Principles of Taxation for Business and

Investment Planning 16th Edition Jones

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Chapter 09 - Nontaxable Exchanges

Chapter 09
Nontaxable Exchanges

True / False Questions

1. Tax neutrality for asset exchanges is the exception rather than the rule.
True False

2. When unrelated parties agree to an exchange of noncash properties, the economic

presumption is that the properties are of equal value.
True False

3. When unrelated parties agree to an exchange of noncash properties, the economic

presumption is that the properties have the same adjusted book basis.
True False

4. Gain realized on a property exchange that is not recognized is actually deferred rather than
nontaxable.
True False

5. Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.
True False

6. A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the
extent of the FMV of the boot.
True False

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Chapter 09 - Nontaxable Exchanges

7. A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the
lesser of the FMV of the boot or the gain realized.
True False

8. A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the
basis of the qualifying property received.
True False

9. Signo Inc.'s current year income statement includes a $21,000 gain realized on the exchange
of an old business asset for a new business asset. If the exchange is nontaxable, Signo has a
$21,000 favorable permanent book/tax difference.
True False

10. Tarletto Inc.'s current year income statement includes a $229,000 gain realized on the
exchange of an old business asset for a new business asset. If the exchange is nontaxable,
Tarletto's book basis in the new asset is $229,000 greater than its tax basis.
True False

11. Mr. Lexon owns investment property with a $719,000 basis. If the property is worth only
$500,000, Mr. Lexon would prefer a taxable disposition of the property over a like-kind
exchange.
True False

12. Muro Inc. exchanged an old inventory item for a new asset. If the new asset is also an
inventory item, the exchange is nontaxable.
True False

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Chapter 09 - Nontaxable Exchanges

13. Mrs. Cooley exchanged 400 shares of stock for corporate bonds. If the stock and bonds
were issued by the same corporation, they are like-kind properties, and the exchange is
nontaxable.
True False

14. Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla
Partnership. This exchange is taxable.
True False

15. A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize
the loss.
True False

16. Yelano Inc. exchanged an old forklift used in its business for a new forklift. This like-kind
exchange is nontaxable.
True False

17. Reiter Inc. exchanged an old forklift for new office furniture. This like-kind exchange is
nontaxable.
True False

18. All types of business and investment real properties are like-kind.
True False

19. The goodwill of one business is never of a like-kind to the goodwill of a different business.
True False

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Chapter 09 - Nontaxable Exchanges

20. Mrs. Volter exchanged residential real estate for a commercial office building. The
residential real estate was subject to a $92,800 mortgage, which was assumed by the other party
to the exchange. Mrs. Volter must treat the relief of the mortgage as $92,800 boot received.
True False

21. Mr. Bentley exchanged investment land subject to a $300,000 mortgage for commercial
real estate subject to a $188,000 mortgage. Mr. Bentley is treated as paying $112,000 boot in
the exchange.
True False

22. Toffel Inc. exchanged investment land subject to a $240,000 mortgage for unencumbered
farmland. If Toffel realized a $168,000 gain on the exchange, it must recognize the entire gain.
True False

23. V&P Company exchanged unencumbered investment land for farmland subject to a
$200,000 mortgage. If V&P realized a $168,000 gain on the exchange, it must recognize the
entire gain.
True False

24. In a like-kind exchange in which both properties are subject to a mortgage, both parties to
the exchange are treated as receiving boot equal to the relief of their respective mortgage.
True False

25. A flood destroyed a business asset owned by Boochi Company. Boochi's adjusted tax basis
in the asset was $87,100. Six months after the flood, Boochi used its $100,000 insurance
settlement to replace the asset. Boochi can recognize a $12,900 gain or it can elect to defer gain
recognition.
True False

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Chapter 09 - Nontaxable Exchanges

26. On July 2, 2011, a tornado destroyed an asset owned by Leigh Inc., a calendar year taxpayer.
Leigh's adjusted tax basis in the asset was $22,700, and the reimbursement from its property
insurance company was $35,000. If Leigh wants to defer recognizing its $12,300 realized gain,
it must replace the asset no later than December 31, 2012.
True False

27. Vandals destroyed a business asset owned by L&L Company. L&L's adjusted tax basis in
the asset was $60,800, and the reimbursement from its property insurance company was
$90,000. L&L must pay at least $60,800 for a replacement asset in order to defer gain
recognition on the involuntary conversion.
True False

28. If a taxpayer elected to defer a $13,000 gain realized on an involuntary conversion, the tax
basis of the taxpayer's replacement property equals the cost of the property less $13,000.
True False

29. A taxpayer who exchanges property for an interest in a partnership never recognizes gain or
loss on the exchange.
True False

30. A taxpayer who transfers property for corporate stock can defer gain recognition only if the
taxpayer owns at least 50% of the corporation's outstanding stock immediately after the
exchange.
True False

31. A corporation's tax basis in property received in exchange for corporate stock depends on
whether the exchange was taxable or nontaxable to the transferors of the property.
True False

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Chapter 09 - Nontaxable Exchanges

32. A partnership always takes a carryover basis in property received from a partner in
exchange for an equity interest in the partnership.
True False

33. The wash sale rule can result in the nonrecognition of both gains and losses.
True False

34. A taxpayer who realizes a loss on the sale of marketable securities and reacquires
substantially the same securities within the 30 day period before the sale cannot recognize the
loss.
True False

Multiple Choice Questions

35. The tax basis in property received in a like-kind exchange in which no gain or loss is
recognized is a:
A. FMV basis
B. Cost basis
C. Substituted basis
D. Carryover basis

36. Which of the following statements about the inclusion of boot in a nontaxable exchange is
false?
A. The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases
of the properties exchanged.
B. The receipt of boot can trigger gain recognition but not loss recognition.
C. The party paying the boot includes the FMV of the boot in the tax basis of the property
received.
D. None of the above is false.

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Chapter 09 - Nontaxable Exchanges

37. Which of the following statements about nontaxable exchanges is true?

A. The parties to the exchange agree that the properties exchanged are of equal value.
B. The parties to the exchange both realize gain on the exchange.
C. No cash can change hands in a nontaxable exchange.
D. Any gain realized on the exchange is not included in financial statement income.

38. Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a
new asset worth $20,000. Which of the following statements is false?
A. The old asset's FMV is $20,000.
B. If the exchange is nontaxable, Berly's tax basis in the new asset is $12,300.
C. If the exchange is taxable, Berly's recognized gain is $7,700.
D. None of the statements is false.

39. Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for
a new asset worth $90,000 and $10,000 cash. Which of the following statements is false?
A. The old asset's FMV is $100,000.
B. If the exchange is nontaxable, Doppia's recognized gain is $10,000.
C. If the exchange is nontaxable, Doppia's tax basis in the new asset is $78,750.
D. None of the statements is false.

40. Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in
exchange for a new asset worth $75,000. Which of the following statements is false?
A. The old asset's FMV is $70,000.
B. If the exchange is nontaxable, Eliot's recognized gain is $5,000.
C. If the exchange is nontaxable, Eliot's tax basis in the new asset is $58,100.
D. None of the statements is false.

41. G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in
exchange for a new asset worth $150,000. Which of the following statements is false?
A. The old asset's FMV is $150,000.
B. If the exchange is nontaxable, G&G's recognized gain is -0-.
C. If the exchange is nontaxable, G&G's tax basis in the new asset is $130,300.
D. None of the statements is false.

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Chapter 09 - Nontaxable Exchanges

42. Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a
new asset worth $48,000 and $3,000 cash. Which of the following statements is false?
A. If the exchange is taxable, Itak recognizes a $6,700 gain.
B. If the exchange is nontaxable, Itak recognizes a $3,000 gain.
C. If the exchange is nontaxable, Itak's tax basis in the new asset is $44,300.
D. None of the statements is false.

43. Kornek Inc. transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in
exchange for a new asset worth $260,000. Which of the following statements is false?
A. If the exchange is taxable, Kornek recognizes a $48,000 gain.
B. If the exchange is nontaxable, Kornek recognizes a $12,000 gain.
C. If the exchange is nontaxable, Kornek's tax basis in the new asset is $212,000.
D. None of the statements is false.

44. LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a
new asset worth $11,000 and $1,500 cash. Which of the following statements is false?
A. If the exchange is taxable, LiO recognizes an $1,100 loss.
B. If the exchange is nontaxable, LiO recognizes no loss.
C. If the exchange is nontaxable, LiO's tax basis in the new asset is $12,100.
D. None of the statements is false.

45. Which of the following statements about boot included in a nontaxable exchange is false?
A. The purpose of boot is to equalize the values of the exchanged properties.
B. The payment of boot triggers recognition of realized gain to the payer.
C. The receipt of boot triggers recognition of realized gain to the recipient.
D. The receipt of boot does not trigger recognition of realized loss to the recipient.

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Chapter 09 - Nontaxable Exchanges

46. Nagin Inc. transferred an old asset in exchange for a new asset worth $84,000 and $6,000
cash. The old asset and new asset were like-kind properties. Which of the following statements
is true?
A. If Nagin's basis in the old asset was $95,000, Nagin can recognize a $5,000 loss.
B. If Nagin's basis in the old asset was $85,000, Nagin must recognize a $6,000 gain.
C. If Nagin's basis in the old asset was $79,200, Nagin must recognize a $6,000 gain.
D. None of the above is true.

47. Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no
cash was included in the exchange). The assets were like-kind properties. Oxono reported the
gain as revenue on its financial statements. Which of the following is true?
A. The exchange resulted in a favorable temporary book/tax difference.
B. The exchange resulted in a favorable permanent book/tax difference.
C. The exchange resulted in an unfavorable temporary book/tax difference.
D. The exchange resulted in an unfavorable permanent book/tax difference.

48. Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different
parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the
exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for
$533,000 cash. Compute Q&J's book and tax gain on sale.
A. $188,000 book and tax gain
B. $188,000 book gain and $61,000 tax gain
C. $61,000 book and tax gain
D. None of the above

49. Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different
parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the
exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for
$533,000 cash. Which of the following statements is true?
A. The nontaxable exchange had no effect on Q&J's deferred tax accounts.
B. The nontaxable exchange resulted in a deferred tax liability that reversed this year.
C. The nontaxable exchange resulted in a deferred tax asset that reversed this year.
D. The sale of the parcel of land had no effect on Q&J's deferred tax accounts.

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Chapter 09 - Nontaxable Exchanges

50. Eight years ago, Prescott Inc. realized a $16,200 gain on the exchange of old equipment for
new equipment. Prescott included the gain in book income, but the exchange was nontaxable.
This year, Prescott sold the new equipment for $2,500. At date of sale, the equipment's book
basis and tax basis had both been depreciated to zero. Which of the following statements is
true?
A. The nontaxable exchange had no effect on Prescott's deferred tax accounts.
B. The nontaxable exchange resulted in a deferred tax asset.
C. The sale of the new equipment had no effect on Prescott's deferred tax accounts.
D. None of the above is true.

51. Luce Company exchanged the copyright on a software application for a copyright on a
different software application. Luce's gain on the exchange was nontaxable (because the
copyrights were like-kind) but was included in financial statement income. Which of the
following statements is false?
A. Luce's book basis in the copyright received is the copyright's cost (FMV).
B. Luce's tax basis in the copyright received equals its tax basis in the copyright surrendered.
C. Luce's future amortization deductions with respect to its tax basis in the copyright will be
different from future amortization expense for financial statement purposes.
D. None of the statements is false.

52. Which of the following statements about like-kind exchanges is false?

A. Like-kind property must be held for either business or investment use.
B. Businesses cannot engage in like-kind exchanges of inventory.
C. The definition of like-kind property for tangible personalty is determined by the IRS.
D. Business cannot exchange undeveloped land for developed real estate.

53. Rydell Company exchanged business equipment (initial cost $55,250; accumulated
depreciation $25,450) for like-kind equipment worth $44,000 and $2,000 cash. As a result,
Rydell must recognize:
A. $2,000 ordinary gain
B. $2,000 Section 1231 gain
C. No gain or loss
D. None of the above

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Chapter 09 - Nontaxable Exchanges

54. YCM Inc. exchanged business equipment (initial cost $114,800; accumulated depreciation
$63,400) for like-kind equipment worth $110,000 and $10,000 cash. As a result, Rydell must
recognize:
A. No gain or loss
B. $10,000 Section 1231 gain
C. $10,000 ordinary gain
D. None of the above

55. Teco Inc. and MW Company exchanged like-kind production assets. Teco's asset had an
$80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a
$28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the
following statements is false?
A. Teco's realized gain is $26,100 and recognized gain is -0-.
B. MW's realized gain is $59,400 and recognized gain is $7,500.
C. Teco's basis in its newly acquired asset is $61,400.
D. MW's basis in its newly acquired asset is $35,600.

56. Acme Inc. and Beamer Company exchanged like-kind production assets. Acme's asset had
a $240,000 FMV and $117,300 adjusted tax basis, and Beamer's asset had a $225,000 FMV and
a $168,200 adjusted tax basis. Beamer paid $15,000 cash to Acme as part of the exchange.
Which of the following statements is true?
A. Acme's realized gain is $122,700 and recognized gain is -0-.
B. Beamer's realized gain is $56,800 and recognized gain is $15,000.
C. Acme's basis in its newly acquired asset is $117,300.
D. Beamer's basis in its newly acquired asset is $168,200.

