TAX 4001 Final Exam Prep Test
Questions with Complete Solutions
Gwen and Travis organized a new business as an LLC in which they own equal interests. The
new business generated a $10,000 operating loss its first year. Travis has no other taxable
income for the current year, but expects to have sufficient taxable income in future years to
pay tax in the 24% tax bracket. Which of the following statements regarding Travis' tax savings
from the current LLC loss is true? - ANSWER Travis can carry his share of LLC loss forward, and
will get tax savings only when he generates future income.
Marcia is a shareholder in an S corporation and also works for the corporation. This year, her
share of ordinary income was $250,000 and her compensation was $100,000. Which of the
following accurately describes her tax consequences from these earnings? - ANSWER Both the
ordinary income and the compensation are subject to income tax and the compensation is
subject to payroll tax.
G&G Incorporated transferred an old asset with a $110,300 adjusted tax basis plus $20,000
cash in exchange for a new asset worth $150,000. Which of the following statements is false? -
ANSWER The old asset's FMV is $150,000.
Hank exchanged an old asset with a $12,000 adjusted basis for a new asset with a $32,000 FMV
plus $2,000 cash. Compute Hank's realized and recognized gain if the new and old assets are
like-kind properties. - ANSWER $22,000 realized gain; $2,000 recognized gain
Ficia Incorporated owned investment land subject to a $294,500 recourse mortgage. Ficia failed
to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's
basis in the land was $300,000, and the land's appraised FMV was $260,000. The creditor
informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the
mortgage. Which of the following statements is true? - ANSWER Ficia recognizes $34,500
ordinary income and a $40,000 capital loss.
,Grantly Seafood is a calendar year taxpayer. This year, a hurricane destroyed three of Grantly's
fishing boats with a $784,500 aggregate adjusted tax basis. Grantly received a $1 million
reimbursement from its insurance company and purchased a new fishing boat for $750,000
before the end of the tax year. Compute Grantly's recognized gain or loss on the involuntary
conversion and its tax basis in the new boat. - ANSWER $215,500 recognized gain; $750,000
basis in the boat
Johnson Incorporated and C&K Company entered into an exchange of real property. Here is
the information for the properties to be exchanged.
JohnsonC&KFMV$ 900,000$ 675,000Adjusted tax basis593,000462,000Mortgage200,000-0-
Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the
Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the
property received from Johnson. - ANSWER None of these choices are correct.
Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax
year showed the following:
Ordinary business income$ 41,000Short-term capital loss1,500
Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct
because of the basis limitation. What is his tax basis in his partnership interest at the end of the
current tax year? - ANSWER $32,500
The three Crosby children intend to form a business. The business will borrow $900,000 from a
local bank. Which of the following statements is true? - ANSWER If the business is a
partnership the owners can allocate income and losses in any reasonable manner.
Hunter, age 17, is considered a dependent of his parents for tax purposes. This year,
Hunter earned $16,000 for appearing in a television commercial. Compute Hunter's
standard deduction. - ANSWER $16,350
Which of the following is NOT one of the characteristics of a constructive dividend? - ANSWER
All of these choices are common characteristics of constructive dividends.
, Which of the following statements about the transfer of debt in a like-kind exchange is false? -
ANSWER If both properties in the exchange are subject to debt, both parties will be treated as
receiving boot.
Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax
year showed the following:
Ordinary business loss$ (20,000)Short-term capital gain2,100Dividend income1,600Cash
distribution5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How
much of the ordinary loss may he deduct on his Form 1040? Assume the excess business loss
limitation does not apply. - ANSWER $13,300
Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to
Massur Incorporated in exchange for Massur common stock. Which of the following statements
is false? - ANSWER If Vincent is not in control of Massur immediately after the exchange, both
Vincent and Massur must recognize a $1,327,000 gain.
This year, Adula Company sold equipment purchased in five years ago at a cost of $117,200.
Accumulated depreciation through date of sale was $33,000. Which of the following statements
is false? - ANSWER If the sale price was $80,000, Adula recognized $4,200 ordinary loss.
Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner
and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips
contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership
immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership
interest? - ANSWER $1,200,000
During the current year, Margie earned wage income of $300,000. If Margie is single, which of
the following statements regarding her Medicare tax liability is true? - ANSWER Margie will owe
the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent
Medicare tax only on her wage income in excess of $200,000.
