TAX 4001 FINAL EXAM UPDATED QUESTIONS AND ANSWERS
A fire destroyed furniture and fixtures used in Jock's business. Jock's adjusted basis in the furniture and
fixtures was $81,300. Jock received a $100,000 reimbursement from his insurance company and
immediately spent $93,000 to purchase new furniture and fixtures. How much gain or loss must Jock
recognize on this involuntary conversion? - CORRECT ANSWER✅✅$7000
Which of the following statements concerning partnerships is false? - CORRECT ANSWER✅✅A partner
is taxed annually on only that portion of a partnership's taxable income that is actually distributed.
Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W
Incorporated in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had
7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and recognized gain on the
exchange and the tax basis in her 4,200 M&W shares. - CORRECT ANSWER✅✅$228,500 gain realized
and recognized; $340,200 basis in M&W shares
Princetown Incorporated has a $4.82 million basis in 88% of the outstanding stock of Merryvale
Corporation. Merryvale manufactures Christmas decorations, cards, and wrapping paper. Princetown's
board of directors recently learned that Merryvale is bankrupt. The board voted unanimously to dissolve
the corporation and distribute all assets to Merryvale's creditors. What is the tax consequence to
Princetown of the board's actions? - CORRECT ANSWER✅✅$4.82 million ordinary loss.
Mrs. Stile owns investment land subject to a $600,000 nonrecourse mortgage. Her basis in the land is
$212,000, and the land's appraised FMV is $575,000. Mrs. Stile is considering defaulting on the
mortgage and allowing the creditor to foreclose. If Mrs. Stile disposes of the land through a foreclosure,
she will recognize: - CORRECT ANSWER✅✅$388,000 capital gain
Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This
year, Waters recorded the following items of income and expense:
Sales revenue $ 500,000
Interest income 6,000
Long-term capital gain 10,000
Cost of goods sold (250,000)
Salary and wages (75,000)
Other operating expenses (55,000)
,Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her
partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her
partnership interest at the end of the year. - CORRECT ANSWER✅✅$93,000
Grantly Seafood is a calendar year taxpayer. In 2021, a hurricane destroyed three of Grantly's fishing
boats with a $784,500 aggregate adjusted tax basis. On October 12, 2021, Grantly received a $1 million
reimbursement from its insurance company. On May 19, 2022, Grantly purchased a new fishing boat for
$750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in
the new boat. - CORRECT ANSWER✅✅$215,500 recognized gain; $750,000 basis in the boat
Mr. and Mrs. Cox reported $490,000 AGI on their joint return. The couple has three dependent children
under age 17. Compute their child tax credit. - CORRECT ANSWER✅✅$1,500
Honu, Incorporated has book income of $1,200,000. Book income includes $380,000 income tax
expense, $10,000 of municipal bond interest income, and $150,000 of business meals expense. Based
only on these items, compute Honu's taxable income. - CORRECT ANSWER✅✅$1,645,000
Mr. and Mrs. Lansing, who file a joint tax return, have four dependent children under age 17. Which of
the following statements is false? - CORRECT ANSWER✅✅None of these choices are false.
Which of the following statements regarding S corporations is true? - CORRECT ANSWER✅✅Generally,
the transfer of property by a controlling shareholder to a newly-formed S corporation in exchange for
stock is a nontaxable event.
Which of the following statements regarding alternative business forms is true? - CORRECT
ANSWER✅✅Some states treat S corporations as taxable corporations for purposes of corporate
franchise taxes.
Samantha died on January 18, 2020. Her husband Dave lived by himself until he remarried in 2021. What
was Dave's filing status in 2020 and 2021? - CORRECT ANSWER✅✅Married filing jointly in 2020 and
2021.
Mr. Jones and his first wife were legally divorced on February 19, 2021. Mr. Jones remarried the second
Mrs. Jones on December 20, 2021. Which of the following describes Mr. Jones' filing status in 2021? -
CORRECT ANSWER✅✅Married filing jointly with the second Mrs. Jones
, Nixon Incorporated transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash.
Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the
following statements is true? - CORRECT ANSWER✅✅If Asset A and Asset Z are like-kind property,
Nixon recognizes a $15,750 gain and takes a $400,000 basis in Asset Z.
Irby Incorporated was incorporated in 2015 and adopted a calendar year. Here is a schedule of Irby's net
Section 1231 gains and (losses) reported on its tax returns through 2020.
2015 2016 2017 2018 2019 2020
$(4,900) $(3,000) $(7,890) $45,600 $-0- $1,300
In 2021, Irby recognized a $14,750 gain on the sale of business land. How is this gain characterized on
Irby's tax return? - CORRECT ANSWER✅✅$14,750 Section 1231 gain.
Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This
year, Waters recorded the following items of income and expense:
Sales revenue $ 500,000
Interest income 6,000
Long-term capital gain 10,000
Cost of goods sold (250,000)
Salary and wages (75,000)
Other operating expenses (55,000)
Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's
ordinary (non-separately stated) income and indicate which items must be separately stated. - CORRECT
ANSWER✅✅Ordinary income, $120,000; interest income and long-term capital gain are separately
stated.
Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support for their
two children, Dana, age 26, and John, age 17. Both children live in the Andersons' home. Dana earned
$7,100 from a part-time job, while John earned no income this year. Which of the following statements
is true? - CORRECT ANSWER✅✅Dana is neither a qualifying child nor a qualifying relative of the
Andersons.
