Question 1

For tax purposes, the cost basis of an asset does not include any portion of the purchase price paid through debt financing.

Accepted Answer

A) True 
 B)False

Question 2

Szabi Inc., a calendar year taxpayer, purchased two assets during 2017: a machine costing $380,000 and computer equipment costing $403,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

Accepted Answer

A)  Under Section 179, Szabi should elect to expense the $380,000 cost of the machine and $130,000 of the cost of the computer equipment. 
B)  Under Section 179, Szabi should elect to expense the $403,500 cost of the computer equipment machine and $106,500 of the cost of the machine. 
C)  Under Section 179, Szabi must elect to expense $255,000 of the cost of the machine and $255,000 of the cost of the computer equipment. 
D)  Under Section 179, Szabi is indifferent as to which costs to expense. 
A)  Under Section 179, Szabi should elect to expense the $380,000 cost of the machine and $130,000 of the cost of the computer equipment. 
B)  Under Section 179, Szabi should elect to expense the $403,500 cost of the computer equipment machine and $106,500 of the cost of the machine. 
C)  Under Section 179, Szabi must elect to expense $255,000 of the cost of the machine and $255,000 of the cost of the computer equipment. 
D)  Under Section 179, Szabi is indifferent as to which costs to expense.

Question 3

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 4

NRW Company, a calendar year taxpayer, purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building. NRW placed the realty in service on August 2, 2018.
a. Compute NRW's MACRS depreciation with respect to the realty for 2018 and 2019.
b. Compute NRW's adjusted basis in the land and building on December 31, 2019.
c. How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?

Accepted Answer

a. MACRS depreciation for 2018 is $65,47

Question 5

Which of the following statements concerning business goodwill is false?

Accepted Answer

A)  If a business creates goodwill by developing a loyal customer base and generating brand name recognition, the tax basis in the goodwill is zero. 
B)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis is not amortized for financial reporting purposes. 
C)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis may be amortized over 15 years for tax purposes. 
D)  The tax deduction for goodwill amortization is an unfavorable book/tax difference. 
A)  If a business creates goodwill by developing a loyal customer base and generating brand name recognition, the tax basis in the goodwill is zero. 
B)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis is not amortized for financial reporting purposes. 
C)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis may be amortized over 15 years for tax purposes. 
D)  The tax deduction for goodwill amortization is an unfavorable book/tax difference.

Question 6

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 7

B&P Inc., a calendar year corporation, purchased only one operating asset during 2017: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2017.

Accepted Answer

A)  $99,900 
B)  $71,920 
C)  $79,920 
D)  $0 
A)  $99,900 
B)  $71,920 
C)  $79,920 
D)  $0

Question 8

Marz Inc. made a $75,000 cash expenditure this year (year 0). Use Appendix A of your textbook provided to compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Marz has a 21% marginal tax rate and uses a 7% discount rate.

Accepted Answer

A)  $49,344 
B)  $56,316 
C)  $60,258 
D)  None of the above 
A)  $49,344 
B)  $56,316 
C)  $60,258 
D)  None of the above

Question 9

On April 2, Reid Inc., a calendar year taxpayer, paid a $750,000 lump-sum price to purchase a business. The appraised FMVs of the balance sheet assets were:
Accounts receivable $ 38,000
Inventory 415,000
Fixtures and equipment 147,000
$ 600,000
Which of the following statements is false?

Accepted Answer

A)  Reid must capitalize $150,000 of the cost as purchased goodwill. 
B)  Reid may amortize the $150,000 cost for both book and tax purposes. 
C)  Reid's amortization deduction for the current year is $7,500. 
D)  None of the above is false. 
A)  Reid must capitalize $150,000 of the cost as purchased goodwill. 
B)  Reid may amortize the $150,000 cost for both book and tax purposes. 
C)  Reid's amortization deduction for the current year is $7,500. 
D)  None of the above is false.

Question 10

Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000. Which of the following statements is true?

Accepted Answer

A)  Kassim's book basis and tax basis in the asset is $275,000. 
B)  Kassim's book basis is $275,000, but its tax basis is $35,000. 
C)  Kassim's book basis and tax basis in the asset is $35,000. 
D)  If Kassim is a cash basis taxpayer, its initial tax basis in the asset is zero. 
A)  Kassim's book basis and tax basis in the asset is $275,000. 
B)  Kassim's book basis is $275,000, but its tax basis is $35,000. 
C)  Kassim's book basis and tax basis in the asset is $35,000. 
D)  If Kassim is a cash basis taxpayer, its initial tax basis in the asset is zero.

