Exam 2

Question 1

Capital losses can only be deducted against capital gains, while ordinary losses are __________ against _________

Answer 1

fully deductible
any type of income

Question 2

realized gain or loss

Answer 2

amount realized on disposition - adjusted tax basis of property

Question 3

realization principle of accounting

Answer 3

increases or decreases in the value of assets are not accounted for as income

Question 4

amount realized

Answer 4

any cash received plus the FMV of any property received

Question 5

in financial terms, a return of investment __________ represent income

a) does
b) does not

Answer 5

b) does not

Question 6

in financial terms, a return on investments _________ represent income

a) does
b) does not

Answer 6

a) does

Question 7

installment sale method

Answer 7

does not recognize the entire realized gain in the year of sale

Question 8

installment sale method (formula)

Answer 8

realized gain / sale = % each year

Question 9

in cases in which deferral is not beneficial, taxpayers may make a written election not to use the installment sale method

TRUE
FALSE

Answer 9

TRUE

Question 10

capital gain or loss results from __________ all other gains or losses are considered

Answer 10

the sale or exchange of a capital asset
ordinary

Question 11

The two components of a capital gain/loss

Answer 11

1. must be a sale or exchange
2. must be a capital asset

Question 12

every asset is a capital asset unless it falls under what eight categories?

Answer 12

1. business inventories
2. business accounts receivable
3. business supplies
4. real or depreciable business properties
5. creative assets (patents, copyrights, etc)
6. U.S. government publications [not in text]
7. commodities derivatives [not in text]
8. hedging transaction properties [not in text]

Question 13

Capital asset is determined by …

Answer 13

the use of which the asset is held by its owner

Question 14

Capital losses can be deducted only to the extent of capital gains

TRUE
FALSE

Answer 14

TRUE

Question 15

the netting process of a gain/loss

Answer 15

Question 16

If a company sold a capital asset with a $100k basis for $25k and recognizes a $75k capital gain during the year, the loss will be ________ deductible

Answer 16

fully

Question 17

If a company sold a capital asset with a $100k basis for $25k and recognizes a $40k capital gain during the year, the loss will be ________ deductible

Answer 17

partially

Question 18

If a company sold a capital asset with a $100k basis for $25k and recognizes no capital gain during the year, the loss will be ________ deductible

Answer 18

non

Question 19

Individual taxpayers are permitted an annual deduction of up to ________ for capital losses in excess of capital gains

Answer 19

$3,000

Question 20

a nondeductible net capital loss incurred by a(n) __________ is carried forward indefinitely

Answer 20

individual

Question 21

a net capital loss incurred by a company is carried back _________ years and forward ________ years, but only as a deduction against net capital gains recognized during this ________ year period

Answer 21

3
5
8

Question 22

Generally, taxpayers prefer ordinary income to capital gains

TRUE
FALSE

Answer 22

FALSE

Question 23

for a firm that sells its accounts receivable to a third party , the difference between the amount realized and the tax basis is….

a) ordinary income or loss
b) capital gain or loss

Answer 23

a) ordinary income or loss

Question 24

Firm EQP is moving locations and is choosing to sell its current office supplies instead of transporting them. If EQP ________ the cost, it recognizes _________ on their disposition

Answer 24

deducted, ordinary income

Question 25

Firm EQP is moving locations and is choosing to sell its current office supplies instead of transporting them. If EQP ________ the cost, it recognizes _________ on their disposition

Answer 25

capitalized, ordinary loss

Question 26

Section 1231 Assets

Answer 26

business real and depreciable property and intangibles subject to amortization held by the owner for more than on year

Question 27

Section 1231 netting process [image]

Answer 27

Question 28

recapturing recognized loss under Section 1231 [image]

Answer 28

If a taxpayer incurs a net gain under Section 1231 in the current year and had a net loss in any of the previous five years, they must treat an equal amount of the current year’s gain as ordinary income to recapture the previous loss

Question 29

Capital gains/losses don’t affect income

TRUE
FALSE

Answer 29

TRUE

Question 30

Ordinary gains/losses don’t affect income

TRUE
FALSE

Answer 30

FALSE

Question 31

Company RC recognized a $24k net Section 1231 gain in 2023, a loss of $900 in 2021, a loss of $6,200 in 2020, and a gain of $1,350 in 2019. 2022 and 2018 had no section 1231 losses or gains.

What is the gain reported in 2023?

Answer 31

$16,900