Exam 7: Property Acquisitions and Cost Recovery Deductions

Belsap Inc., a calendar year taxpayer, purchased a total of $590,000 depreciable personalty during May 2017. Which of the following statements is true? 

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. -Which of the following statements is true? 

In an inflationary economy, the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.  

Conant Company purchased only one item of tangible personalty in 2018. The cost of the item was $2,539,700. Conant can elect to expense $1,000,000 of this cost. 

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 $\quad$$\quad$ $ 4,800 Utilities $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 735 Staff hiring and training $\quad$$\quad$$\quad$ 3,920 Newspaper advertising $\quad$$\quad$$\quad$$\quad$ 960 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 10,415 Which of the following statements is true?

Richland Company purchased an asset in 2015 for $50,000 and sold it in 2018. The asset was 7-year recovery property. Richland's 2018 MACRS depreciation on the asset was $6,245. 

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

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

Which of the following statements about tax basis is false?  

Terrance Inc., a calendar year taxpayer, purchased used equipment for $2,765,000 and placed it in service on March 4, 2017. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2017. a. Compute Terrance's tax depreciation with respect to the equipment for 2017 and 2018. b. Compute Terrance's adjusted basis in the equipment on December 31, 2018. c. How would your answers to a. and b. change if the equipment was placed in service in 2018 instead of 2017?

Mr and Mrs Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true? 

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: 

On May 1, Sessi Inc., a calendar year corporation, purchased a business for a $2 million lump-sum price. The business' balance sheet assets had the following appraised FMV. Accounts receivable $\quad$$\quad$ $ 38,900 Inventory $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 450,000 Tangible personality $\quad$$\quad$ 225,000 *Realty: Building $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 500,000 Land $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 50,000 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $1,263,900 a. Compute the cost basis of the goodwill acquired by Sessi Inc. on the purchase of this business. b. Compute Sessi's goodwill amortization deduction for the year of purchase. c. Use a 35 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

Merkon Inc. must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent. The purchased asset would be 3-year recovery property that Merkon could use for four years, after which the asset would have no salvage value. Assuming a 21% tax rate, an 8% discount rate, and no Section 179 deduction or bonus depreciation, which of the following statements is true? Use Appendix A, Table 7-2. (Round discount factor(s) to 3 decimal places.) 

Which of the following statements concerning MACRS depreciation is true?  

Kaskar Company, a calendar year taxpayer, paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building. Kaskar place the realty in service on September 29. Refer to the appropriate MACRS Table in Chapter 7 to compute Kaskar's first-year depreciation on the realty.  

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

Jaboy Inc. was incorporated three years ago. In its first year, Jaboy capitalized $72,000 organizational and start-up costs for tax purposes. However, it expensed these costs for financial statement purposes. Which of the following statements is true? 

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 12. The MACRS depreciation calculation assumes that the building was placed in service on May 15 (midquarter). 

A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.