Questions with Complete Solutions
Gwen and Travis organized a new business as an LLC in which they own equal interests. The
new business generated a $10,000 operating loss its first year. Travis has no other taxable
income for the current year, but expects to have sufficient taxable income in future years to
pay tax in the 24% tax bracket. Which of the following statements regarding Travis' tax savings
from the current LLC loss is true? - ANSWER Travis can carry his share of LLC loss forward, and
will get tax savings only when he generates future income.
Marcia is a shareholder in an S corporation and also works for the corporation. This year, her
share of ordinary income was $250,000 and her compensation was $100,000. Which of the
following accurately describes her tax consequences from these earnings? - ANSWER Both the
ordinary income and the compensation are subject to income tax and the compensation is
subject to payroll tax.
G&G Incorporated transferred an old asset with a $110,300 adjusted tax basis plus $20,000
cash in exchange for a new asset worth $150,000. Which of the following statements is false? -
ANSWER The old asset's FMV is $150,000.
Hank exchanged an old asset with a $12,000 adjusted basis for a new asset with a $32,000 FMV
plus $2,000 cash. Compute Hank's realized and recognized gain if the new and old assets are
like-kind properties. - ANSWER $22,000 realized gain; $2,000 recognized gain
Ficia Incorporated owned investment land subject to a $294,500 recourse mortgage. Ficia failed
to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's
basis in the land was $300,000, and the land's appraised FMV was $260,000. The creditor
informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the
mortgage. Which of the following statements is true? - ANSWER Ficia recognizes $34,500
ordinary income and a $40,000 capital loss.
,Grantly Seafood is a calendar year taxpayer. This year, a hurricane destroyed three of Grantly's
fishing boats with a $784,500 aggregate adjusted tax basis. Grantly received a $1 million
reimbursement from its insurance company and purchased a new fishing boat for $750,000
before the end of the tax year. Compute Grantly's recognized gain or loss on the involuntary
conversion and its tax basis in the new boat. - ANSWER $215,500 recognized gain; $750,000
basis in the boat
Johnson Incorporated and C&K Company entered into an exchange of real property. Here is
the information for the properties to be exchanged.
JohnsonC&KFMV$ 900,000$ 675,000Adjusted tax basis593,000462,000Mortgage200,000-0-
Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the
Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the
property received from Johnson. - ANSWER None of these choices are correct.
Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax
year showed the following:
Ordinary business income$ 41,000Short-term capital loss1,500
Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct
because of the basis limitation. What is his tax basis in his partnership interest at the end of the
current tax year? - ANSWER $32,500
The three Crosby children intend to form a business. The business will borrow $900,000 from a
local bank. Which of the following statements is true? - ANSWER If the business is a
partnership the owners can allocate income and losses in any reasonable manner.
Hunter, age 17, is considered a dependent of his parents for tax purposes. This year,
Hunter earned $16,000 for appearing in a television commercial. Compute Hunter's
standard deduction. - ANSWER $16,350
Which of the following is NOT one of the characteristics of a constructive dividend? - ANSWER
All of these choices are common characteristics of constructive dividends.
, Which of the following statements about the transfer of debt in a like-kind exchange is false? -
ANSWER If both properties in the exchange are subject to debt, both parties will be treated as
receiving boot.
Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax
year showed the following:
Ordinary business loss$ (20,000)Short-term capital gain2,100Dividend income1,600Cash
distribution5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How
much of the ordinary loss may he deduct on his Form 1040? Assume the excess business loss
limitation does not apply. - ANSWER $13,300
Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to
Massur Incorporated in exchange for Massur common stock. Which of the following statements
is false? - ANSWER If Vincent is not in control of Massur immediately after the exchange, both
Vincent and Massur must recognize a $1,327,000 gain.
This year, Adula Company sold equipment purchased in five years ago at a cost of $117,200.
Accumulated depreciation through date of sale was $33,000. Which of the following statements
is false? - ANSWER If the sale price was $80,000, Adula recognized $4,200 ordinary loss.
Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner
and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips
contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership
immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership
interest? - ANSWER $1,200,000
During the current year, Margie earned wage income of $300,000. If Margie is single, which of
the following statements regarding her Medicare tax liability is true? - ANSWER Margie will owe
the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent
Medicare tax only on her wage income in excess of $200,000.
