash, agreed to take the title subject to the $200,000 mortgage, and agreed to pay him $100,000 with interest at 6 percent one year from the date of sale. How much is Roberts recognized gain on the sale? Correct Answer: Amount realized: Cash $500,000 Mortgage (property taken subject to) 200,000 Note receivable 100,000 $800,000 Adjusted basis (460,000) Realized and recognized gain $340,000 2. Albert is considering two options for selling land for which he has an adjusted basis of $70,000 and on which there is a mortgage of $100,000. Under the first option, Albert will sell the land for $150,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete. Under the second option, Albert will sell the land for $50,000 and the buyer will assume the mortgage. Calculate Alberts recognized gain under both options. Correct Answer: Option 1 Option 2 Amount realized $150,000 $150,000 Less: Adjusted basis (70,000) (70,000) Recognized gain $ 80,000 $ 80,000 Since the liability assumption is included in the calculation of Alberts amount realized, the recognized gain is $80,000, the same as for the cash sale. 3. Annette purchased stock on March 1, 2011, for $150,000. At December 31, 2011, it was worth $160,000. She also purchased a bond on September 1, 2011, for $20,000. At year end, it was worth $12,000. Determine Annettes realized and recognized gain or loss. Correct Answer: Annettes realized gain or loss is zero and her recognized gain or loss is zero. Since a sale or other disposition has not occurred, there is no realization or recognition on either the stock or the bond. 4. Nigel purchased a blending machine for $125,000 for use in his business. As to the machine, he has deducted MACRS cost recovery of $31,024, maintenance costs of $5,200, and repair costs of $4,000. Calculate Nigels adjusted basis for the machine. Correct Answer: Nigels adjusted basis for the machine is calculated as follows: Cost $125,000 Less: Cost recovery (31,024) Adjusted basis $ 93,976 Neither the maintenance cost of $5,200 nor the repair cost of $4,000 are capital expenditures. These costs are deducted in the tax year incurred. 5. Amanda uses a delivery van in her business. The adjusted basis is $29,000, and the fair market value is $25,000. The delivery van is stolen and Amanda receives insurance proceeds of $25,000. Determine Amandas realized and recognized gain or loss. Correct Answer: Amount realized $25,000 Adjusted basis (29,000) Realized loss ($ 4,000) Recognized loss ($ 4,000) Since the proceeds received from the insurance company are less than the adjusted basis, the realized loss of $4,000 is recognized....
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- Spring '12
- The Land