57. Tauber Inc. and J&I Company exchanged like-kind production assets. Tauber's asset had a
$17,500 FMV and $3,000 adjusted tax basis, and J&I's asset had a $19,000 FMV and a $9,000
adjusted tax basis. Tauber paid $1,500 cash to J&I as part of the exchange. Which of the
following statements is false?
A. Tauber's realized gain is $14,500 and recognized gain is -0-.
B. J&I's realized gain is $10,000 and recognized gain is -0-.
C. Tauber's basis in its newly acquired asset is $4,500.
D. J&I's basis in its newly acquired asset is $9,000.

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Chapter 09 - Nontaxable Exchanges

58. Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750
cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV.
Which of the following statements is true?
A. If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a
$400,000 basis in Asset Z.
B. If Asset A and Asset Z are not like-kind property, Nixon recognizes a $110,000 gain and
takes a $510,000 basis in Asset Z.
C. If Asset A and Asset Z are like-kind property, Nixon recognizes no gain and takes a
$400,000 basis in Asset Z.
D. If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a
$415,750 basis in Asset Z.

59. Mr. and Mrs. Eyre own residential rental property that they would like to dispose of in a
nontaxable exchange. Which of the following would not qualify as like-kind property?
A. Commercial office building
B. Undeveloped land
C. Warehouse used to store transportation equipment
D. All of the above qualify as like-kind property.

60. Tanner Inc. owns a fleet of passenger automobiles that it would like to dispose of in a
nontaxable exchange. Which of the following would qualify as like-kind property?
A. Sports utility vehicles
B. Double decker buses
C. Dump trucks
D. Both a. and b. would qualify as like-kind.

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Chapter 09 - Nontaxable Exchanges

61. Babex Inc. and OMG Company entered into an exchange of real property. Here is the
information for the properties to be exchanged.

Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute
Babex's gain recognized on the exchange and its tax basis in the property received from OMG.
A. $175,000 gain recognized; $768,000 basis in OMG property
B. No gain recognized; $768,000 basis in OMG property
C. $175,000 gain recognized; $943,000 basis in OMG property
D. None of the above

62. Babex Inc. and OMG Company entered into an exchange of real property. Here is the
information for the properties to be exchanged.

Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute
OMG's gain recognized on the exchange and its tax basis in the property received from Babex.
A. $175,000 gain recognized; $514,500 basis in Babex property
B. No gain recognized; $689,500 basis in Babex property
C. No gain recognized; $514,500 basis in Babex property
D. None of the above

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Chapter 09 - Nontaxable Exchanges

63. Johnson Inc. and C&K Company entered into an exchange of real property. Here is the
information for the properties to be exchanged.

Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the
Johnson property. Compute Johnson's gain recognized on the exchange and its tax basis in the
property received from C&K.
A. $25,000 gain recognized; $593,000 basis in C&K property
B. $25,000 gain recognized; $793,000 basis in C&K property
C. $225,000 gain recognized; $593,000 basis in C&K property
D. None of the above

64. Johnson Inc. and C&K Company entered into an exchange of real property. Here is the
information for the properties to be exchanged.

Pursuant to the exchange, C&K paid $25,000 cash to Johnson and assumed the mortgage on the
Johnson property. Compute C&K's gain recognized on the exchange and its tax basis in the
property received from Johnson.
A. $200,000 gain recognized; $662,000 basis in Johnson property
B. No gain recognized; $462,000 basis in Johnson property
C. No gain recognized; $487,000 basis in Johnson property
D. None of the above

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Chapter 09 - Nontaxable Exchanges

65. Which of the following statements about the transfer of debt in a like-kind exchange is
false?
A. The party relieved of debt treats the relief as boot received.
B. The party assuming debt treats the assumption as boot paid.
C. If both properties in the exchange are subject to debt, both parties will be treated as receiving
boot.
D. None of the above is false.

66. Mr. Weller and the Olson Partnership entered into an exchange of investment real property.
Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's
property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of the
following statements is true?
A. Mr. Weller received $193,000 boot; Olson paid $193,000 boot.
B. Mr. Weller paid $193,000 boot; Olson received $193,000 boot.
C. Mr. Weller received $428,000 boot; Olson received $235,000 boot.
D. Mr. Weller paid $428,000 boot; Olson paid $235,000 boot.

67. Perry Inc. and Dally Company entered into an exchange of real property. Here is the
information for the properties to be exchanged.

Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally
assumed the mortgage on the Perry property. Compute Perry's gain recognized on the exchange
and its tax basis in the property received from Dally.
A. No gain recognized; $410,000 basis in the Dally property
B. No gain recognized; $440,000 basis in the Dally property
C. $100,000 gain recognized; $410,000 basis in the Dally property
D. None of the above

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Chapter 09 - Nontaxable Exchanges

68. Perry Inc. and Dally Company entered into an exchange of real property. Here is the
information for the properties to be exchanged.

Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally
assumed the mortgage on the Perry property. Compute Dally's gain recognized on the exchange
and its tax basis in the property received from Perry.
A. $30,000 gain recognized; $313,000 basis in the Perry property
B. 100,000 gain recognized; $383,000 basis in the Perry property
C. $30,000 gain recognized; $283,000 basis in the Perry property
D. None of the above

69. In April, vandals completely destroyed outdoor signage owned by Renfru Inc. Renfru's
adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from
its property insurance company, and on August 8, it paid $60,000 to replace the signage.
Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the
new signage.
A. No recognized gain or loss; $50,000 basis in the signage
B. No recognized gain or loss; $60,000 basis in the signage
C. $18,700 recognized gain; $60,000 basis in the signage
D. None of the above

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Chapter 09 - Nontaxable Exchanges

70. In March, a flood completely destroyed three delivery vans owned by Totle Inc. Totle's
adjusted tax basis in the vans was $48,900. Totle received a $90,000 reimbursement from its
property insurance company, and on September 8, it purchased one new delivery van for
$70,000. Compute Totle's recognized gain on loss on the involuntary conversion and its tax
basis in the new van.
A. No recognized gain or loss; $48,900 basis in the van
B. $20,000 recognized gain; $70,000 basis in the van
C. $20,000 recognized gain; $48,900 basis in the van
D. None of the above

71. In June, a fire completely destroyed office furniture owned by W&S Inc. W&S's adjusted
tax basis in the furniture was $17,040. W&S received a $15,000 reimbursement from its
property insurance company, and on August 8, it paid $16,000 to replace the furniture.
Compute W&S's recognized gain on loss on the involuntary conversion and its tax basis in the
new furniture.
A. No recognized gain or loss; $18,040 basis in the furniture
B. $2,040 recognized loss; $16,000 basis in the furniture
C. No recognized gain or loss; $13,960 basis in the furniture
D. None of the above

