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Depreciation, Amortization, and Basis

Question 11
Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?
a. $493,783.
b. $496,825.
c. $496,958.
d. $500,000.
e. None of the above.

Question 12
Milton owns a bond (face value of $25,000) for which he paid $28,000. Which of the following statements is correct?
a. If the bond is taxable, Milton must amortize the $3,000 premium over its remaining life.
b. The adjusted basis of the taxable bond remains at $28,000, as the amortized amount is
deducted as interest.
c. If the bond is tax-exempt, Milton can elect to amortize the $3,000 premium over the
remaining life of the bond.
d. The adjusted basis of the tax-exempt bond remains at $28,000, as the amortized amount
cannot be deducted as interest.
e. None of the above is correct.

Question 13
Tony owned the following lots of Orange Corporation stock.
Purchase date No. of shares Basis
October 1, 2007 50 $ 4,500
February 8, 2008 50 5,500
September 5, 2008 100 11,000

On October 12, 2008, 100 shares of stock were sold for $14,000. Tony did not specifically identify the shares of stock sold. What is the recognized gain or loss?
Question 13 answers
a. $0.
b. $3,000.
c. $3,500.
d. $4,000.
e. None of the above.

Question 14
Amy received nontaxable stock rights on February 3, 2008. She allocated $5,200 of the $40,000 basis for the associated stock to the stock rights. The stock rights are exercised on October 2, 2008. The exercise price for the stock is $18,000. What is the taxpayer's basis for the acquired stock?

a. $0.
b. $12,800.
c. $18,000.
d. $23,200.
e. None of the above.

Question 15
Allie transfers stock to Walt. Her adjusted basis for the stock is $20,000 and the fair market value is $50,000. Which of the following is correct?
a. If the transfer is a gift, gift taxes of $6,000 are paid by Allie, and the gift is made in 1970,
Walt's basis for the stock is $26,000.
b. If the transfer is a gift, gift taxes of $6,000 are paid by Allie, and the gift is made in 2008,
Walt's basis for the stock is $26,000.
c. If the transfer is an inheritance and $6,000 of estate taxes are paid by Allie's estate, Walt's
basis is $20,000.
d. If the transfer is an inheritance and $6,000 of estate taxes are paid by Allie's estate, Walt's
basis is $26,000.
e. None of the above is correct.

Question 16
Shontelle received a gift of income-producing property with an adjusted basis of $50,000 to the donor and fair market value of $40,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Shontelle subsequently sold the property for $45,000. What is the recognized gain or loss
a. $5,000.
b. $4,000.
c. ($5,000).
d. ($11,000).
e. None of the above.

Question 17
Molly gives her niece a machine to use in her business with a fair market value of $14,000 and a basis in Molly's hands of $17,000. What is the niece's basis for depreciation (cost recovery)?
a. $0.
b. $3,000.
c. $14,000.
d. $17,000.
e. None of the above.

Question 18
Al and Kathy are married and jointly own land (adjusted basis of $40,000). At the time of Kathy's death, the land had a fair market value of $60,000. Under the joint ownership arrangement, the land passes to Al. His basis will be:
a. $60,000 if all parties live in a community property state.
b. $50,000 if all parties live in a community property state.
c. $60,000 if all parties live in a common law state.
d. $40,000 if all parties live in a common law state.
e. None of the above.

Question 19
Iva owns Mauve, Inc. stock (adjusted basis of $40,000) which she sells to Joshua, her brother, for its fair market value of $32,000. Fifteen months later, he sells it to Faye, a friend, for its fair market value of $39,000. Determine Iva's recognized loss, Joshua's recognized gain or loss, and Faye's adjusted basis for the stock.
Iva's recognized loss Joshua's recognized gain or loss Faye's basis
a. $ -0- $ -0- $39,000
b. $ -0- $7,000 $32,000
c. $ -0- $7,000 $39,000
d. $8,000 $7,000 $39,000
e. None of the above.

Question 20
If personal use property is converted to business use:
a. Gain is recognized on the date of conversion to the extent of the excess of the fair market
value over the adjusted basis.
b. Loss is recognized on the date of conversion to the extent of the excess of the adjusted
basis over the fair market value.
c. The basis for gain is the lower of the taxpayer's adjusted basis or the fair market value at
the date of conversion.
d. The basis for loss is the taxpayer's adjusted basis on the date of conversion.
e. None of the above is correct.

Solution Preview

These questions were researched using West 2007 Individual Income tax by Hoffman, Smith, and Willis.

Question 11
Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?
a. $493,783. This is the answer. The adjusted basis of a business asset is the greater of the amount allowed or allowable. In this case the greater amount is the depreciation amount from year one added to the depreciation amount of year two or calculated as follows $500,000 - $3,042 - $3,175 = $493,783.
b. $496,825.
c. $496,958.
d. $500,000.
e. None of the above.

Question 12
Milton owns a bond (face value of $25,000) for which he paid $28,000. Which of the following statements is correct?
a. If the bond is taxable, Milton must amortize the $3,000 premium over its remaining life. F - Amortization is an election that the taxpayer makes. The word" must", makes this a false response.
b. The adjusted basis of the taxable bond remains at $28,000, as the amortized amount is
deducted as interest. F -The adjusted basis is amount paid minus premium.
c. If the bond is tax-exempt, Milton can elect to amortize the $3,000 premium over the
remaining life of the bond. F - Tax-exempt bondholders do not get the deductions because the bonds do not generate taxable income.
d. The adjusted basis of the tax-exempt bond remains at $28,000, as the amortized amount
cannot be deducted as interest. F - The basis of the tax-exempt bonds remains the original face amount.
e. None of the above is correct. True - After examining the other answers this is the only statement that can be said to be true.

Question 13
Tony owned the following lots of Orange Corporation stock.
Purchase ...

Solution Summary

This solution in question and answer format contains principles associated with depreciation, amortization, and basis.

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