ACCT 424 Week 8 Final Exam Answers

ACCT 424 Week 8 Final Exam Answers
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ACCT 424 Week 8 Final Exam Answers
1. (TCO 1)
Hunter and
Warren form Tan
Corporation.
Hunter transfers
equipment (basis
of $210,000 and
fair market value
of $180,000),
and Warren
transfers land
(basis of $15,000
and fair market
value of
$150,000) and
$30,000 cash.
Each receives
50% of Tan’s
stock. Which
happens as a
result of these
transfers? (Points
: 5)
Hunter has a
recognized loss
of $30,000;
Warren has a
recognized gain
of $135,000.
Neither Hunter
nor Warren has
any recognized
gain or loss.
Hunter has no

ecognized loss;
Warren has a
recognized gain
of $30,000.
Tan Corporation
has a basis in the
land of $45,000.
None of the
above
2. (TCO 1)
Samantha
transferred land
worth $200,000
(basis of
$40,000) to
Lava
Corporation, an
existing entity,
for 300 shares
of its stock.
Lava
Corporation has
two other
shareholders,
Timothy and
Brett, each of
whom holds 50
shares. Which
happens with
respect to the
transfer? (Points
: 5)
Samantha
has no
recognized gain.
Lava
Corporation has

a basis of
$200,000 in the
land.
Samantha has a
basis of
$200,000 in her
300 shares in
Lava
Corporation.
Both B and C
None of the
above
3. (TCO 2)
Pelican Inc., a
closely held
corporation (not
a PSC), has a
$350,000 loss
from a passive
activity,
$135,000 of
active income,
and $160,000 of
portfolio
income. How
much is
Pelican’s
taxable
income? (Points
: 5)
$0
($55,000)
$135,000
$295,000
$160,000

4. (TCO 2)
Silver
Corporation
has average
gross receipts
of $5.7
million, $4.6
million, and
$4.8 million
for the last
three years,
respectively.
Silver is
_____. (Points
: 5)
not subject
to the
corporate
income tax
a small
corporation
with respect to
the AMT
not subject to
the AMT
not a small
corporation
with respect to
the AMT
None of the
above
5. (TCO 3) As of
January 1,
Everest
Corporation has
a deficit in

accumulated E &
P of $75,000. For
tax year, current
E & P (all of
which accrued
ratably) is
$40,000 (prior to
any distribution).
On July 1,
Everest
Corporation
distributes
$60,000 to its
sole,
noncorporate
shareholder.
Which is the
amount of the
distribution that
is a
dividend? (Points
: 5)
$0
$40,000
$60,000
$75,000
None of the
above
6. (TCO 3)
Parrot
Corporation
has
accumulated
E & P of
$40,000 on
January 1,
20×1. In
20×1, Parrot

has current E
& P of
$45,000
(before any
distribution).
On December
31, 20×1, the
corporation
distributes
$120,000 to
its sole
shareholder,
Michael (an
individual).
Which is
Parrot
Corporation’s
E & P as of
January 1,
20×2? (Points
: 5)
$0
($35,000)
$40,000
$85,000
None of the
above
7. (TCO 4)
Cardinal
Corporation
has 1,000
shares of
common
stock
outstanding.
John owns
300 of the
shares,

John’s
grandfather
owns 200
shares,
John’s
daughter
owns 300
shares, and
Redbird
Corporation
owns 200
shares. John
owns 60% of
the stock in
Redbird
Corporation.
How many
shares is John
deemed to
own in
Cardinal
Corporation
under the
attribution
rules of
§318? (Points
: 5)
600
720
800
300
None of the
above
8. (TCO 5)
Francis
exchanges her
20% interest in
Beryl

Corporation for
10,000 shares of
Pyrite
Corporation
(value $200,000)
and $40,000
cash. Francis’s
basis in her Beryl
stock is $95,000.
The accumulated
earnings of Beryl
are $325,000,
and the
accumulated
earnings of Pyrite
are $225,000 at
the time of the
reorganization.
How does
Francis treat this
transaction for
tax
purposes? (Points
: 5)
No gain is
recognized by
Francis in this
reorganization.
Francis reports a
$40,000
recognized
dividend
Francis reports a
$40,000
recognized
capital gain.
Francis reports a
$35,000
recognized
dividend and a
$5,000 capital

gain.
None of the
above
9. (TCO 6)
How are the
members of
a
consolidated
group
affected by
computations
related to E
& P? (Points
: 5)
E & P is
computed
solely on a
consolidated
basis.
Consolidated
E & P is
computed as
the sum of
the E & P
balances of
each of the
group
members.
Members E
& P balances
are frozen as
long as the
consolidation
election is in
place.
Each member
keeps its own
E & P