72. Grantly Seafood is a calendar year taxpayer. In 2012, a hurricane destroyed three of
Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2012,
Grantly received a $1.2 million reimbursement from its insurance company. What is the latest
date that Grantly can replace the boats to avoid gain recognition from the involuntary
conversion?
A. December 31, 2012
B. December 31, 2013
C. December 31, 2014
D. October 11, 2015

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Chapter 09 - Nontaxable Exchanges

73. Grantly Seafood is a calendar year taxpayer. In 2012, a hurricane destroyed three of
Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2012,
Grantly received a $1 million reimbursement from its insurance company. On May 19, 2013,
Grantly purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss
on the involuntary conversion and its tax basis in the new boat.
A. $215,500 recognized gain; $750,000 basis in the boat
B. $250,000 recognized gain; $750,000 basis in the boat
C. $250,000 recognized gain; $784,500 basis in the boat
D. None of the above

74. Thieves stole computer equipment used by Ms. James in her small business. Ms. James' tax
basis in the equipment was zero. One month after the theft, she received a $17,600
reimbursement from her casualty insurance company and used $14,850 to replace the computer
equipment. She used the $2,750 remaining reimbursement to purchase a new desk for her office.
Which of the following statements is false?
A. Ms. James must recognize a $2,750 gain on the involuntary conversion.
B. Ms. James's basis in her new computer equipment is -0-.
C. Ms. James's basis in her new desk is $2,750.
D. None of the above is false.

75. A fire destroyed equipment used by BLP Inc. in its manufacturing business. BLP's adjusted
tax basis in the equipment was $24,000. Three weeks after the fire, BLP paid $40,000 for
replacement equipment. Which of the following statements is false?
A. If the destroyed equipment was uninsured, BLP recognizes a $24,000 ordinary loss and
takes a $40,000 basis in the new equipment.
B. If BLP received a $20,000 insurance reimbursement, it recognizes a $4,000 ordinary loss
and takes a $40,000 basis in the new equipment.
C. If BLP received a $30,000 insurance reimbursement, it recognizes no gain and takes a
$34,000 basis in the new equipment.
D. If BLP received a $42,500 insurance reimbursement, it recognizes no gain and takes a
$24,000 basis in the new equipment.

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Chapter 09 - Nontaxable Exchanges

76. Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to
J&K Inc. in exchange for J&K common stock. Which of the following statements is true?
A. If Mr. Jamail owns 14% of J&K's outstanding stock immediately after the exchange, he must
recognize a $157,100 gain.
B. If Mr. Jamail owns 74% of J&K's outstanding stock immediately after the exchange, he must
recognize a $157,100 gain.
C. If Mr. Jamail owns 81% of J&K's outstanding stock immediately after the exchange, he must
recognize a $157,100 gain.
D. Statements a. and b. are true.

77. Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to
J&K Partnership in exchange for a partnership interest. Which of the following statements is
true?
A. If Mr. Jamail owns a 14% partnership interest immediately after the exchange, he must
recognize a $157,100 gain.
B. If Mr. Jamail owns 34% partnership interest immediately after the exchange, he recognizes
no gain on the exchange.
C. If Mr. Jamail owns a 14% partnership interest immediately after the exchange, his tax basis
in the interest is $187,000.
D. Statements a. and c. are true.

78. Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis
$973,000) to Massur Inc. in exchange for Massur common stock. Which of the following
statements is false?
A. If Vincent does not recognize gain on its exchange of property for stock, Vincent's tax basis
in its Massur stock is $973,000.
B. If Vincent recognizes gain on its exchange of property for stock, Vincent's tax basis in its
Massur stock is $2.3 million.
C. If Vincent is not in control of Massur immediately after the exchange, both Vincent and
Massur must recognize a $1,327,000 gain.
D. If Vincent is in control of Massur immediately after the exchange, Massur's tax basis in the
transferred realty is $973,000.

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Chapter 09 - Nontaxable Exchanges

79. IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange
for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a
$283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000
FMV and a $98,000 adjusted tax basis and received 400 shares. Compute IPM and Zeta's
realized and recognized gain on the exchange.
A. IPM realized $392,000 gain and recognized no gain. Zeta realized $352,000 gain and
recognized no gain.
B. IPM realized and recognized $392,000 gain. Zeta realized and recognized $352,000 gain.
C. IPM realized $392,000 gain and recognized no gain. Zeta realized and recognized $352,000
gain.
D. There is not enough information to compute realized and recognized gain.

80. IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange
for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a
$283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000
FMV and a $98,000 adjusted tax basis and received 400 shares. Determine IPM and Zeta's tax
basis in their IPeta stock and IPeta's aggregate tax basis in the transferred assets.
A. IPM's basis $283,000; Zeta's basis $450,000; IPeta's basis $733,000
B. IPM's basis $283,000; Zeta's basis $98,000; IPeta's basis $381,000
C. IPM's basis $675,000; Zeta's basis $450,000; IPeta's basis $1,125,000
D. None of the above

81. IPM Inc. and Zeta Company formed IPeta Inc. by transferring business assets in exchange
for 1,000 shares of IPeta common stock. IPM transferred assets with a $675,000 FMV and a
$283,000 adjusted tax basis and received 600 shares. Zeta transferred assets with a $450,000
FMV and a $98,000 adjusted tax basis and received 400 shares. Which of the following
statements is false?
A. IPM's 600 shares of stock are worth $675,000.
B. Zeta's gain realized on the exchange is $392,000.
C. The exchange of stock for assets is nontaxable to IPeta.
D. None of the above is false.

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Chapter 09 - Nontaxable Exchanges

82. Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in
exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000
FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a
$180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Compute Loonis and
Rhea's realized and recognized gain on the exchange.
A. Loonis realized and recognized $376,000 gain. Rhea realized and recognized $105,000 gain.
B. Loonis realized $376,000 gain and recognized no gain. Rhea realized and recognized
$105,000 gain.
C. Loonis realized $376,000 gain and recognized no gain. Rhea realized $105,000 gain and
recognized no gain.
D. There is not enough information to compute realized and recognized gain.

83. Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in
exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000
FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a
$180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Determine Loonis
and Rhea's tax basis in their LooNR stock and LooNR's aggregate tax basis in the transferred
assets.
A. Loonis' basis is $444,000; Rhea's basis is $75,000; LooNR's basis is $1 million.
B. Loonis' basis is $444,000; Rhea's basis is $180,000; LooNR's basis is $1 million.
C. Loonis' basis is $444,000; Rhea's basis is $180,000; LooNR's basis is $624,000.
D. None of the above

84. Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in
exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000
FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a
$180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Which of the
following statements is true?
A. The FMV of Rhea's 180 shares is $180,000.
B. Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR
immediately after the exchange.
C. LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets.
D. None of the above is true.