Cactus Company is a calendar year S corporation with the following current year information:
A fire destroyed furniture and fixtures used in Jock's business. Jock's adjusted basis in the furniture and
fixtures was $81,300. Jock received a $100,000 reimbursement from his insurance company and
immediately spent $93,000 to purchase new furniture and fixtures. How much gain or loss must Jock
recognize on this involuntary conversion? - CORRECT ANSWER✅✅$7000
Which of the following statements concerning partnerships is false? - CORRECT ANSWER✅✅A partner
is taxed annually on only that portion of a partnership's taxable income that is actually distributed.
Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W
Incorporated in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had
7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and recognized gain on the
exchange and the tax basis in her 4,200 M&W shares. - CORRECT ANSWER✅✅$228,500 gain realized
and recognized; $340,200 basis in M&W shares
Princetown Incorporated has a $4.82 million basis in 88% of the outstanding stock of Merryvale
Corporation. Merryvale manufactures Christmas decorations, cards, and wrapping paper. Princetown's
board of directors recently learned that Merryvale is bankrupt. The board voted unanimously to dissolve
the corporation and distribute all assets to Merryvale's creditors. What is the tax consequence to
Princetown of the board's actions? - CORRECT ANSWER✅✅$4.82 million ordinary loss.
Mrs. Stile owns investment land subject to a $600,000 nonrecourse mortgage. Her basis in the land is
$212,000, and the land's appraised FMV is $575,000. Mrs. Stile is considering defaulting on the
mortgage and allowing the creditor to foreclose. If Mrs. Stile disposes of the land through a foreclosure,
she will recognize: - CORRECT ANSWER✅✅$388,000 capital gain
Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This
year, Waters recorded the following items of income and expense:
Sales revenue $ 500,000
Interest income 6,000
Long-term capital gain 10,000
Cost of goods sold (250,000)
Salary and wages (75,000)
Other operating expenses (55,000)
,Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her
partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her
partnership interest at the end of the year. - CORRECT ANSWER✅✅$93,000
Grantly Seafood is a calendar year taxpayer. In 2021, a hurricane destroyed three of Grantly's fishing
boats with a $784,500 aggregate adjusted tax basis. On October 12, 2021, Grantly received a $1 million
reimbursement from its insurance company. On May 19, 2022, Grantly purchased a new fishing boat for
$750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in
the new boat. - CORRECT ANSWER✅✅$215,500 recognized gain; $750,000 basis in the boat
Mr. and Mrs. Cox reported $490,000 AGI on their joint return. The couple has three dependent children
under age 17. Compute their child tax credit. - CORRECT ANSWER✅✅$1,500
Honu, Incorporated has book income of $1,200,000. Book income includes $380,000 income tax
expense, $10,000 of municipal bond interest income, and $150,000 of business meals expense. Based
only on these items, compute Honu's taxable income. - CORRECT ANSWER✅✅$1,645,000
Mr. and Mrs. Lansing, who file a joint tax return, have four dependent children under age 17. Which of
the following statements is false? - CORRECT ANSWER✅✅None of these choices are false.
Which of the following statements regarding S corporations is true? - CORRECT ANSWER✅✅Generally,
the transfer of property by a controlling shareholder to a newly-formed S corporation in exchange for
stock is a nontaxable event.
Which of the following statements regarding alternative business forms is true? - CORRECT
ANSWER✅✅Some states treat S corporations as taxable corporations for purposes of corporate
franchise taxes.
Samantha died on January 18, 2020. Her husband Dave lived by himself until he remarried in 2021. What
was Dave's filing status in 2020 and 2021? - CORRECT ANSWER✅✅Married filing jointly in 2020 and
2021.
Mr. Jones and his first wife were legally divorced on February 19, 2021. Mr. Jones remarried the second
Mrs. Jones on December 20, 2021. Which of the following describes Mr. Jones' filing status in 2021? -
CORRECT ANSWER✅✅Married filing jointly with the second Mrs. Jones
, Nixon Incorporated transferred Asset A to an unrelated party in exchange for Asset Z and $15,750 cash.
Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV. Which of the
following statements is true? - CORRECT ANSWER✅✅If Asset A and Asset Z are like-kind property,
Nixon recognizes a $15,750 gain and takes a $400,000 basis in Asset Z.
Irby Incorporated was incorporated in 2015 and adopted a calendar year. Here is a schedule of Irby's net
Section 1231 gains and (losses) reported on its tax returns through 2020.
2015 2016 2017 2018 2019 2020
$(4,900) $(3,000) $(7,890) $45,600 $-0- $1,300
In 2021, Irby recognized a $14,750 gain on the sale of business land. How is this gain characterized on
Irby's tax return? - CORRECT ANSWER✅✅$14,750 Section 1231 gain.
Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This
year, Waters recorded the following items of income and expense:
Sales revenue $ 500,000
Interest income 6,000
Long-term capital gain 10,000
Cost of goods sold (250,000)
Salary and wages (75,000)
Other operating expenses (55,000)
Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's
ordinary (non-separately stated) income and indicate which items must be separately stated. - CORRECT
ANSWER✅✅Ordinary income, $120,000; interest income and long-term capital gain are separately
stated.
Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support for their
two children, Dana, age 26, and John, age 17. Both children live in the Andersons' home. Dana earned
$7,100 from a part-time job, while John earned no income this year. Which of the following statements
is true? - CORRECT ANSWER✅✅Dana is neither a qualifying child nor a qualifying relative of the
Andersons.
Cactus Company is a calendar year S corporation with the following current year information:
