Question 1

Which of the following expenditures must be capitalized for tax purposes?

Accepted Answer

A)  Intangible drilling and development costs 
B)  Leasehold costs 
C)  Research and development costs 
D)  Advertising expenditures 
A)  Intangible drilling and development costs 
B)  Leasehold costs 
C)  Research and development costs 
D)  Advertising expenditures B

Question 2

Which of the following statements about the tax treatment of research and experimental expenditures is true?

Accepted Answer

A)  The treatment violates the tax principle of conservatism. 
B)  The treatment creates a favorable book/tax difference. 
C)  The treatment minimizes the after-tax cost of the expenditures. 
D)  Both the treatment violates the tax principle of conservatism and the treatment minimizes the after-tax cost of the expenditures are true. 
A)  The treatment violates the tax principle of conservatism. 
B)  The treatment creates a favorable book/tax difference. 
C)  The treatment minimizes the after-tax cost of the expenditures. 
D)  Both the treatment violates the tax principle of conservatism and the treatment minimizes the after-tax cost of the expenditures are true. D

Question 3

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2020. Kemp made one asset purchase: used manufacturing equipment costing $1,543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made the Section 179 election with respect to the equipment, compute Kemp's 2020 cost recovery deduction.

Accepted Answer

A)  $1,543,600 
B)  $1,077,680 
C)  $1,000,000 
D)  None of these choices are correct 
A)  $1,543,600 
B)  $1,077,680 
C)  $1,000,000 
D)  None of these choices are correct A

Question 4

Maxcom Inc. purchased 15 passenger automobiles for use by its sales force. Which of the following statements is true?

Accepted Answer

A)  Maxcom must use the straight-line method to depreciate the passenger automobiles for tax purposes. 
B)  Maxcom's annual tax depreciation on the passenger automobiles may be limited to an amount less than MACRS depreciation. 
C)  Maxcom's annual tax depreciation on the passenger automobiles is computed under MACRS. 
D)  Even though Maxcom purchased the automobiles for business use, Maxcom is not allowed any tax depreciation for the automobiles. 
A)  Maxcom must use the straight-line method to depreciate the passenger automobiles for tax purposes. 
B)  Maxcom's annual tax depreciation on the passenger automobiles may be limited to an amount less than MACRS depreciation. 
C)  Maxcom's annual tax depreciation on the passenger automobiles is computed under MACRS. 
D)  Even though Maxcom purchased the automobiles for business use, Maxcom is not allowed any tax depreciation for the automobiles.

Question 5

Hoopin Oil Inc. was allowed to deduct $5.3 million of intangible drilling and development costs on this year's tax return. Which of the following statements is false?

Accepted Answer

A)  The deduction is a tax preference for Hoopin. 
B)  The deduction minimizes Hoopin's after-tax cost of locating and preparing oil wells for production. 
C)  Hoopin was allowed to deduct the costs only because they did not result in any long-term economic benefit. 
D)  None of these choices are false. 
A)  The deduction is a tax preference for Hoopin. 
B)  The deduction minimizes Hoopin's after-tax cost of locating and preparing oil wells for production. 
C)  Hoopin was allowed to deduct the costs only because they did not result in any long-term economic benefit. 
D)  None of these choices are false.

Question 6

Hextone Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $14,890, and first-year MACRS depreciation was $27,090. As a result of this book/tax difference, Hextone recorded a $2,562 deferred tax liability.

Accepted Answer

A) True 
 B)False

Question 7

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800:

Accepted Answer

A)  Unfavorable permanent book/tax difference 
B)  Favorable permanent book/tax difference 
C)  Unfavorable temporary book/tax difference 
D)  Favorable temporary book/tax difference 
A)  Unfavorable permanent book/tax difference 
B)  Favorable permanent book/tax difference 
C)  Unfavorable temporary book/tax difference 
D)  Favorable temporary book/tax difference

Question 8

Broadus, a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2020. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true?