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Chapter 09 - Nontaxable Exchanges

85. Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700)
to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange,
M&W had 7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and
recognized gain on the exchange and the tax basis in her 4,200 M&W shares.
A. $228,500 gain realized and recognized; $340,200 basis in M&W shares
B. $228,500 gain realized and recognized; $111,700 basis in M&W shares
C. $228,500 gain realized and no gain recognized; $111,700 basis in M&W shares
D. None of the above

86. Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700)
to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange,
M&W had 7,800 shares of outstanding stock. Compute M&W's recognized gain on its
exchange of stock for property and determine M&W's tax basis in the property received from
Mrs. Brinkley.
A. No gain recognized; $111,700 tax basis in property
B. No gain recognized; $340,200 tax basis in property
C. $340,200 gain recognized; $111,700 tax basis in property
D. $111,700 gain recognized; $111,700 tax basis in property

87. Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700)
to M&W Inc. in exchange for a 36% interest in M&W Partnership. Determine Mrs. Brinkley's
realized and recognized gain on the exchange and the tax basis in her partnership interest.
A. $228,500 gain realized and recognized; $340,200 basis in M&W interest
B. $228,500 gain realized and recognized; $111,700 basis in M&W interest
C. $228,500 gain realized and no gain recognized; $111,700 basis in M&W interest
D. None of the above

88. Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700)
to M&W Inc. in exchange for a 36% interest in M&W Partnership. Compute M&W's
recognized gain on its exchange of an equity interest for property and determine M&W's tax
basis in the property received from Mrs. Brinkley.
A. No gain recognized; $340,200 tax basis in property
B. No gain recognized; $111,700 tax basis in property
C. $340,200 gain recognized; $111,700 tax basis in property
D. $111,700 gain recognized; $111,700 tax basis in property

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Chapter 09 - Nontaxable Exchanges

89. Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000
shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for
820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for 148 shares,
and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the transferred
assets, each Triple share is worth $125. Which of the following is false?
A. Mr. Albert's tax basis in his 820 shares is $50,000.
B. Triple Inc.'s tax basis in the assets transferred by Mrs. Billig is $9,000.
C. Mrs. Crisp's tax basis in her 32 shares is $4,000.
D. None of the above is false.

90. Mr. Slake sold 1,580 shares of publicly traded DDL stock (tax basis $49,240) for $40,000
cash on February 13. He paid $43,000 cash to purchase 1,600 DDL shares on March 2.
Compute Mr. Slake's loss recognized on the February 13 sale and determine his tax basis in the
1,600 shares.
A. No loss recognized; $40,000 basis
B. $9,240 loss recognized; $43,000 basis
C. No loss recognized; $52,240 basis
D. No loss recognized $49,240 basis

91. Ms. Ellis sold 889 shares of publicly traded Omer stock (tax basis $161,400) for $125,000
cash on July 2. She paid $136,200 cash to purchase 900 Omer shares on August 8. Compute Ms.
Ellis' loss recognized on the July 2 sale and determine her tax basis in the 900 shares.
A. $36,400 loss recognized; $136,200 basis
B. No loss recognized; $136,200 basis
C. No loss recognized; $76,200 basis
D. $36,400 loss recognized $125,000 basis

92. Which of the following statements about the wash sale rule is false?
A. The rule disallows loss recognition but not gain recognition.
B. The rule applies to both individual and corporate taxpayers.
C. The rule applies only to sales of marketable securities and not to sales of other types of
investment assets.
D. None of the above is false.

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Chapter 09 - Nontaxable Exchanges

Essay Questions

93. Lorch Company exchanged an old asset with a $120,700 tax basis and a $155,000 FMV for
a new asset with a $142,250 FMV and $12,750 cash.

a. If the old asset and the new asset are like-kind properties, compute Lorch's realized and
recognized gain and Lorch's tax basis in the new asset.
b. How would your answers change if the new asset is worth only $116,000, and Lorch received
$39,000 cash in the exchange?

94. Sissoon Inc. exchanged a business asset for an investment asset. Both assets had a $620,000
appraised FMV. Sissoon's book basis in the business asset was $518,900, and its tax basis was
$443,400.

a. Compute Sissoon's book and tax gain if the business asset and investment asset were
like-kind properties for tax purposes.
b. Determine Sissoon's book and tax basis of the investment asset acquired in the nontaxable
exchange.
c. Compute Sissoon's book and tax gain if the business asset and investment asset were not
like-kind properties for tax purposes.
d. Determine Sissoon's book and tax basis of the investment asset acquired in the taxable
exchange.

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Chapter 09 - Nontaxable Exchanges

95. On May 13, 2010, a flood destroyed the building in which SDF Inc. manufactured its
product. SDF's adjusted tax basis in the building was $984,000. On November 29, 2010, SDF
received a $1.2 million reimbursement from its casualty insurance company. In each of the
following cases, compute SDF's recognized gain on this involuntary conversion and its initial
basis in the replacement property.

a. On June 2, 2011, SDF completed construction of a replacement building for $1.3 million.
b. On February 18, 2013, SDF paid $1.3 million to purchase a replacement building.
c. On August 30, 2012, SDF paid $1.1 million to purchase a replacement building.

96. Mr. and Mrs. Meredith own a sole proprietorship consisting of business assets with a
$649,000 aggregated adjusted tax basis. According to an independent appraisal, the business is
worth $2 million. The Merediths are planning to transfer the entire business to Molleri Inc. in
exchange for 20,000 shares of Molleri stock. How much gain will the Merediths recognize on
the exchange of business assets for stock and what basis will they take in the stock if:

a. Molleri has 23,000 shares of outstanding stock immediately after the exchange?
b. Molleri has 500,000 shares of outstanding stock immediately after the exchange?

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Chapter 09 - Nontaxable Exchanges

97. Texark Inc., a calendar year taxpayer, reported $5,210,300 net income before tax on its
financial statements prepared in accordance with GAAP. The corporation's records reveal the
following information.

• Depreciation expense per books was $713,700, and MACRS depreciation was $662,000.
• Texark exchanged old equipment (-0- tax basis; $44,200 book basis) for new equipment
(FMV $50,000). Book gain was included in book income, although the exchange was
nontaxable for tax purposes.
• Texark received a $100,000 insurance reimbursement for the destruction of machinery with a
$29,000 tax basis and a $70,000 book basis. Texark spent $110,000 to replace the machinery
before year-end.

Compute Texark's taxable income.

9-26
Chapter 09 - Nontaxable Exchanges

Chapter 09 Nontaxable Exchanges Answer Key

True / False Questions

1. Tax neutrality for asset exchanges is the exception rather than the rule.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

2. When unrelated parties agree to an exchange of noncash properties, the economic

presumption is that the properties are of equal value.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

3. When unrelated parties agree to an exchange of noncash properties, the economic

presumption is that the properties have the same adjusted book basis.
FALSE

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

4. Gain realized on a property exchange that is not recognized is actually deferred rather than
nontaxable.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

5. Qualifying property received in a nontaxable exchange has a cost basis for tax purposes.
FALSE

Qualifying property takes a substituted basis.

