Question 1

The after-tax cost of an expenditure is minimized when the expenditure is deductible in the current year.

Accepted Answer

A) True 
 B)False

Question 2

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:

Accepted Answer

A)  Mid-month convention 
B)  Mid-quarter convention 
C)  Mid-year convention 
D)  Daily pro-ration method 
A)  Mid-month convention 
B)  Mid-quarter convention 
C)  Mid-year convention 
D)  Daily pro-ration method

Question 3

Moses Inc. purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge. Which of the following is true?

Accepted Answer

A)  Moses' tax basis in the furniture is $8,842. 
B)  Moses' tax basis in the furniture is $8,692, and it can deduct the delivery charge. 
C)  Moses' tax basis in the furniture is $8,350, and it can deduct the sales tax. 
D)  Moses' tax basis in the furniture is $8,200, and it can deduct the sales tax and delivery charge. 
A)  Moses' tax basis in the furniture is $8,842. 
B)  Moses' tax basis in the furniture is $8,692, and it can deduct the delivery charge. 
C)  Moses' tax basis in the furniture is $8,350, and it can deduct the sales tax. 
D)  Moses' tax basis in the furniture is $8,200, and it can deduct the sales tax and delivery charge.

Question 4

BriarHill Inc. purchased four items of tangible personalty in 2020 at a total cost of $3,679,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Accepted Answer

A) True 
 B)False

Question 5

Environmental clean-up costs are generally deductible in the year incurred.

Accepted Answer

A) True 
 B)False

Question 6

Ferelli Inc. is a calendar year taxpayer. On September 1, Ferelli signed a 24-month lease on 3,600 square feet of commercial office space and paid a $3,240 fee to the agent who located the space and negotiated the lease. Ferelli paid $5,900 to install new overhead lighting in the office space. The lighting is 7-year recovery property. Compute Ferelli's current-year cost recovery deduction with respect to the $9,140 costs associated with the office space. Use Table 7-2.

Accepted Answer

A)  $540 
B)  $843 
C)  $1,523 
D)  $1,383 
A)  $540 
B)  $843 
C)  $1,523 
D)  $1,383

Question 7

Lovely Cosmetics Inc. incurred $785,000 research costs on the development of its formula for a new line of face creams. Lovely obtained a 17-year patent on the formula from the U.S. government. Which of the following statements is true?

Accepted Answer

A)  Lovely is allowed to deduct the $785,000 research costs. 
B)  Lovely's tax basis in its patent is $785,000. 
C)  The $785,000 cost results in a favorable book/tax difference. 
D)  Both Lovely is allowed to deduct the $785,000 research costs and Lovely's tax basis in its patent is $785,000 are true. 
A)  Lovely is allowed to deduct the $785,000 research costs. 
B)  Lovely's tax basis in its patent is $785,000. 
C)  The $785,000 cost results in a favorable book/tax difference. 
D)  Both Lovely is allowed to deduct the $785,000 research costs and Lovely's tax basis in its patent is $785,000 are true.

Question 8

Uqua Inc. purchased a depreciable asset for $189,000. First-year depreciation for book purposes was $22,000, and first-year MACRS depreciation was $37,800. If Uqua's marginal tax rate is 21%, the excess tax depreciation results in a $3,318:

Accepted Answer

A)  Deferred tax asset 
B)  Deferred tax liability 
C)  Permanent favorable book/tax difference 
D)  Permanent unfavorable book/tax difference 
A)  Deferred tax asset 
B)  Deferred tax liability 
C)  Permanent favorable book/tax difference 
D)  Permanent unfavorable book/tax difference

Question 9

Which of the following statements about the depletion deduction is false?

Accepted Answer

A)  Firms can deduct the greater of cost depletion or percentage depletion for the year. 
B)  Percentage depletion is a tax preference item. 
C)  The depletion deduction can never exceed the unrecovered cost basis in the depletable asset. 
D)  Percentage depletion is not based on any actual decrease in the expected productive value of a mine or well. 
A)  Firms can deduct the greater of cost depletion or percentage depletion for the year. 
B)  Percentage depletion is a tax preference item. 
C)  The depletion deduction can never exceed the unrecovered cost basis in the depletable asset. 
D)  Percentage depletion is not based on any actual decrease in the expected productive value of a mine or well.

