CHAPTER 1 PRACTICE EXERCISES

Exercise 1. Mark, a single individual, purchased 9,000 shares of Risky

Corporation stock on December 1, last year, for $6 per share. On June 30
this year Risky Corporation declared bankruptcy and the stock became
worthless.
Part A. Does Mark have a deductible loss? If so what is the total amount
and character of this loss?
Part B. Assuming that Risky Corporation stock qualifies as Section 1244
stock, what is the character of the total amount of loss? How much of the
loss is deductible this year?
Solution to Exercise 1, Part A Does Mark have a deductible loss?

Yes, stock the has become worthless is deemed to have been sold
for $0
on the December 31, the last day of year of worthlessness
The total amount of the loss is $54,000 ($6 x 9,000 = $54,000)
The character of loss is long-term capital loss
Solution to Exercise 1, Part B Assuming Section 1244 stock, what is
the character of the loss and how much is deductible this year
Since this is Sec. 1244 stock, Mark can deduct up to $50,000 as an ordinary
deduction. The balance of the loss is $4,000 ($54,000 - $50,000) and is
considered
a long-term capital loss, of which $3,000 can be deducted in the current year.
Thus, a total of $53,000 can be deducted in the year of worthlessness.
Exercise 2. Sam is a 60% partner the ST partnership. The STs balance
sheet is as follows:. Required. What is Sams basis in his partnership
interest?
Assets
Current Assets
Noncurrent Assets
Total Assets

Liability & Owners Equity

100,00 Liabilities
300,000
0
300,00 Sams Capital Account
60,000
0
Toms Capital Account
40,000
400,00 Total Liab & Owners Equity
400,000
0

Solution to Exercise 2

Start:
Less:
Equals:

Capital Account (inside basis)

Share of liabilities ($120,000 x 50%)
Outside basis

CHAPTER 1: EXERCISES AND SOLUTIONS PAGE 1

60,000
180,000
$240,000

CHAPTER 1 PRACTICE EXERCISES

Exercise 3. On July 1 of this year the BC Corporation is formed by Betty
White and Carl Redman. Betty contributed a Whiteacre $75,000 for 50% of
the stock in BC corporation and the assumption of a $25,000 mortgage on
Whiteacre. Bettys basis in Whiteacre $30,000. Carl contributed Redacre
worth $65,000 for 50% of the stock in BC corporation and the assumption of a
$15,000 mortgage on Redacre. Carls basis in Redacre was $25,000
Betty
White

Contributes Whiteacre (FMV = $75,000; AB =

$30,000)
50% interest (worth $50,000) + assumption of $25,000
mtg

Carl
Redman

Contributes Redacre (FMV = $65,000; AB =

$25,000)
50% interest (worth $50,000) + assumption of $15,000
mtg

BC
Corporation

Part A. What are BC corporation tax accounting journal entries to record this
formation transaction?
BC corps TAX journal entry for Betty is:

Basis in Whiteacre received

Mortgage
Common stock
BC corps TAX journal entry for Carl is:

Basis in Redacre received

Mortgage
Common stock

Adjusted Basis
carryover

30,000
25,000
5,000
Adjusted Basis
carryover

25,000
15,000
10,000

Part B. What is Bettys and Carls gain realized, gain recognized, and gain
deferred?

Determining Gain Realized

Start: FMV of corporate stock
Plus:
Liabilities assumed
Equal Amount realized
s:
Less
Adjusted basis of property
Equal Gain Realized
s:
Gain Recognized
Determining Deferred Gain

Betty
$50,000
25,000
$75,000

Carl
$50,000
15,000
$65,000

(30,000)
$45,000

(25,000)
$40,000

$None

$None

Betty

Carl

CHAPTER 1: EXERCISES AND SOLUTIONS PAGE 2

CHAPTER 1 PRACTICE EXERCISES

Start:
Less
Equal
s:

Gain Realized
Gain Recognized
Gain Deferred

$45,000
($None)
$45,000

$40,000
($None)
$40,000

Part C. What is Bettys and Carls basis in stock received?

Determining Basis in Stock

Start: FMV of corporate stock
Minus Gain Deferred
Equal Basis in stock
s:

Betty
$50,000
45,000
$ 5,000

CHAPTER 1: EXERCISES AND SOLUTIONS PAGE 3

Carl
$50,000
40,000
$10,000

CHAPTER 1 PRACTICE EXERCISES

Exercise 4. On July 1 of this year the B&P partnership is formed by Brianna
and Paula. Brianna contributed Blueacre worth $25,000 for a 40%
partnership interest in B&P Partnership and the assumption of a $5,000
mortgage on the Blueacre. Briannas basis in the Blueacre was $20,000.
Paula contributed Purpleacre worth $90,000 for a 60% partnership interest in
B&P Partnership Entity and the assumption of a $60,000 mortgage on
Purpleacre. Paulas basis in Purpleacre was $66,000
Briann
a
Blue

Blueacre (FMV = $25,000; AB = $20,000)

40% interest (worth $20,000) + assumption of $5,000
mtg.

Paula
Purple

Purpleacre (FMV=$90,000, AB=$66,000)

60% interest (worth $30,000) +assumption of $60,000
mtg

B&P
Partner
ship

Part A. What are B&P partnerships tax accounting journal entries to record
this formation transaction?
B&P partnerships
Brianna is:

TAX

journal

entry

for

Basis in Blueacre received

Mortgage
Briannas capital account
B&P partnerships
Paula:

TAX

journal

Adjusted Basis
carryover

20,000
5,000
15,000
entry

Basis in Purpleacre received

Mortgage
Paulas capital account

for

Adjusted Basis
carryover

66,000
60,000
6,000

Part B. What is Briannas and Paulas gain realized, gain recognized, and
gain deferred?

Determining Gain Realized

Start: FMV of partnership interest
Plus:
Liabilities assumed
Equal Amount realized
s:
Less
Adjusted basis of property
Equal Gain Realized
s:
Gain Recognized
Determining Deferred Gain

Brianna
$20,000
5,000
$25,000

Paula
$30,000
60,000
$90,000

(20,000)
$5,000

(66,000)
$24,000

$None

$None

Brianna

CHAPTER 1: EXERCISES AND SOLUTIONS PAGE 4

Paula

CHAPTER 1 PRACTICE EXERCISES

Start:
Less
Equal
s:

Gain Realized
Gain Recognized
Gain Deferred

$5,000
($None)
$5,000

$24,000
($None)
$24,000

Part C. What is Briannas and Paulas share of partnership liabilities?

Determining Partners Share of

Partnership Liabs
Start: Total liability incurred by partnership
Times Percentage partnership interest
Equal Share of partnership liabilities
s:

Brianna
65,000
40%
26,000

Paula
65,000
60%
39,000

Part D. What is Briannas and Paulas outside basis in partnership interest

received?

Determining Partners Outside Basis

Start: FMV of partnership interest
Minus Gain Deferred
Equal Inside basis in partnership interest
s:
Plus
Share of liabilities
Equal Outside basis in partnership
s:
interest

Brianna
$20,000
(5,000)
$15,000

Paula
$30,000
(24,000)
$6,000

26,000
$41,000

39,000
$45,000

CHAPTER 1: EXERCISES AND SOLUTIONS PAGE 5