Question

Heather owns 100 shares of Diego Corporation common stock for which she paid $2,000. She receives a nontaxable stock dividend of 10 shares of preferred stock on her common stock. The fair market values on the date of distribution of the preferred stock dividend are $20 a share for common stock and $100 a share for preferred stock. What is Heather's basis in the common and preferred shares?

Round any division to two decimal places and use rounded values in subsequent computations. If required, round your final answers to the nearest dollar.

Heather's basis for the common stock is $ and $ for the preferred stock.

Sebastian purchases two pieces of equipment for $175,000. Appraisals of the equipment indicate that the fair market value of the first piece of equipment is $122,500 and that of the second piece of equipment is $192,500. What is Sebastian's basis in these two assets?

If required, round your interim calculations to two decimal places. Use rounded amounts in subsequent computations. If required, round final answers to the nearest dollar.

Sebastian's basis for the first piece of equipment is $ and $ for the second piece of equipment.

Abby's home had a basis of $360,000 ($160,000 attributable to the land) and a fair market value of $340,000 ($155,000 attributable to the land) when she converted 70% of it to business use by opening a bed-and-breakfast. Four years after the conversion, Abby sells the home for $500,000 ($165,000 attributable to the land).

a. Calculate Abby's basis for gain, loss, and cost recovery for the portion of her personal residence that was converted to business use.

If an amount is zero, enter "0".

	House		Land
Gain basis	$		$
Loss basis	$		$
Cost recovery basis	$		$

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Losses from the sale of personal use assets are not recognized for tax purposes, but losses from the sale of business and income-producing assets are deductible.

b. Calculate the cost recovery deducted by Abby during the four-year period of business use, assuming that bed-and-breakfast is opened on January 1 of Year 1 and the house is sold on December 31 of year 4. Assume that the cost recovery percentages are 2.461% in Year 1 and 2.564% in Years 2–5.

Round your computations and the final answer to the nearest dollar.

The total cost recovery for the four-year period is $.

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Incorrect

c. What is Abby's recognized gain or loss on the sale of the business use portion?

Abby's recognized gain on the sale of the business-use portion of the house is $, and her recognized gain on the business-use portion of the land is $.

Answer 1

payment made on the common stock of 100 share $2000

nontaxable tax dividend received 10 shares of preferred stock

fire market value on preferred stock $100

fire market value on common stock $20

Heather's basis for the common stock

basic common stock 100*$20=$2000

basic prefferd stock 10*$20=$200

Sebastian's basis for the first piece of equipment is $175,000*($122,500÷$3,15,000) = $68,055 and

$175,000*($192,500÷$3,15,000) =$106944 for the second piece of equipment..

b)Year 1 $129,500 x 2.461% = $3,187

Year 2 $129,500 x 2.564% = $3,320

Year 3 $129,500 x 2.564% = $3,320

Year 4 $129,500 x 2.564$ x (11.5/12) = $3,182

Total $13,009

C) House (70%) Land (70%)

Amount realized $234,500 $115,500

Less: Adjusted basis* (126,991) (112,000)

Realized gain $107,509 $3,500

Recognized gain $107,509 $3,500

*Original basis for gain $140,000

Less: Cost recovery (13,009)

Adjusted basis $126,991