Question 11

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.

Accepted Answer

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

Question 12

Which of the following statements about the uniform capitalization (unicap) rules is false?

Accepted Answer

A)  The unicap rules determine the annual costs that firms must capitalize to inventory for tax purposes. 
B)  The unicap rules may require capitalization of more indirect costs to inventory for tax purposes than for book purposes. 
C)  The unicap rules may result in a book/tax difference for cost of goods sold. 
D)  The unicap rules apply to all taxpayers with inventory, regardless of size. 
A)  The unicap rules determine the annual costs that firms must capitalize to inventory for tax purposes. 
B)  The unicap rules may require capitalization of more indirect costs to inventory for tax purposes than for book purposes. 
C)  The unicap rules may result in a book/tax difference for cost of goods sold. 
D)  The unicap rules apply to all taxpayers with inventory, regardless of size.

Question 13

Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.

Accepted Answer

A) True 
 B)False

Question 14

The difference between the before-tax cost and after-tax cost of an asset equals the net present value of the tax savings from any cost recovery deductions with respect to the asset.

Accepted Answer

A) True 
 B)False

Question 15

Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 the above is 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 the above is false.

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

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2017. Which of the following statements is true?

Accepted Answer

A)  Laven can elect to expense $510,000 of the cost. The $51,240 remaining cost is capitalized and subject to 50% bonus and MACRS depreciation. 
B)  Laven can elect to expense $510,000 of the cost. The $51,240 remaining cost is capitalized and is not depreciable. 
C)  Laven can expense the entire $561,240 cost using 100% bonus depreciation. 
D)  The amount of the cost that Laven can elect to expense depends on Laven's 2016 taxable income. 
A)  Laven can elect to expense $510,000 of the cost. The $51,240 remaining cost is capitalized and subject to 50% bonus and MACRS depreciation. 
B)  Laven can elect to expense $510,000 of the cost. The $51,240 remaining cost is capitalized and is not depreciable. 
C)  Laven can expense the entire $561,240 cost using 100% bonus depreciation. 
D)  The amount of the cost that Laven can elect to expense depends on Laven's 2016 taxable income.

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 the above 
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 the above

For tax purposes, the cost basis of an asset does not include any portion of the purchase price paid through debt financing.

Szabi Inc., a calendar year taxpayer, purchased two assets during 2017: a machine costing $380,000 and computer equipment costing $403,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

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.

Which of the following statements concerning business goodwill is false?

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?

B&P Inc., a calendar year corporation, purchased only one operating asset during 2017: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2017.

Marz Inc. made a $75,000 cash expenditure this year (year 0). Use Appendix A of your textbook provided to compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Marz has a 21% marginal tax rate and uses a 7% discount rate.

On April 2, Reid Inc., a calendar year taxpayer, paid a $750,000 lump-sum price to purchase a business. The appraised FMVs of the balance sheet assets were: Accounts receivable $ 38,000 Inventory 415,000 Fixtures and equipment 147,000 $ 600,000 Which of the following statements is false?

Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000. Which of the following statements is true?

Which of the following statements about the uniform capitalization (unicap) rules is false?

Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.

The difference between the before-tax cost and after-tax cost of an asset equals the net present value of the tax savings from any cost recovery deductions with respect to the asset.

Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

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

Which of the following statements about MACRS is false?

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

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2017. Which of the following statements is true?

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

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

For tax purposes, the cost basis of an asset does not include any portion of the purchase price paid through debt financing.

Szabi Inc., a calendar year taxpayer, purchased two assets during 2017: a machine costing $380,000 and computer equipment costing $403,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

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.

Which of the following statements concerning business goodwill is false?

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?

B&P Inc., a calendar year corporation, purchased only one operating asset during 2017: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2017.

Marz Inc. made a $75,000 cash expenditure this year (year 0). Use Appendix A of your textbook provided to compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Marz has a 21% marginal tax rate and uses a 7% discount rate.

On April 2, Reid Inc., a calendar year taxpayer, paid a $750,000 lump-sum price to purchase a business. The appraised FMVs of the balance sheet assets were: Accounts receivable $ 38,000 Inventory 415,000 Fixtures and equipment 147,000 $ 600,000 Which of the following statements is false?

Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000. Which of the following statements is true?

Which of the following statements about the uniform capitalization (unicap) rules is false?

Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.

The difference between the before-tax cost and after-tax cost of an asset equals the net present value of the tax savings from any cost recovery deductions with respect to the asset.

Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

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

Which of the following statements about MACRS is false?

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

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2017. Which of the following statements is true?

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

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