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Tax Accounting Chapter 20 Quiz

Terms in this set (20)

Which of the following entities is not considered a flow-through entity?

-C corporation
-S corporation
-Limited liability company (LLC)
-Partnership
C corporation


Income earned from a C corporation is taxed when earned and taxed when distributed to shareholders as dividends. A flow-through entity passes through its earned income directly to the shareholders or partners; thus, the income is taxed only once.
Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $24,000 of cash and land with an FMV of $69,000. Her basis in the land is $34,000. Andrew contributes equipment with an FMV of $26,000 and a building with an FMV of $47,000. His basis in the equipment is $22,000, and his basis in the building is $34,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

-$0
-$4,000
-$48,000
-$52,000
$0


Partnerships don't recognize any gain on the receipt of contributed appreciated property. The built-in gain or built-in loss will be reported at the time of disposition of the asset. To ensure this result, the partnership's basis in the acquired property is a carryover basis.
Which of the following statements is true when property is contributed in exchange for a partnership interest?

-Any contributed property in a partnership has a carryover basis, and the character of the property is determined by the way the contributing partner used the property.
-The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution.
-The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.
-Services are not allowed to be contributed to a partnership in return for a partnership interest.
-All of these choices are true.
The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.


Any contributed property in a partnership initially has a carryover basis, but the character of the contributed property is assessed at the partnership level. The partnership's inside basis in contributed property usually does not reflect any gain recognized by contributing partners. The holding period for a partner's partnership interest depends upon the type of assets a partner contributes. Specifically, a partner's holding period tacks on only if the partner contributes Section 1221 or 1231 property. Otherwise, the partner's holding period begins on the date of contribution. Lastly, services are allowed to be contributed for a partnership interest.
Partnerships may maintain their capital accounts according to which of the following rules?

-GAAP
-704(b)
-Tax
-Any of the rules
-Only GAAP and 704(b)
Any of the rules
In what order should the tests to determine a partnership's year-end be applied?

-Majority interest taxable year; least aggregate deferral; principal partners test
-Principal partners test; majority interest taxable year; least aggregate deferral
Principal partners test; least aggregate deferral; majority interest taxable year
-Majority interest taxable year; principal partners test; least aggregate deferral
-None of the choices are correct.
Majority interest taxable year; principal partners test; least aggregate deferral
A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _____.

-$5,000,000
-$1,000,000
-$26,000,000
-Partnerships may never use the cash method if they have corporate partners.
$26,000,000


The only exception allowing partnerships to use the cash method while having a corporate partner applies when the average annual gross receipts of the partnership for the prior three taxable years are less than $26,000,000.
TQK, LLC, provides consulting services and was formed on 1/31/X5. Aaron and ABC, Incorporated, each hold a 50 percent capital and profits interest in TQK. If TQK averaged $29,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

-Accrual method
-Cash method
-Hybrid method
-Accrual method or cash method
Accrual method


TQK does not meet the $26,000,000 average gross receipts exception that would allow it to qualify to use the cash method or hybrid method of accounting in X9. Thus, it must use the accrual method of accounting for X9.
On 12/31/X4, Zoom, LLC, reported a $73,500 loss on its books. The items included in the loss computation were $39,000 in sales revenue, $24,000 in qualified dividends, $31,000 in cost of goods sold, $59,000 in charitable contributions, $29,000 in employee wages, and $17,500 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

-($8,000)
-($38,500)
-($73,500)
-($108,500)
($38,500)

($73,500) - $24,000 + $59,000

While Zoom shows a loss on its books, some of the items included in calculating its book loss will be separately stated on its return. Specifically, its qualified dividends and charitable contribution deduction will be separately stated. After removing these items from the $73,500 book loss, the ordinary business loss reported on its tax return would be $38,500.
Which of the following would not be classified as a separately stated item?

