Question 1

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 the above statements is 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 the above statements is true.

Question 2

Conant Company purchased only one item of tangible personalty in 2015. The cost of the item was $209,700. Conant can elect to expense $25,000 of this cost.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 a. and b. 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 a. and b. are true.

Question 5

Durna Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $874,000, and the second purchase was equipment costing $660,000. Both assets are 7-year recovery property. Durna placed the machine in service on March 27 and the equipment in service on December 14. How many months of MACRS depreciation is Durna allowed for each asset?

Accepted Answer

A)  Durna is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment. 
B)  Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment. 
C)  Durna is allowed 1.5 months of depreciation for both the machine and the equipment. 
D)  Durna is allowed six months of depreciation for both the machine and the equipment. 
A)  Durna is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment. 
B)  Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment. 
C)  Durna is allowed 1.5 months of depreciation for both the machine and the equipment. 
D)  Durna is allowed six months of depreciation for both the machine and the equipment.

Question 6

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

Question 7

Dorian, a calendar year corporation, purchased $1,568,000 of equipment on May 3. This was Dorian's only purchase of depreciable property for the year. If the equipment has a 10-year recovery period, refer to Table 7.2 and compute Dorian's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

Accepted Answer

A)  First year $156,800; second year $282,240 
B)  First year $78,400; second year $282,240 
C)  First year $156,800; second year $245,016 
D)  None of the above 
A)  First year $156,800; second year $282,240 
B)  First year $78,400; second year $282,240 
C)  First year $156,800; second year $245,016 
D)  None of the above

Question 8

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 9

Kigin Company spent $240,000 to clean up hazardous waste that had contaminated land used in Kigin's business. Which of the following statements is true?

Accepted Answer

A)  Kigin must capitalize the $240,000 expenditure to the cost of the land. 
B)  If Kigin purchased the land in an uncontaminated state, it can deduct the $240,000 because the expenditure is merely returning the land to its original condition. 
C)  Kigin can deduct the $240,000 as a repair expense. 
D)  None of the above is true. 
A)  Kigin must capitalize the $240,000 expenditure to the cost of the land. 
B)  If Kigin purchased the land in an uncontaminated state, it can deduct the $240,000 because the expenditure is merely returning the land to its original condition. 
C)  Kigin can deduct the $240,000 as a repair expense. 
D)  None of the above is true.

Question 10

Hextone Inc., which has a 35% 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 $4,270 deferred tax liability.

Accepted Answer

A) True 
 B)False

Question 11

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2014. Which of the following statements is true?

Accepted Answer

A)  Laven can elect to expense $500,000 of the cost. The $61,240 remaining cost is capitalized and subject to 50% bonus and MACRS depreciation. 
B)  Laven can elect to expense $500,000 of the cost. The $61,240 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 2014 taxable income. 
A)  Laven can elect to expense $500,000 of the cost. The $61,240 remaining cost is capitalized and subject to 50% bonus and MACRS depreciation. 
B)  Laven can elect to expense $500,000 of the cost. The $61,240 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 2014 taxable income.

Question 12

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 13

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 35%. Which of the following statements is true?

Accepted Answer

A)  The book/tax difference in depreciation results in a $1,498 decrease in Lensa's deferred tax liabilities. 
B)  The book/tax difference in depreciation results in a $1,498 deferred tax asset. 
C)  The $4,280 difference between book and tax depreciation is unfavorable. 
D)  Both a. and c. are true. 
A)  The book/tax difference in depreciation results in a $1,498 decrease in Lensa's deferred tax liabilities. 
B)  The book/tax difference in depreciation results in a $1,498 deferred tax asset. 
C)  The $4,280 difference between book and tax depreciation is unfavorable. 
D)  Both a. and c. are true.

Question 14

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.

Accepted Answer

a. Compute the cost basis of the goodwil

Question 15

This year, Zulou Industries capitalized $552,000 indirect costs to inventory for book purposes and $591,600 indirect cost to inventory under unicap. Zulou's cost of goods sold for book purposes was $2,458,000, and its cost of goods sold for tax purposes was $2,707,000. If Zulou has no other book/tax differences, and its book income is $5,000,000, compute Zulou's taxable income.