Accepted Answer

A)  Broadus can elect to expense only $92,600 of the cost of the personalty under Section 179. 
B)  Broadus can elect to expense the $128,300 cost of the personaltyunder Section 179 but can deduct only $92,600 of the expense. 
C)  Broadus can elect to expense only $35,700 of the cost of the personalty under Section 179. 
D)  Broadus can elect to expense the $128,300 cost of the personalty under Section 179 but can deduct only $35,700 of the expense. 
A)  Broadus can elect to expense only $92,600 of the cost of the personalty under Section 179. 
B)  Broadus can elect to expense the $128,300 cost of the personaltyunder Section 179 but can deduct only $92,600 of the expense. 
C)  Broadus can elect to expense only $35,700 of the cost of the personalty under Section 179. 
D)  Broadus can elect to expense the $128,300 cost of the personalty under Section 179 but can deduct only $35,700 of the expense.

Question 9

Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.

Accepted Answer

A) True 
 B)False

Question 10

Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price. Compute Pettit's book basis and tax basis in the equipment.

Accepted Answer

A)  Book basis $30,000; tax basis $170,000 
B)  Book and tax basis $200,000 
C)  Book basis $200,000; tax basis $30,000 
D)  Book and tax basis $30,000 
A)  Book basis $30,000; tax basis $170,000 
B)  Book and tax basis $200,000 
C)  Book basis $200,000; tax basis $30,000 
D)  Book and tax basis $30,000

Question 11

Lensa Inc. purchased machinery several years ago for $400,000. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 21%. Which of the following statements is true?

Accepted Answer

A)  The book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities. 
B)  The book/tax difference in depreciation results in a $899 deferred tax asset. 
C)  The $4,280 difference between book and tax depreciation is unfavorable. 
D)  Both the book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities and the $4,280 difference between book and tax depreciation is unfavorable are true. 
A)  The book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities. 
B)  The book/tax difference in depreciation results in a $899 deferred tax asset. 
C)  The $4,280 difference between book and tax depreciation is unfavorable. 
D)  Both the book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities and the $4,280 difference between book and tax depreciation is unfavorable are true.

Question 12

Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following intangible assets is not amortizable for tax purposes?

Accepted Answer

A)  Organizational costs 
B)  Patent with a 12-year remaining life 
C)  Partnership interest 
D)  All of these assets are amortizable for tax purposes 
A)  Organizational costs 
B)  Patent with a 12-year remaining life 
C)  Partnership interest 
D)  All of these assets are amortizable for tax purposes

Question 14

Mr. and Mrs. Schulte paid a $750,000 lump-sum price to purchase a business. At date of purchase, the appraised FMVs of the balance sheet assets were: $\begin{array}{llr}
  \text {  Accounts receivable} &\$38,000\
 \text {  Inventory} &415,000\
 \text { Fixtures and equipment } &147,000\&\$600,000
\end{array}$
 Which of the following statements is true?

Accepted Answer

A)  The Schultes must allocated the $750,000 cost to the balance sheet assets based on the assets' relative FMV. 
B)  The Schultes must capitalize $150,000 of the cost to nonamortizable goodwill. 
C)  The Schultes may deduct $150,000 of the cost as business goodwill. 
D)  None of these choices are true. 
A)  The Schultes must allocated the $750,000 cost to the balance sheet assets based on the assets' relative FMV. 
B)  The Schultes must capitalize $150,000 of the cost to nonamortizable goodwill. 
C)  The Schultes may deduct $150,000 of the cost as business goodwill. 
D)  None of these choices are true.

Question 15

An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.

Accepted Answer

A) True 
 B)False

Question 16

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements concerning MACRS depreciation is true?

Accepted Answer

A)  MACRS depreciation for the year in which an asset is placed in service or sold is based on the number of days the asset was used in the year. 
B)  MACRS depreciation for buildings is not accelerated but is computed using the straight-line method. 
C)  The recovery period under MACRS is based on the estimated useful life of the particular asset under consideration. 
D)  Salvage value is taken into account in computing MACRS depreciation. 
A)  MACRS depreciation for the year in which an asset is placed in service or sold is based on the number of days the asset was used in the year. 
B)  MACRS depreciation for buildings is not accelerated but is computed using the straight-line method. 
C)  The recovery period under MACRS is based on the estimated useful life of the particular asset under consideration. 
D)  Salvage value is taken into account in computing MACRS depreciation.

