Federal Taxation Individuals - Exam 2
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to
the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for
business use. At the time the gift was made, the equipment had a fair market value of $32,000.
Ignoring gift tax consequences, what is Russett's basis in the equipment? - CORRECT
ANSWER - $31,000
Ms. Willow operated a small manufacturing plant. She took delivery on a new plastic mold
stamping machine. Her costs included the following:
Cost of machine : $88,000
Sales tax : 4,000
Freight charges to deliver property to her : 1,500
Excise taxes : 2,000
What is Ms. Willow's basis in the machine? - CORRECT ANSWER - $95,500
The basis in property inherited from a decedent may be determined as follows: - CORRECT
ANSWER - The fair market value at the date of death or the fair market value at an alternative
valuation date.
Powerful Partnership purchased real property in Year 1. In Year 4, the city where the property is
located assessed taxes for sidewalks. How should Powerful Partnership treat the accrued taxes
for this local improvement? - CORRECT ANSWER - Capitalize the taxes by adding them to
the property's adjusted basis.
In January of Year 1, Joan Hill bought one share of Orban Corp. stock for $300. On March 1,
Year 4, Orban distributed one share of a new class of preferred stock for each share of common
stock held. This distribution was nontaxable. On March 1, Year 4, Joan's one share of common
stock had a fair market value of $450, while the preferred stock had a fair market value of $150.
After the distribution of the preferred stock, Joan's bases for her Orban stocks are - CORRECT
ANSWER - Common
, $225
Preferred
$75
Which of the following types of costs are required to be capitalized under the Uniform
Capitalization Rules of Code Sec. 263A? - CORRECT ANSWER - Warehousing.
The uniform capitalization method must be used by
I. Manufacturers of tangible personal property with average annual gross receipts of $32 million
for the preceding 3 years
II. Retailers of personal property with $2 million in average annual gross receipts for the 3
preceding years - CORRECT ANSWER - I only.
In June of the current year, Susan's mother gave her 100 shares of a listed stock. The donor's
basis for this stock, which she bought 10 years ago, was $4,000, and market value on the date of
the gift was $3,000. Susan sold this stock in July of the current year for $3,500. The donor paid
no gift tax. What was Susan's reportable gain or loss in the current year on the sale of the 100
shares of stock gifted to her? - CORRECT ANSWER - $0
Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on
January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when
the fair market value (FMV) of the stock was $120 share. Immediately following the split, the
FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker
specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock
was $65 per share. What is the basis of the 100 shares of stock Greller sold? - CORRECT
ANSWER - $5,000
On December 1, 2022, Michael, a self-employed cash-basis taxpayer, borrowed $100,000 to use
in his business. The loan was to be repaid on November 30, 2023. Michael paid the entire
interest of $12,000 on December 1, 2022. What amount of interest was deductible on Michael's
2023 income tax return? - CORRECT ANSWER - $11,000
Browne, a self-employed taxpayer, had 2023 business taxable income of $1,100,000 prior to any
expense deduction for equipment purchases. In 2023, Browne purchased and placed into service,
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to
the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for
business use. At the time the gift was made, the equipment had a fair market value of $32,000.
Ignoring gift tax consequences, what is Russett's basis in the equipment? - CORRECT
ANSWER - $31,000
Ms. Willow operated a small manufacturing plant. She took delivery on a new plastic mold
stamping machine. Her costs included the following:
Cost of machine : $88,000
Sales tax : 4,000
Freight charges to deliver property to her : 1,500
Excise taxes : 2,000
What is Ms. Willow's basis in the machine? - CORRECT ANSWER - $95,500
The basis in property inherited from a decedent may be determined as follows: - CORRECT
ANSWER - The fair market value at the date of death or the fair market value at an alternative
valuation date.
Powerful Partnership purchased real property in Year 1. In Year 4, the city where the property is
located assessed taxes for sidewalks. How should Powerful Partnership treat the accrued taxes
for this local improvement? - CORRECT ANSWER - Capitalize the taxes by adding them to
the property's adjusted basis.
In January of Year 1, Joan Hill bought one share of Orban Corp. stock for $300. On March 1,
Year 4, Orban distributed one share of a new class of preferred stock for each share of common
stock held. This distribution was nontaxable. On March 1, Year 4, Joan's one share of common
stock had a fair market value of $450, while the preferred stock had a fair market value of $150.
After the distribution of the preferred stock, Joan's bases for her Orban stocks are - CORRECT
ANSWER - Common
, $225
Preferred
$75
Which of the following types of costs are required to be capitalized under the Uniform
Capitalization Rules of Code Sec. 263A? - CORRECT ANSWER - Warehousing.
The uniform capitalization method must be used by
I. Manufacturers of tangible personal property with average annual gross receipts of $32 million
for the preceding 3 years
II. Retailers of personal property with $2 million in average annual gross receipts for the 3
preceding years - CORRECT ANSWER - I only.
In June of the current year, Susan's mother gave her 100 shares of a listed stock. The donor's
basis for this stock, which she bought 10 years ago, was $4,000, and market value on the date of
the gift was $3,000. Susan sold this stock in July of the current year for $3,500. The donor paid
no gift tax. What was Susan's reportable gain or loss in the current year on the sale of the 100
shares of stock gifted to her? - CORRECT ANSWER - $0
Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on
January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when
the fair market value (FMV) of the stock was $120 share. Immediately following the split, the
FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker
specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock
was $65 per share. What is the basis of the 100 shares of stock Greller sold? - CORRECT
ANSWER - $5,000
On December 1, 2022, Michael, a self-employed cash-basis taxpayer, borrowed $100,000 to use
in his business. The loan was to be repaid on November 30, 2023. Michael paid the entire
interest of $12,000 on December 1, 2022. What amount of interest was deductible on Michael's
2023 income tax return? - CORRECT ANSWER - $11,000
Browne, a self-employed taxpayer, had 2023 business taxable income of $1,100,000 prior to any
expense deduction for equipment purchases. In 2023, Browne purchased and placed into service,