Question 10

Inger Associates, which manufactures plastic containers, recently sold 12,000 containers to R&A Inc. The selling price per container was $18. R&A paid for the containers by transferring 864 shares of its common stock to Inger. On date of payment, R&A stock was selling on Nasdaq at $250 per share. Compute Inger's tax basis in the R&A stock.

Accepted Answer

A)  -0-. 
B)  $216,000. 
C)  Inger's tax basis equals its manufacturing cost of the 12,000 containers. 
D)  None of these choices are correct. 
A)  -0-. 
B)  $216,000. 
C)  Inger's tax basis equals its manufacturing cost of the 12,000 containers. 
D)  None of these choices are correct.

Question 11

MACRS depreciation for buildings is based on the straight-line method.

Accepted Answer

A) True 
 B)False

Question 12

Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.

Accepted Answer

A) True 
 B)False

Question 13

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Accepted Answer

A)  If Driller's allowable percentage depletion is $313,000, Driller will deduct cost depletion. 
B)  If Driller's allowable percentage depletion is $515,000, Driller will deduct percentage depletion. 
C)  If Driller's allowable percentage depletion is $515,000, Driller's depletion deduction is limited to $498,200. 
D)  Both if Driller's allowable percentage depletion is $313,000, Driller will deduct cost depletion and if Driller's allowable percentage depletion is $515,000, Driller will deduct percentage depletion are both true statements. 
A)  If Driller's allowable percentage depletion is $313,000, Driller will deduct cost depletion. 
B)  If Driller's allowable percentage depletion is $515,000, Driller will deduct percentage depletion. 
C)  If Driller's allowable percentage depletion is $515,000, Driller's depletion deduction is limited to $498,200. 
D)  Both if Driller's allowable percentage depletion is $313,000, Driller will deduct cost depletion and if Driller's allowable percentage depletion is $515,000, Driller will deduct percentage depletion are both true statements.

Question 14

Lisle Inc. manufactures small appliances in three plants in the Southeast. Which of the following statements is true?

Accepted Answer

A)  If Lisle uses LIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes. 
B)  If Lisle uses FIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes. 
C)  Lisle is not allowed to use LIFO to compute the cost of goods sold for tax purposes. 
D)  None of these statements are true. 
A)  If Lisle uses LIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes. 
B)  If Lisle uses FIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes. 
C)  Lisle is not allowed to use LIFO to compute the cost of goods sold for tax purposes. 
D)  None of these statements are true.

Question 15

Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center. $\begin{array}{lc}
\text { Rent on commercial space } & \$ 4,800 \
\text { Utilities } & 735 \
\text { Staff hiring and training } & 3,920 \
\text { Newspaper advertising } & 960 \
&\$ 10,415
\end{array}$
 Which of the following statements is true?

Accepted Answer

A)  If Vane already operates seven other health and fitness centers, it can deduct the $10,415 preoperating expenditures of the eighth center as expansion costs. 
B)  If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment. 
C)  If the new center represents a new business for Vane, it must capitalize the $10,415 preoperating expenditures. 
D)  None of these choices are true. 
A)  If Vane already operates seven other health and fitness centers, it can deduct the $10,415 preoperating expenditures of the eighth center as expansion costs. 
B)  If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment. 
C)  If the new center represents a new business for Vane, it must capitalize the $10,415 preoperating expenditures. 
D)  None of these choices are true.