-Short-term capital gains
-Charitable contributions
-MACRS depreciation expense
-Guaranteed payments
MACRS depreciation expense
Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $42,000 in cash and $42,000 worth of equipment. Frank's adjusted basis in the equipment was $27,000. Bob contributed $42,000 in cash and $42,000 worth of land. Bob's adjusted basis in the land was $38,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $68,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

-$26,000
-$39,000
-$17,000
-$43,000
$17,000


value of land = $42,000
less: adjusted basis = ($38,000)
Bob's built-in gain = $4,000

sales consideration = $68,000
less: land value = ($42,000)
both members gain to be allocated = $26,000

Bob's allocation = $4,000 + ($26,000 x 50%)
When must a partnership file its return?

-By the 15th day of the third month after the partnership's tax year-end.
-By the fifth month after the original due date if an extension is filed.
-By the 15th day of the fourth month after the partnership's tax year-end.
-By the 15th day of the third month after the partnership's tax year-end and by the fifth month after the original due date if an extension is filed.
-By the fifth month after the original due date if an extension is filed and by the 15th day of the fourth month after the partnership's tax year-end.
By the 15th day of the third month after the partnership's tax year-end.
What form does a partnership use when filing an annual informational return?

-Form 1040
-Form 1041
-Form 1065
-Form 1120
Form 1065
Which of the following does not adjust a partner's basis?

-Ordinary business income (loss)
-Change in amount of partnership debt
-Tax-exempt income
-All of these choices adjust a partner's basis.
All of these choices adjust a partner's basis.


A partner's initial tax basis is adjusted at least annually by the partner's share of any income or expense items, the partner's share of any change in the amount of partnership debt, or by a contribution from or a distribution to the partner.
What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

-1, 3, 2
-1, 2, 3
-3, 1, 2
-2, 3, 1
1, 3, 2
If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

-The partner will treat the distribution in excess of her basis as ordinary income.
-The partner will treat the distribution in excess of her basis as capital gain.
-The partner will not ever be taxed on the distribution in excess of her basis.
-The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.
The partner will treat the distribution in excess of her basis as capital gain.
Jerry, a partner with 30 percent capital and profits interest, received his Schedule K-1 from Plush Pillows, LP. At the beginning of the year, Jerry's tax basis in his partnership interest was $45,000. His current-year Schedule K-1 reported an ordinary loss of $10,000, long-term capital gain of $4,500, qualified dividends of $3,500, $2,000 of non-deductible expenses, a $25,000 cash contribution, and a reduction of $5,500 in his share of partnership debt. What is Jerry's adjusted basis in his partnership interest at the end of the year?

-$35,000
-$43,000
-$60,500
-$66,000
$60,500

$45,000 + $25,000 + $4,500 + $3,500 − $5,500 − $2,000 − $10,000 = $60,500

Jerry's initial tax basis is increased by his cash contribution and share of separately stated items (long-term capital gain and qualified dividends). His basis is then reduced by his share of the reduction in partnership debt, non-deductible expenses, and ordinary loss
How does additional debt or relief of debt affect a partner's basis?

-Debt has no effect on a partner's basis.
-Relief of debt increases a partner's basis.
-Both additional debt and relief of debt increase a partner's basis.
-Additional debt increases a partner's basis.
Additional debt increases a partner's basis.
In what order are the loss limitations for partnerships applied?

-Tax basis; at-risk amount; passive activity loss; excess business loss.
-Passive activity loss; excess business loss; tax basis; at-risk amount.
-Tax basis; passive activity loss; at-risk amount; excess business loss.
-At-risk amount; tax basis; excess business loss; passive activity loss.
Tax basis; at-risk amount; passive activity loss; excess business loss.
What type of debt is not included in calculating a partner's at-risk amount?

-Recourse debt
-Qualified nonrecourse debt
-Nonrecourse debt
-All of these types of debt are included in the at-risk amount.
Nonrecourse debt


A partner's at-risk amount typically reflects the partner's potential economic risk of loss associated with holding the partnership interest. Consequently, nonrecourse debt is generally not included in the at-risk amount. However, qualified nonrecourse debt is an exception to this general rule and is included in the at-risk amount.
Which person would generally be treated as a material participant in an activity?

-A participant in a rental activity
-A limited partner
-An LLC member not involved with management of the LLC
-A general partner
A general partner
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