account.
None of the
above
10. (TCO 11)
Which
statement, if
any, does not
reflect the rules
governing the
negligence
accuracyrelated
penalty?(Points
: 5)
The
penalty rate is
20%.
The penalty is
imposed only
on the part of
the deficiency
attributable to
negligence.
The penalty
applies to all
federal taxes,
except when
fraud is
involved.
The penalty is
waived if the
taxpayer uses
Form 8275 to
disclose a
return position
that is
reasonable,
though

contrary, to the
IRS position.
None of the
above
1. (TCO 7) On
January 1 of the
current year,
Rachel and Julio
form an equal
partnership.
Rachel makes a
cash contribution
of $80,000 and a
property
contribution
(adjusted basis of
$110,000, fair
market value of
$80,000) in
exchange for her
interest in the
partnership. Julio
contributes
property (adjusted
basis of $120,000,
fair market value
of $160,000) in
exchange for his
partnership
interest. Which
statement is true
concerning the
income tax results
of this partnership
formation? (Points
: 5)
Rachel has a
$160,000 tax basis
for her partnership
interest.

The partnership
has an $80,000
adjusted basis in
the property
contributed by
Rachel.
Rachel recognizes
a $30,000 loss on
her property
transfer.
Julio has a
$120,000 tax basis
for his partnership
interest.
None of the above
2. (TCO 7)
Samantha
and Rebecca
are equal
partners in
the S&R
Partnership.
On January
1 of the
current year,
each
partner’s
adjusted
basis in S&R
was
$240,000.
During the
current year,
S&R
borrowed
$180,000 for
which
Samantha
and Rebecca
are

personally
liable. S&R
sustained a
net operating
loss of
$30,000 in
the current
year ended
December
31. If
liabilities are
shared
equally by
the partners,
which is
each
partner’s
basis in her
interest in
S&R on
January 1 of
the next
year? (Points
: 5)
$135,000
$225,000
$240,000
$315,000
None of the
above
3. (TCO 7)
Naomi
contributed
property
($80,000
basis and
fair market
value of

$120,000)
to the ABC
Partnership
in exchange
for a 50%
interest in
partnership
capital and
profits.
During the
first year of
partnership
operations,
ABC had
net taxable
income of
$60,000 and
tax-exempt
income of
$56,000.
The
partnership
distributed
$24,000
cash to
Naomi. Her
share of
partnership
recourse
liabilities on
the last day
of the
partnership
year was
$32,000.
Which is
Naomi’s
adjusted
basis
(outside
basis) for
her
partnership
interest at
yearend?
(Points

: 5)
$110,000
$146,000
$144,000
$196,000
None of the
above
4. (TCO 8)
During 20×2,
Houston Nutt,
the sole
shareholder of
a calendar-year
S corporation,
received a
distribution of
$16,000. On
December 31,
20×1, his stock
basis was
$4,000. The
corporation
earned $11,000
ordinary
income during
the year. It has
no accumulated
E & P. Which
statement is
correct? (Points
: 5)
Nutt
recognizes a
$1,000 LTCG.
Nutt’s stock
basis will be

$2,000.
Nutt’s ordinary
income is
$15,000.
Nutt’s return of
capital is
$11,000.
None of the
above
5. (TCO 8) Which
statement is correct
with respect to an S
corporation? (Points
: 5)
There is no
advantage also to
elect § 1244 stock.
An S corporation
can own 85% of an
insurance company.
An estate may be a
shareholder.
A voting trust
arrangement is not
available.
None of the above
6. (TCO 9)
Which
reduces a
shareholder’s
S corporation
stock

asis? (Points
: 5)
Depletion
in excess of
basis of
property
Illegal
kickbacks
Nontaxable
income
Sales
None of the
above
7. (TCO 9) Matt
and Hillary are
husband and
wife, and live in
Pennsylvania.
Using joint
funds, in 1990
they purchase an
insurance policy
on Matt’s life
and designate
their daughter,
Sandra, as the
beneficiary. The
policy has a
maturity value of
$2,000,000. Matt
dies first and the
insurance
proceeds are
paid to Sandra.
As to the
proceeds, (Points
: 5)

8. (TCO 10) The
trustee of the
Washington Trust
is not required to
distribute all of the
current-year annual
accounting income
of the trust to its
sole beneficiary,
Betty. Which is the
trust’s personal
exemption? (Points
: 5
9. (TCO 10) The
Jain Trust is
required to pay its
entire annual
accounting income
to the Daytona
Museum, a
qualifying charity.
Which is the trust’s
personal
exemption? (Points
: 5)
10. (TCO 10)
Pam makes a
gift of land
(basis of
$313,000; fair
market value
of $913,000)

to her
granddaughter,
Tracy. As a
result of the
transfer, Pam
paid a gift tax
of $45,000.
Which is
Tracy’s
income tax
basis in the
land? (Points :
5)