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

6. A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the
extent of the FMV of the boot.
FALSE

Payment of boot does not trigger gain recognition.

Difficulty: 1 Easy
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

7. A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the
lesser of the FMV of the boot or the gain realized.
TRUE

Difficulty: 2 Medium
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

8. A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the
basis of the qualifying property received.
TRUE

Difficulty: 2 Medium
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

9. Signo Inc.'s current year income statement includes a $21,000 gain realized on the exchange
of an old business asset for a new business asset. If the exchange is nontaxable, Signo has a
$21,000 favorable permanent book/tax difference.
FALSE

The book/tax difference is temporary.

Difficulty: 2 Medium
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

10. Tarletto Inc.'s current year income statement includes a $229,000 gain realized on the
exchange of an old business asset for a new business asset. If the exchange is nontaxable,
Tarletto's book basis in the new asset is $229,000 greater than its tax basis.
TRUE

Difficulty: 3 Hard
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

11. Mr. Lexon owns investment property with a $719,000 basis. If the property is worth only
$500,000, Mr. Lexon would prefer a taxable disposition of the property over a like-kind
exchange.
TRUE

A like-kind exchange would result in deferral of Mr. Lexon's recognition (and deduction) of a
loss.

Difficulty: 2 Medium
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

12. Muro Inc. exchanged an old inventory item for a new asset. If the new asset is also an
inventory item, the exchange is nontaxable.
FALSE

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

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Chapter 09 - Nontaxable Exchanges

13. Mrs. Cooley exchanged 400 shares of stock for corporate bonds. If the stock and bonds
were issued by the same corporation, they are like-kind properties, and the exchange is
nontaxable.
FALSE

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

14. Tibco Inc. exchanged an equity interest in ABM Partnership for an equity interest in Jolla
Partnership. This exchange is taxable.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

15. A taxpayer who realizes a loss on the exchange of like-kind property can elect to recognize
the loss.
FALSE

The like-kind exchange rules defer both gain and loss recognition and are mandatory instead of
elective.

Difficulty: 3 Hard
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

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Chapter 09 - Nontaxable Exchanges

16. Yelano Inc. exchanged an old forklift used in its business for a new forklift. This like-kind
exchange is nontaxable.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

17. Reiter Inc. exchanged an old forklift for new office furniture. This like-kind exchange is
nontaxable.
FALSE

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

18. All types of business and investment real properties are like-kind.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

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Chapter 09 - Nontaxable Exchanges

19. The goodwill of one business is never of a like-kind to the goodwill of a different business.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

20. Mrs. Volter exchanged residential real estate for a commercial office building. The
residential real estate was subject to a $92,800 mortgage, which was assumed by the other party
to the exchange. Mrs. Volter must treat the relief of the mortgage as $92,800 boot received.
TRUE

Difficulty: 2 Medium
Learning Objective: 09-04 Describe the effect of the relief and assumption of debt in a like-kind exchange.

21. Mr. Bentley exchanged investment land subject to a $300,000 mortgage for commercial
real estate subject to a $188,000 mortgage. Mr. Bentley is treated as paying $112,000 boot in
the exchange.
FALSE

Mr. Bentley's net $112,000 relief of debt is boot received.

Difficulty: 2 Medium
Learning Objective: 09-04 Describe the effect of the relief and assumption of debt in a like-kind exchange.

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Chapter 09 - Nontaxable Exchanges

22. Toffel Inc. exchanged investment land subject to a $240,000 mortgage for unencumbered
farmland. If Toffel realized a $168,000 gain on the exchange, it must recognize the entire gain.
TRUE

Toffel's relief of debt is treated as $240,000 boot received.

Difficulty: 3 Hard
Learning Objective: 09-04 Describe the effect of the relief and assumption of debt in a like-kind exchange.

23. V&P Company exchanged unencumbered investment land for farmland subject to a
$200,000 mortgage. If V&P realized a $168,000 gain on the exchange, it must recognize the
entire gain.
FALSE

V&P is treated as paying $200,000 boot by assuming the mortgage. The payment of boot does
not trigger gain recognition.

Difficulty: 2 Medium
Learning Objective: 09-04 Describe the effect of the relief and assumption of debt in a like-kind exchange.

24. In a like-kind exchange in which both properties are subject to a mortgage, both parties to
the exchange are treated as receiving boot equal to the relief of their respective mortgage.
FALSE

Only the amount of net debt relief is treated as boot received by the party with net debt relief.

Difficulty: 2 Medium
Learning Objective: 09-04 Describe the effect of the relief and assumption of debt in a like-kind exchange.

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Chapter 09 - Nontaxable Exchanges

25. A flood destroyed a business asset owned by Boochi Company. Boochi's adjusted tax basis
in the asset was $87,100. Six months after the flood, Boochi used its $100,000 insurance
settlement to replace the asset. Boochi can recognize a $12,900 gain or it can elect to defer gain
recognition.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-05 Compute gain recognized and the basis of replacement property in an involuntary conversion.

26. On July 2, 2011, a tornado destroyed an asset owned by Leigh Inc., a calendar year taxpayer.
Leigh's adjusted tax basis in the asset was $22,700, and the reimbursement from its property
insurance company was $35,000. If Leigh wants to defer recognizing its $12,300 realized gain,
it must replace the asset no later than December 31, 2012.
FALSE

Leigh has until December 31, 2013, to replace the asset.

Difficulty: 2 Medium
Learning Objective: 09-05 Compute gain recognized and the basis of replacement property in an involuntary conversion.

27. Vandals destroyed a business asset owned by L&L Company. L&L's adjusted tax basis in
the asset was $60,800, and the reimbursement from its property insurance company was
$90,000. L&L must pay at least $60,800 for a replacement asset in order to defer gain
recognition on the involuntary conversion.
FALSE

L&L must pay at least $90,000 for replacement property.

Difficulty: 1 Easy
Learning Objective: 09-05 Compute gain recognized and the basis of replacement property in an involuntary conversion.

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Chapter 09 - Nontaxable Exchanges

28. If a taxpayer elected to defer a $13,000 gain realized on an involuntary conversion, the tax
basis of the taxpayer's replacement property equals the cost of the property less $13,000.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-05 Compute gain recognized and the basis of replacement property in an involuntary conversion.