Accepted Answer

A)  $4,711,400 
B)  $4,751,000 
C)  $4,790,600 
D)  $5,288,600 
A)  $4,711,400 
B)  $4,751,000 
C)  $4,790,600 
D)  $5,288,600

Question 16

Follen Company is a calendar year taxpayer. On September 1, Follen signed a 24-month lease on 3,800 square feet of commercial office space. Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease. It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements. The rewiring qualifies as five-year recovery property. Compute Follen's first-year cost recovery deductions relating to the lease space.

Accepted Answer

Follen can amortize the $2,580 leasehold

Question 17

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.

Accepted Answer

A)  $31,830 
B)  $35,544 
C)  $22,470 
D)  None of the above 
A)  $31,830 
B)  $35,544 
C)  $22,470 
D)  None of the above

Question 18

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, 2015.
a. Compute NRW's MACRS depreciation with respect to the realty for 2015 and 2016.
b. Compute NRW's adjusted basis in the land and building on December 31, 2016.
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 2015 is $65,47

Question 19

D&R Company, a calendar year corporation, purchased $1,116,000 of equipment on August 3. This was D&R's only purchase of depreciable property for the year. If the equipment has a 7-year recovery period, refer to Table 7.2 and compute D&R's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

Accepted Answer

A)  First year $79,738; second year $273,308 
B)  First year $159,476; second year $273,308 
C)  First year $159,476; second year $234,253 
D)  None of the above 
A)  First year $79,738; second year $273,308 
B)  First year $159,476; second year $273,308 
C)  First year $159,476; second year $234,253 
D)  None of the above

Question 20

Powell Inc. was incorporated and began operations on October 1 and adopted a calendar year for tax purposes. Powell paid $4,200 to the attorney who handled the corporate formation. Which of the following statements is true?

Accepted Answer

A)  If Powell capitalized the $4,200 payment for financial statement purposes, it must also capitalize it for tax purposes. 
B)  Powell can deduct the $4,200 payment on its first tax return. 
C)  For tax purposes, Powell must capitalize the $4,200 organizational cost and amortize it over 15 years. 
D)  None of the above is true. 
A)  If Powell capitalized the $4,200 payment for financial statement purposes, it must also capitalize it for tax purposes. 
B)  Powell can deduct the $4,200 payment on its first tax return. 
C)  For tax purposes, Powell must capitalize the $4,200 organizational cost and amortize it over 15 years. 
D)  None of the above is true.

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

Conant Company purchased only one item of tangible personalty in 2015. The cost of the item was $209,700. Conant can elect to expense $25,000 of this cost.

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?

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?

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.

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.

Kigin Company spent $240,000 to clean up hazardous waste that had contaminated land used in Kigin's business. Which of the following statements is true?

Hextone Inc., which has a 35% 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 $4,270 deferred tax liability.

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2014. Which of the following statements is true?

Which of the following statements about MACRS is false?

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 35%. Which of the following statements is true?

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.

Powell Inc. was incorporated and began operations on October 1 and adopted a calendar year for tax purposes. Powell paid $4,200 to the attorney who handled the corporate formation. Which of the following statements is true?

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

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

Conant Company purchased only one item of tangible personalty in 2015. The cost of the item was $209,700. Conant can elect to expense $25,000 of this cost.

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?

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?

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.

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.

Kigin Company spent $240,000 to clean up hazardous waste that had contaminated land used in Kigin's business. Which of the following statements is true?

Hextone Inc., which has a 35% 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 $4,270 deferred tax liability.

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2014. Which of the following statements is true?

Which of the following statements about MACRS is false?

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 35%. Which of the following statements is true?

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.

Powell Inc. was incorporated and began operations on October 1 and adopted a calendar year for tax purposes. Powell paid $4,200 to the attorney who handled the corporate formation. Which of the following statements is true?

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