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Answers to Selected PAK Questions Unit10
PAK Chapter I:12: Property Transactions - Nontaxable Exchanges
Discussion Questions
I:0-1 a.
Debbie's basis for the equipment received in the exchange is $300,000, and the
holding period starts on May 10, 2000.
b.
The exchange is not a like-kind exchange if either Debbie or Doug disposes of the
property within two years following the date of the exchange. pp. I:12-7 through I:12-9.
I:0-2 They might do a nonsimultaneous exchange. Burke may transfer the $800,000 to an escrow
account and Kim should locate like-kind property that she wishes to own. p. I:12-6.
I:0-3 The replacement property must be functionally the same as the converted property. For
example, a typewriter and a FAX machine do not perform the same functions and are not
functionally related. p. I:12-13.
I:0-4 If the real property is held for productive use in a trade or business or for investment and is
condemned, a proper replacement may be made by acquiring like-kind property. p. I:12-14.
I:0-5 $373,200 ($300,000 + $1,000 + $79,200 - $7,000). p. I:12-17.
Problems
I:0-6
Realized Gain or (Loss)
a.
b.
c.
d.
e.
$65,000
$39,000
$30,000
$28,000
($13,000)
Recognized Gain or (Loss)
Basis of
Equipment Received
-014,000
25,000
28,000
-0-
$20,000
$45,000
$60,000
$60,000
$68,000
pp. I:12-6 through I:12-8.
I:0-7a. $120,000 [($444,000 + $26,000) - $350,000]
b.
$ 26,000 The gain is not solely like-kind. The barges are in asset-class 00.28 and
the computer is an asset-class 00.12. The computer is not like-kind property.
c.
$350,000.
d.
$ 26,000.
e.
$ 8,840 ($26,000 x 34%).
pp. I:12-6 through I:12-8.
I:0-8 a.
Amount realized
$300,000
Minus: Adjusted basis
Gain realized
86,000
$214,000
None of the gain is recognized since neither related party transferred the property within two years of
the exchange.
b.
Amount realized
Minus: Adjusted basis
Gain realized
$300,000
( 279,000)
$ 21,000
None of the gain is recognized since neither related party transferred the property within two years of
the exchange.
c.
Amount realized
Minus: Adjusted basis
Gain realized
The $33,000 gain is recognized. pp. I:12-8 and I:12-9.
$312,000
( 279,000)
$ 33,000
I:0-52a.
Realized gain is $122,000. [($200,000 - $8,000) - $70,000].
b.
Recognized gain is zero.
c.
Realized gain is $240,000. [($520,000 - $30,000) - $250,000].
d.
Recognized gain is $26,301. They may exclude up to $213,699 (312/730 x $500,000)
although the two-year use and ownership tests are not satisfied. An exception applies when the
move is due to a change in employment. A portion of the gain is excluded based on a ratio with a
denominator of 730 days and the numerator being the shorter of: (1) the period which the ownership
and use tests were met during the five-year period ending on the date of sale (312 days), or (2) the
period of time after the date of the most recent sale or exchange for which the exclusion applied until
the date of the current sale of exchange (497 days). pp. I:12-16 through I:12-19.
Case Study Problem
I:12-58 Electric Corporation will recognize a taxable gain of $1,000,000 since the corporation
receives boot as part of a like-kind exchange. The realized gain is $3,400,000 ($5,000,000 $1,600,000), which is more than the $1,000,000 of boot received. The tax basis of the land received
is $1,600,000 and the tax basis of the marketable securities is $1,000,000.
For financial accounting, it is important to determine if the transaction is an exchange of nonmonetary
assets with commercial substance. If so, the gain or loss is recognized, and Electric world report a
gain of $3,400,000. An exchange has commercial substance if future cash flows change as a result of
the exchange, and it is likely that most exchanges will have commercial substance.
If the exchange is of nonmonetary assets without commercial substance, any loss is recognized but not
gain. However, gain is recognized if cash is received. Because the exchange is land for land, it may be
an exchange of nonmonetary assets without commercial substance with the monetary asset treated as
equivalent to cash. If so, the exchange is viewed as a combination of an exchange and a sale with the
basis of the land exchanged allocated based on relative FMV as shown below:
FMV of Land Received
Basis of Land Exchanged
Gain Realized
$4,000,000
( 1,280,000)
$2,720,000
FMV of Securities Received
Basis of Land Sold
Gain Realized
$1,000,000
( 320,000)
$ 680,000
Gain realized on sale of the securities is $680,000. The financial accounting basis of the land
received in the exchange is $1,280,000 and the basis of the marketable securities is $1,000,000
Since taxable income ($1,000,000) is greater than financial accounting income ($680,000), the
deferred tax account will be debited by $108,800 ($320,000 x 34%).