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    Tax Accounting: basis in equipment, stock, gain or loss

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    1). Mr. Dennis, sole proprietor of Dennis Company, purchased a machine for use in his business. Mr. Dennis' costs in connection with this purchase were as follows:
    Note to seller $33,000
    Cash paid to seller 5,000
    State sales tax 2,400
    Freight to place of business 1,500
    Wages paid to workers to install machine 4,200
    What is the amount of Mr. Dennis' basis in the machine?
    a. $33,000
    b. $40,400
    c. $41,900
    d. $46,100

    2). During the current year, Marvin purchased new car wash equipment for use in his service station business. Marvin's costs in connection with the purchase were as follows:
    Cost of the equipment $40,000
    Sales tax on the equipment 4,000
    Delivery charges 600
    Installation and testing charges 3,000
    Expenses of operating the equipment 2,000
    What is Marvin's basis in the car wash equipment?
    a. $44,000
    b. $44,600
    c. $47,600
    d. $49,600

    3). Edward purchased stock last year as follows:
    Month Shares Total Cost
    March 100 $ 270
    July 200 600
    October 600 $1,200

    In April of this year, Edward sells 80 shares for $250. Edward cannot specifically identify the stock sold. The basis for the 80 shares sold is
    a. $160.
    b. $184.
    c. $216.
    d. $240.

    4). In 1990, Michael purchased land for $100,000. Over the years, economic conditions deteriorated, and the value of the land declined to $60,000. Michael sells the property in this year, when it is subject to a $30,000 nonrecourse mortgage. The buyer pays Michael $34,000 cash and takes the property subject to the mortgage. Michael incurs $5,000 in real estate commissions. Michael 's gain or loss on the sale is
    a. $4,000 gain.
    b. $1,000 loss.
    c. $36,000 loss.
    d. $41,000 loss.

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    Solution Preview

    1. All of the above are asset costs. Answer is d. $46,100

    2. All of the above are part of the total cost of the equipment except for the $2000 of operating costs. Answer is c. $47.600.

    3. ...

    Solution Summary

    The solution explains the concepts involved plus computes the correct answer for the four problems.