Exam 7: Property Acquisitions and Cost Recovery Deductions

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center. The Puloso Center opened its doors for business on March 21, 2015. How much of the start-up expenditures can Puloso deduct in 2015?

This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return.

Mann Inc., a calendar year taxpayer, incurred $49,640 start-up expenditures during the preoperating phase of a new business venture. The business started operations in November. Mann expensed the $49,640 on its current-year financial statements. Which of the following statements is true?

Marz Inc. made a $75,000 cash expenditure this year (year 0). 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 30% marginal tax rate and uses a 7% discount rate.

A book/tax difference resulting from application of the unicap rules to manufactured inventory reverses in the year in which the inventory is sold.

Deitle Inc. manufactures small appliances. This year, Deitle capitalized $3,679,000 indirect costs to inventory for book purposes and $3,865,000 indirect costs to inventory for tax purposes. The consequence of the different accounting methods is a $186,000:

Which of the following statements concerning deductible repair expenses is false?

Creighton, a calendar year corporation, reported $5,571,000 net income before tax on its financial statements prepared in accordance with GAAP. The corporate records reveal the following information. • Creighton's depreciation expense per books was $40,980, and its MACRS depreciation deduction was $77,270. • Creighton capitalized $32,670 indirect expenses to manufactured inventory for book purposes and $48,020 indirect expenses to manufactured inventory under the unicap tax rules. • Creighton's cost of goods sold for book purposes was $1,093,800, and its cost of goods sold for tax purposes was $1,107,200. • Creighton purchased a competitor's business on May 1 and allocated $468,000 to the business' goodwill. Compute Creighton's taxable income.

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.

Broadus., a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2014. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true?

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

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

NLT Inc. purchased only one item of tangible personalty in 2015. The cost of the item was $24,000. NLT's taxable income before any Section 179 deduction was $7,100. NLT can elect Section 179 for only $7,100 of the cost of the property.

Which of the following statements about amortization deductions is false?

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).

JebSim Inc. was organized on June 1 and began business on August 10. JebSim elected a calendar year for tax purposes. The corporation incurred $25,160 of legal and other professional fees attributable to its formation. How much of these costs can JebSim deduct on its first tax return?

Purchased goodwill is amortizable both for book and tax accounting purposes.

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

The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.

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.