29. A taxpayer who exchanges property for an interest in a partnership never recognizes gain or
loss on the exchange.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-06 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

30. A taxpayer who transfers property for corporate stock can defer gain recognition only if the
taxpayer owns at least 50% of the corporation's outstanding stock immediately after the
exchange.
FALSE

Difficulty: 1 Easy
Learning Objective: 09-06 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

31. A corporation's tax basis in property received in exchange for corporate stock depends on
whether the exchange was taxable or nontaxable to the transferors of the property.
TRUE

The corporation's basis is a cost basis if the exchange was taxable to the transferors and a
carryover basis if it was nontaxable.

Difficulty: 2 Medium
Learning Objective: 09-06 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

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Chapter 09 - Nontaxable Exchanges

32. A partnership always takes a carryover basis in property received from a partner in
exchange for an equity interest in the partnership.
TRUE

Difficulty: 1 Easy
Learning Objective: 09-06 Explain the tax consequences of the exchange of property for equity in a corporation or partnership.

33. The wash sale rule can result in the nonrecognition of both gains and losses.
FALSE

The wash sale rule is inapplicable to realized gains.

Difficulty: 1 Easy
Learning Objective: 09-07 Describe the tax consequences of a wash sale.

34. A taxpayer who realizes a loss on the sale of marketable securities and reacquires
substantially the same securities within the 30 day period before the sale cannot recognize the
loss.
TRUE

Difficulty: 2 Medium
Learning Objective: 09-07 Describe the tax consequences of a wash sale.

Multiple Choice Questions

35. The tax basis in property received in a like-kind exchange in which no gain or loss is
recognized is a:
A. FMV basis
B. Cost basis
C. Substituted basis
D. Carryover basis

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

36. Which of the following statements about the inclusion of boot in a nontaxable exchange is
false?
A. The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases
of the properties exchanged.
B. The receipt of boot can trigger gain recognition but not loss recognition.
C. The party paying the boot includes the FMV of the boot in the tax basis of the property
received.
D. None of the above is false.

The purpose of including boot is to equalize the FMV of the properties exchanged.

Difficulty: 2 Medium
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

37. Which of the following statements about nontaxable exchanges is true?

A. The parties to the exchange agree that the properties exchanged are of equal value.
B. The parties to the exchange both realize gain on the exchange.
C. No cash can change hands in a nontaxable exchange.
D. Any gain realized on the exchange is not included in financial statement income.

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

38. Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a
new asset worth $20,000. Which of the following statements is false?
A. The old asset's FMV is $20,000.
B. If the exchange is nontaxable, Berly's tax basis in the new asset is $12,300.
C. If the exchange is taxable, Berly's recognized gain is $7,700.
D. None of the statements is false.

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

39. Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for
a new asset worth $90,000 and $10,000 cash. Which of the following statements is false?
A. The old asset's FMV is $100,000.
B. If the exchange is nontaxable, Doppia's recognized gain is $10,000.
C. If the exchange is nontaxable, Doppia's tax basis in the new asset is $78,750.
D. None of the statements is false.

Doppia's tax basis in the new asset is $68,750.

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

40. Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in
exchange for a new asset worth $75,000. Which of the following statements is false?
A. The old asset's FMV is $70,000.
B. If the exchange is nontaxable, Eliot's recognized gain is $5,000.
C. If the exchange is nontaxable, Eliot's tax basis in the new asset is $58,100.
D. None of the statements is false.

Eliot recognizes no gain on the nontaxable exchange.

Difficulty: 2 Medium
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

41. G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in
exchange for a new asset worth $150,000. Which of the following statements is false?
A. The old asset's FMV is $150,000.
B. If the exchange is nontaxable, G&G's recognized gain is -0-.
C. If the exchange is nontaxable, G&G's tax basis in the new asset is $130,300.
D. None of the statements is false.

The old asset's FMV is $130,000.

Difficulty: 2 Medium
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

42. Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a
new asset worth $48,000 and $3,000 cash. Which of the following statements is false?
A. If the exchange is taxable, Itak recognizes a $6,700 gain.
B. If the exchange is nontaxable, Itak recognizes a $3,000 gain.
C. If the exchange is nontaxable, Itak's tax basis in the new asset is $44,300.
D. None of the statements is false.

Difficulty: 1 Easy
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

43. Kornek Inc. transferred an old asset with a $200,000 adjusted tax basis plus $12,000 cash in
exchange for a new asset worth $260,000. Which of the following statements is false?
A. If the exchange is taxable, Kornek recognizes a $48,000 gain.
B. If the exchange is nontaxable, Kornek recognizes a $12,000 gain.
C. If the exchange is nontaxable, Kornek's tax basis in the new asset is $212,000.
D. None of the statements is false.

If the exchange is nontaxable, Kornek recognizes no gain.

Difficulty: 2 Medium
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

44. LiO Company transferred an old asset with a $13,600 adjusted tax basis in exchange for a
new asset worth $11,000 and $1,500 cash. Which of the following statements is false?
A. If the exchange is taxable, LiO recognizes an $1,100 loss.
B. If the exchange is nontaxable, LiO recognizes no loss.
C. If the exchange is nontaxable, LiO's tax basis in the new asset is $12,100.
D. None of the statements is false.

LiO's tax basis in the new asset equals the $13,600 basis in the old asset - $1,100 boot.

Difficulty: 2 Medium
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

45. Which of the following statements about boot included in a nontaxable exchange is false?
A. The purpose of boot is to equalize the values of the exchanged properties.
B. The payment of boot triggers recognition of realized gain to the payer.
C. The receipt of boot triggers recognition of realized gain to the recipient.
D. The receipt of boot does not trigger recognition of realized loss to the recipient.

Only the receipt of boot triggers gain recognition.

Difficulty: 2 Medium
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

46. Nagin Inc. transferred an old asset in exchange for a new asset worth $84,000 and $6,000
cash. The old asset and new asset were like-kind properties. Which of the following statements
is true?
A. If Nagin's basis in the old asset was $95,000, Nagin can recognize a $5,000 loss.
B. If Nagin's basis in the old asset was $85,000, Nagin must recognize a $6,000 gain.
C. If Nagin's basis in the old asset was $79,200, Nagin must recognize a $6,000 gain.
D. None of the above is true.

Difficulty: 1 Easy
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

47. Oxono Company realized a $74,900 gain on the exchange of one asset for another asset (no
cash was included in the exchange). The assets were like-kind properties. Oxono reported the
gain as revenue on its financial statements. Which of the following is true?
A. The exchange resulted in a favorable temporary book/tax difference.
B. The exchange resulted in a favorable permanent book/tax difference.
C. The exchange resulted in an unfavorable temporary book/tax difference.
D. The exchange resulted in an unfavorable permanent book/tax difference.

Difficulty: 1 Easy
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

48. Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different
parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the
exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for
$533,000 cash. Compute Q&J's book and tax gain on sale.
A. $188,000 book and tax gain
B. $188,000 book gain and $61,000 tax gain
C. $61,000 book and tax gain
D. None of the above

Book gain is $61,000 ($533,000 - $472,000 cost basis), and tax gain is $188,000 ($533,000 -
$345,000 substituted basis).

Difficulty: 3 Hard
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

49. Five years ago, Q&J Inc. transferred land with a $345,000 book and tax basis for a different
parcel of land worth $472,000. Q&J included its $127,000 realized gain in book income, but the
exchange was nontaxable. This year, Q&J sold the parcel of land received in the exchange for
$533,000 cash. Which of the following statements is true?
A. The nontaxable exchange had no effect on Q&J's deferred tax accounts.
B. The nontaxable exchange resulted in a deferred tax liability that reversed this year.
C. The nontaxable exchange resulted in a deferred tax asset that reversed this year.
D. The sale of the parcel of land had no effect on Q&J's deferred tax accounts.

The nontaxable exchange caused a $127,000 temporary favorable excess of book income over
tax income. The sale reversed the difference by causing a $127,000 unfavorable excess of tax
income over book income.

Difficulty: 2 Medium
Learning Objective: 09-01 Compute the substituted basis of property received in a nontaxable exchange.

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Chapter 09 - Nontaxable Exchanges

50. Eight years ago, Prescott Inc. realized a $16,200 gain on the exchange of old equipment for
new equipment. Prescott included the gain in book income, but the exchange was nontaxable.
This year, Prescott sold the new equipment for $2,500. At date of sale, the equipment's book
basis and tax basis had both been depreciated to zero. Which of the following statements is
true?
A. The nontaxable exchange had no effect on Prescott's deferred tax accounts.
B. The nontaxable exchange resulted in a deferred tax asset.
C. The sale of the new equipment had no effect on Prescott's deferred tax accounts.
D. None of the above is true.

The deferred tax liability resulting from the nontaxable exchange reversed completely as a
result of excess book over tax depreciation. Prescott's $2,500 book gain on sale was also its tax
gain.

Difficulty: 3 Hard
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.

51. Luce Company exchanged the copyright on a software application for a copyright on a
different software application. Luce's gain on the exchange was nontaxable (because the
copyrights were like-kind) but was included in financial statement income. Which of the
following statements is false?
A. Luce's book basis in the copyright received is the copyright's cost (FMV).
B. Luce's tax basis in the copyright received equals its tax basis in the copyright surrendered.
C. Luce's future amortization deductions with respect to its tax basis in the copyright will be
different from future amortization expense for financial statement purposes.
D. None of the statements is false.

Difficulty: 1 Easy
Learning Objective: 09-02 Compute gain recognized when boot is received in a nontaxable exchange.
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

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Chapter 09 - Nontaxable Exchanges

52. Which of the following statements about like-kind exchanges is false?

A. Like-kind property must be held for either business or investment use.
B. Businesses cannot engage in like-kind exchanges of inventory.
C. The definition of like-kind property for tangible personalty is determined by the IRS.
D. Business cannot exchange undeveloped land for developed real estate.

Difficulty: 1 Easy
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

53. Rydell Company exchanged business equipment (initial cost $55,250; accumulated
depreciation $25,450) for like-kind equipment worth $44,000 and $2,000 cash. As a result,
Rydell must recognize:
A. $2,000 ordinary gain
B. $2,000 Section 1231 gain
C. No gain or loss
D. None of the above

The recognized gain is ordinary under the depreciation recapture rules.

Difficulty: 2 Medium
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

54. YCM Inc. exchanged business equipment (initial cost $114,800; accumulated depreciation
$63,400) for like-kind equipment worth $110,000 and $10,000 cash. As a result, Rydell must
recognize:
A. No gain or loss
B. $10,000 Section 1231 gain
C. $10,000 ordinary gain
D. None of the above

The recognized gain is ordinary under the depreciation recapture rules.

Difficulty: 2 Medium
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

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Chapter 09 - Nontaxable Exchanges

55. Teco Inc. and MW Company exchanged like-kind production assets. Teco's asset had an
$80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a
$28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the
following statements is false?
A. Teco's realized gain is $26,100 and recognized gain is -0-.
B. MW's realized gain is $59,400 and recognized gain is $7,500.
C. Teco's basis in its newly acquired asset is $61,400.
D. MW's basis in its newly acquired asset is $35,600.

MW's basis is $28,100.

Difficulty: 2 Medium
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

56. Acme Inc. and Beamer Company exchanged like-kind production assets. Acme's asset had
a $240,000 FMV and $117,300 adjusted tax basis, and Beamer's asset had a $225,000 FMV and
a $168,200 adjusted tax basis. Beamer paid $15,000 cash to Acme as part of the exchange.
Which of the following statements is true?
A. Acme's realized gain is $122,700 and recognized gain is -0-.
B. Beamer's realized gain is $56,800 and recognized gain is $15,000.
C. Acme's basis in its newly acquired asset is $117,300.
D. Beamer's basis in its newly acquired asset is $168,200.

Acme recognizes $15,000 gain, and Beamer recognizes no gain. Beamer's basis is $183,200.

Difficulty: 2 Medium
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

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Chapter 09 - Nontaxable Exchanges

57. Tauber Inc. and J&I Company exchanged like-kind production assets. Tauber's asset had a
$17,500 FMV and $3,000 adjusted tax basis, and J&I's asset had a $19,000 FMV and a $9,000
adjusted tax basis. Tauber paid $1,500 cash to J&I as part of the exchange. Which of the
following statements is false?
A. Tauber's realized gain is $14,500 and recognized gain is -0-.
B. J&I's realized gain is $10,000 and recognized gain is -0-.
C. Tauber's basis in its newly acquired asset is $4,500.
D. J&I's basis in its newly acquired asset is $9,000.

J&I recognizes $1,500 gain.

Difficulty: 2 Medium
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

58. Nixon Inc. transferred Asset A to an unrelated party in exchange for Asset Z and $15,750
cash. Nixon's tax basis in Asset A was $400,000, and Asset Z had a $510,000 appraised FMV.
Which of the following statements is true?
A. If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a
$400,000 basis in Asset Z.
B. If Asset A and Asset Z are not like-kind property, Nixon recognizes a $110,000 gain and
takes a $510,000 basis in Asset Z.
C. If Asset A and Asset Z are like-kind property, Nixon recognizes no gain and takes a
$400,000 basis in Asset Z.
D. If Asset A and Asset Z are like-kind property, Nixon recognizes a $15,750 gain and takes a
$415,750 basis in Asset Z.

If the exchange is nontaxable, Nixon recognizes $15,750 of its $125,750 realized gain and takes
a $400,000 substituted basis in Asset Z.

Difficulty: 3 Hard
Learning Objective: 09-03 Identify properties that qualify for like-kind exchange treatment.

9-45
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