Question 18

Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true?

Accepted Answer

A)  Elcox is allowed to deduct the $2.3 million cost on this year's tax return only if it expenses the advertising costs for financial statement purposes. 
B)  Elcox must capitalize the $2.3 million cost. 
C)  Elcox is allowed to deduct the $2.3 million cost. 
D)  The $2.3 million cost results in an unfavorable book/tax difference. 
A)  Elcox is allowed to deduct the $2.3 million cost on this year's tax return only if it expenses the advertising costs for financial statement purposes. 
B)  Elcox must capitalize the $2.3 million cost. 
C)  Elcox is allowed to deduct the $2.3 million cost. 
D)  The $2.3 million cost results in an unfavorable book/tax difference.

Question 19

Which of the following statements about MACRS is false?

Accepted Answer

A)  Depreciable assets are assumed to have no residual or salvage value. 
B)  Every depreciable asset is assigned to one of ten recovery periods. 
C)  Allowable depreciation methods are based on the assets assigned recovery period. 
D)  None of these choices are false. 
A)  Depreciable assets are assumed to have no residual or salvage value. 
B)  Every depreciable asset is assigned to one of ten recovery periods. 
C)  Allowable depreciation methods are based on the assets assigned recovery period. 
D)  None of these choices are false.

Question 20

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 3. The MACRS depreciation calculation assumes that the building was placed in service on June 15.

Accepted Answer

A) True 
 B)False

Which of the following expenditures must be capitalized for tax purposes?

Which of the following statements about the tax treatment of research and experimental expenditures is true?

Maxcom Inc. purchased 15 passenger automobiles for use by its sales force. Which of the following statements is true?

Hoopin Oil Inc. was allowed to deduct $5.3 million of intangible drilling and development costs on this year's tax return. Which of the following statements is false?

Hextone Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $14,890, and first-year MACRS depreciation was $27,090. As a result of this book/tax difference, Hextone recorded a $2,562 deferred tax liability.

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800:

Broadus, a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2020. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true?

Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.

Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price. Compute Pettit's book basis and tax basis in the equipment.

Lensa Inc. purchased machinery several years ago for $400,000. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 21%. Which of the following statements is true?

Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.

Which of the following intangible assets is not amortizable for tax purposes?

Mr. and Mrs. Schulte paid a $750,000 lump-sum price to purchase a business. At date of purchase, the appraised FMVs of the balance sheet assets were: Accounts receivable \3 8,000 Inventory 415,000 Fixtures and equipment 147,000 \6 00,000 Which of the following statements is true?

An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

Which of the following statements concerning MACRS depreciation is true?

Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true?

Which of the following statements about MACRS is false?

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 3. The MACRS depreciation calculation assumes that the building was placed in service on June 15.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, Llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

Exam 7: Property Acquisitions and Cost Recovery Deductions

Which of the following expenditures must be capitalized for tax purposes?

Which of the following statements about the tax treatment of research and experimental expenditures is true?

Maxcom Inc. purchased 15 passenger automobiles for use by its sales force. Which of the following statements is true?

Hoopin Oil Inc. was allowed to deduct $5.3 million of intangible drilling and development costs on this year's tax return. Which of the following statements is false?

Hextone Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $14,890, and first-year MACRS depreciation was $27,090. As a result of this book/tax difference, Hextone recorded a $2,562 deferred tax liability.

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800:

Broadus, a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2020. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true?

Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.

Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price. Compute Pettit's book basis and tax basis in the equipment.

Lensa Inc. purchased machinery several years ago for $400,000. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 21%. Which of the following statements is true?

Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.

Which of the following intangible assets is not amortizable for tax purposes?

Mr. and Mrs. Schulte paid a $750,000 lump-sum price to purchase a business. At date of purchase, the appraised FMVs of the balance sheet assets were: Accounts receivable \3 8,000 Inventory 415,000 Fixtures and equipment 147,000 \6 00,000 Which of the following statements is true?

An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

Which of the following statements concerning MACRS depreciation is true?

Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true?

Which of the following statements about MACRS is false?

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 3. The MACRS depreciation calculation assumes that the building was placed in service on June 15.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, Llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters