Exam

Name___________________________________
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
All recognized gains and losses must eventually be classified either as capital or ordinary.

1)
_______
2
A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000. The taxpayer has a realized gain of
$3,000.
2)
_______

Gains and losses are recognized when property is disposed of by gift or bequest.

3)
_______
4
On January 1 of this year, Brad purchased 100 shares of stock at $4,000. By December 31 of this year, the stock had
declined in value to $2,200, but Brad still held the shares. Brad has recognized a $1,800 loss for tax purposes this year.
4)
_______
5
Rick sells stock of Ty Corporation, which has an adjusted basis of $20,000, for $22,000. He pays a sales commission of $500.
In computing his gain or loss, the amount realized by Rick is $1,500.
5)
_______

The initial adjusted basis of property depends upon how the property is acquired.

6)
_______
7

Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are
incurred.
7)
_______
8
A taxpayer purchased an asset for $50,000 several years ago. He is now planning to sell it. Under the recovery of basis
doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.
8)
_______

All realized gains and losses are recognized for tax purposes.

9)
_______
1
Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for
profit.
10)
______
1
If Houston Printing Co. purchases a new printing press during the current year for $30,000, pays sales taxes of $2,000, and
pays $1,000 for installation, the cost basis for the printing press is $33,000.
11)
______

Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.

12)
______

Interest incurred during the development and manufacture of a machine must be capitalized.
13)
______

14)
Capitalization of interest is required if debt is incurred to construct real property.
14)
______
1
For purposes of calculating depreciation, property converted from personal use to business use will take on a basis equal
to the greater of its FMV or its adjusted basis on the date of the conversion.
15)
______

A building used in a trade or business is a capital asset.

16)
______
1
Bad debt losses from nonbusiness debts are deductible as short-term or long-term capital losses depending on how long
the debt was outstanding.
17)
______

A nonbusiness bad debt is deductible only in the year in which the debt becomes totally worthless.
18)
______

If a capital asset held for one year or more is sold at a gain, the gain is classified as long-term capital gain.
19)
______

Net long-term capital gains receive preferential tax treatment if they exceed net short-term capital losses.
20)
______

Generally, gains resulting from the sale of collectibles such as antiques, stamps, or artwork are taxed at a maximum rate of
25%.
21)
______

If the taxpayer's net long-term capital losses exceed the net short-term capital gains, the excess may be offset against
ordinary income up to $3,000 per year. Any excess losses over $3,000 may be carried over indefinitely.
22)
______

Gain on sale of a patent by an inventor generally is ordinary income.

23)
______

The gain or loss on an asset purchased on March 31, 2013, and sold on March 31, 2014, is classified as short-term.
24)
______

Because of the locked-in effect, high capital gains tax rates may discourage taxpayer's from selling appreciated capital
assets.
25)
______

1)
TRUE
2)
TRUE
3)
FALSE
4)
FALSE
5)
FALSE
6)
TRUE
7)
TRUE
8)
TRUE
9)
FALSE
10)
TRUE
11)
TRUE
12)
FALSE
13)
TRUE
14)
TRUE
15)
FALSE
16)
FALSE
17)
FALSE
18)
TRUE
19)
FALSE
20)
TRUE
21)
FALSE
22)
TRUE
23)
FALSE
24)
TRUE
25)
TRUE