Question 16

Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. This year, Bettis' auditors required Bettis to write the goodwill down to $500,000 and record a $100,000 impairment expense. Because of the accounting treatment of goodwill, Bettis has a current:

Accepted Answer

A)  $60,000 unfavorable temporary book/tax difference 
B)  $100,000 unfavorable temporary book/tax difference 
C)  $100,000 unfavorable permanent book/tax difference 
D)  $40,000 favorable temporary book/tax difference 
A)  $60,000 unfavorable temporary book/tax difference 
B)  $100,000 unfavorable temporary book/tax difference 
C)  $100,000 unfavorable permanent book/tax difference 
D)  $40,000 favorable temporary book/tax difference

Question 17

Zola Inc. paid a $10,000 legal fee to the attorney who resolved a dispute over Zola's title to investment land. Zola's auditors required the corporation to expense the payment for financial statement purposes. The tax law required Zola to capitalize the payment to the basis of the land. This difference in accounting treatment results in a:

Accepted Answer

A)  Deferred tax asset 
B)  Deferred tax liability 
C)  Permanent unfavorable book/tax difference 
D)  Permanent favorable book/tax difference 
A)  Deferred tax asset 
B)  Deferred tax liability 
C)  Permanent unfavorable book/tax difference 
D)  Permanent favorable book/tax difference

Question 18

A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.

Accepted Answer

A) True 
 B)False

Question 19

Selkie Inc. paid a $2 million lump sum to purchase a business. According to the contract, the seller of the business is prohibited from engaging in a similar business for 18 months. Selkie allocated $300,000 of the purchase price to this covenant not to compete. Selkie may amortize the $300,000 over 15 years.

Accepted Answer

A) True 
 B)False

Question 20

Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.

Accepted Answer

A)  The lease is an intangible asset and therefore has a zero basis to Colby. 
B)  The lease has a zero basis because Colby obtained the lease at no cost. 
C)  $52,200. 
D)  None of these choices are correct. 
A)  The lease is an intangible asset and therefore has a zero basis to Colby. 
B)  The lease has a zero basis because Colby obtained the lease at no cost. 
C)  $52,200. 
D)  None of these choices are correct.

The after-tax cost of an expenditure is minimized when the expenditure is deductible in the current year.

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:

Moses Inc. purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge. Which of the following is true?

BriarHill Inc. purchased four items of tangible personalty in 2020 at a total cost of $3,679,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Environmental clean-up costs are generally deductible in the year incurred.

Lovely Cosmetics Inc. incurred $785,000 research costs on the development of its formula for a new line of face creams. Lovely obtained a 17-year patent on the formula from the U.S. government. Which of the following statements is true?

Uqua Inc. purchased a depreciable asset for $189,000. First-year depreciation for book purposes was $22,000, and first-year MACRS depreciation was $37,800. If Uqua's marginal tax rate is 21%, the excess tax depreciation results in a $3,318:

Which of the following statements about the depletion deduction is false?

MACRS depreciation for buildings is based on the straight-line method.

Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Lisle Inc. manufactures small appliances in three plants in the Southeast. Which of the following statements is true?

Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center. Rent on commercial space \ 4,800 Utilities 735 Staff hiring and training 3,920 Newspaper advertising 960 \ 10,415 Which of the following statements is true?

A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.

Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.

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

The after-tax cost of an expenditure is minimized when the expenditure is deductible in the current year.

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:

Moses Inc. purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge. Which of the following is true?

BriarHill Inc. purchased four items of tangible personalty in 2020 at a total cost of $3,679,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Environmental clean-up costs are generally deductible in the year incurred.

Lovely Cosmetics Inc. incurred $785,000 research costs on the development of its formula for a new line of face creams. Lovely obtained a 17-year patent on the formula from the U.S. government. Which of the following statements is true?

Uqua Inc. purchased a depreciable asset for $189,000. First-year depreciation for book purposes was $22,000, and first-year MACRS depreciation was $37,800. If Uqua's marginal tax rate is 21%, the excess tax depreciation results in a $3,318:

Which of the following statements about the depletion deduction is false?

MACRS depreciation for buildings is based on the straight-line method.

Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Lisle Inc. manufactures small appliances in three plants in the Southeast. Which of the following statements is true?

Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center. Rent on commercial space \ 4,800 Utilities 735 Staff hiring and training 3,920 Newspaper advertising 960 \ 10,415 Which of the following statements is true?

A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.

Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.

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