ACC 2460 – Fall 2003
Solutions to Extra Review Problems for Exam 2
Chapter 7
9.
12.
a.
Zeron’s taxable income is $88,200 ($87,200 service income + $1,000 ordinary income + $2,400
Section 1231 gain  $2,400 capital loss). The $4,600 capital loss in excess of Section 1231 gain
is nondeductible in the current year.
b.
Zeron’s taxable income is $80,600 ($87,200 service income  $6,600 Section 1231 loss). The
$1,700 capital loss is nondeductible in the current year.
c.
Zeron’s taxable income is $93,810 ($87,200 service income + $3,900 ordinary income + $1,510
Section 1231 gain + $1,200 capital gain).
d.
Zeron’s taxable income is $80,900 ($87,200 service income  $10,300 Section 1231 loss +
$4,000 capital gain).
e.
Zeron’s taxable income is $88,900 ($87,200 service income + $2,800 Section 1231 gain + $5,200
capital gain  $6,300 capital loss).
a.
EzTech’s gains and losses from sales of business assets are computed and characterized as
follows.
Amount
Adjusted
Realized
Ordinary
Section 1231
Realized
Basis
Gain/(Loss)
Gain
Gain/(Loss)
Machinery
Office equipment
Warehouse
$87,500
57,500
125,000
$57,840
37,530
141,880
$29,660
19,970
(16,880)
$29,660
12,470
0
$42,130
$7,500
(16,880)
$(9,380)
EzTech’s net capital loss from the sale of its investment assets is computed as follows:
Investment securities
Investment land
Amount
Realized
Adjusted
Basis
Capital
Gain/(Loss)
$83,100
178,000
$72,700
200,000
$10,400
(22,000)
(11,600)
EzTech’s taxable income is computed as follows.
Net income from operations
Ordinary gain from sales of business assets
Section 1231 loss
Taxable income
b.
$1,219,400
45,130
(9,380)
$1,255,150
If EzTech’s land was a Section 1231 asset instead of a capital asset, the $22,000 loss recognized
on sale would increase the corporation’s Section 1231 loss to $31,380, and EzTech’s taxable
income is computed as follows.
Net income from operations
Ordinary gain from sales of business assets
Section 1231 loss
Capital gain from sale of investment securities
Taxable income
$1,219,400
45,130
(31,380)
10,400
$1,243,550
20.
ZEJ’s net book income before tax
Excess of book over tax depreciation
Book gain on equipment sale
Tax gain on equipment sale
$270,000
2,700
$(23,000)
38,000
15,000
35,000
$322,700
Nondeductible loss on sale to related party
ZEJ’s taxable income
The $18,000 gain realized on the securities sale to a related party is taxable and does not cause a
book/tax difference.
Chapter 8
2.
9.
12.
a.
Realized loss $15,000; recognized loss $15,000; tax basis in new property $65,000.
b.
Realized loss $15,000; recognized loss -0-; tax basis in new property $80,000.
c.
In this case, the old property must be worth only $63,000. Realized loss $17,000; recognized loss
$17,000; tax basis in new property $65,000.
d.
Realized loss $17,000; recognized loss -0-; tax basis in new property $82,000.
e.
In this case, the old property must be worth $73,000. Realized loss $7,000; recognized loss
$7,000; tax basis in new property $65,000.
f.
Realized loss $7,000; recognized loss -0-; tax basis in new property $72,000.
a.
PO’s realized gain is $490,000 ($800,000 amount realized [$250,000 FMV of Boardwalk +
$550,000 debt relief]  $310,000 adjusted basis). PO must recognize the entire $490,000 gain
because the $550,000 boot (debt relief) exceeds the realized gain. PO’s tax basis in Boardwalk is
$250,000.
b.
QR’s realized gain is $190,000 ($800,000 amount realized  $610,000 adjusted basis [$60,000
adjusted basis in Boardwalk + $550,000 debt assumption]). QR recognizes no gain and takes a
$610,000 basis in Marvin Gardens.
a.
NP must recognize the entire $120,000 realized gain ($650,000 insurance reimbursement 
$530,000 adjusted basis) on the involuntary conversion.
b.
NP does not recognize any of the $120,000 realized gain because it spent at least $650,000 on
replacement property within two taxable years following the year in which the gain was realized.
c.
Because NP did not acquire the replacement property within two taxable years following the year
in which the gain was realized, it must recognize the entire $120,000 gain.
Chapter 9
3.
a. BDF’s 2003 payroll tax is $4,590 ($60,000 × 7.65%).
b. BDF’s 2003 payroll tax is $8,294 ([$87,000 × 6.2%] + [$200,000 × 1.45%]).
13.
Partner X
Initial basis in partnership interest
Deduction for $21,000 share of loss
$50,000
(21,000)
Partner Y
$10,000*
(10,000)
Adjusted basis at beginning of next year
$29,000
-0-
* Adjusted basis of contributed business assets
16.
a.
b.
c.
Mrs. Z’s adjusted basis at beginning of 2003
Increased by: 60% share of dividends and interest
60% share of capital gain
Basis before loss deduction
Decreased by limited deduction for
60% share of business loss
Mrs. Z’s adjusted basis at end of 2003
Napa Corporation’s dividend-received deduction is $158,500.
KLP dividend $55,000  70%
Gamma dividend $120,000  100%
13.
(107,480)
-0-
If Mrs. Z received a $5,000 cash distribution from the partnership, her basis before the loss
deduction would be only $102,480, and the deduction for her share of the business loss is limited
to $102,480.
Chapter 10
3.
$95,000
8,760
3,720
$107,480
PT’s taxable income
AMT adjustments
AMT tax preference
AMTI before exemption
Exemption
($40,000  [25%  $17,000 excess AMTI])
AMT rate
Tentative minimum tax
Regular tax
AMT
$38,500
120,000
$158,500
$100,000
45,000
22,000
$167,000
(35,750)
$131,250
.20
$26,250
(22,250)
$4,000