Deck 7: Property Acquisitions and Cost Recovery Deductions

Question 1

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

Answer 1

True

Question 2

KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November 13. This was KJD's only purchase of tangible personalty this year. KJD must use a midquarter convention to compute MACRS depreciation on the equipment. 

Answer 2

True

Question 3

Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset. 

Answer 3

False

Question 4

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

Question 5

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

Question 6

The MACRS calculation is based on the estimated useful life of the depreciable asset. 

Question 7

Tregor Inc., which manufactures plastic components, rents equipment on a monthly basis for use in its manufacturing process. The monthly rent is a deductible expense when incurred. 

Question 8

Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.  

Question 9

The MACRS calculation ignores any salvage or residual value of an asset. 

Question 10

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.  

Question 11

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. 

Question 12

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

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.  

Question 14

Cosmo Inc. purchased an asset costing $67,500 by paying $13,500 cash at date of purchase and giving the seller a 5-year interest-bearing note for the $54,000 balance. Cosmo's tax basis in the asset is $13,500.  

Question 15

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

Question 16

The expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.  

Question 17

Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250.  

Question 18

L&P Inc., which manufactures electrical components, purchased new equipment for use in its manufacturing process. The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules. 

Question 19

Mallow Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $37,225, and first-year MACRS depreciation was $55,025. As a result of this book/tax difference, Mallow recorded a $3,738 deferred tax asset. 

Question 20

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

Question 21

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

Question 22

Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false? 

A) Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years.
B) Poole must capitalize the expenditure if it extends the estimated useful life of an existing asset by three years.
C) Poole must capitalize the expenditure if it results in a long-term economic benefit to the company.
D) None of the above is false.

Question 23

NLT Inc. purchased only one item of tangible personalty in 2018. 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.  

Question 24

BriarHill Inc. purchased four items of tangible personalty in 2018 at a total cost of $3,579,000. BriarHill cannot elect to expense any of the cost of the property under Section 179. 

Question 25

A firm must capitalize start-up expenditures of a new business in excess of $5,000 but may deduct expansion costs of an existing business. 

Question 26

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. 

Question 27

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

Question 28

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). 

Question 29

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

Question 30

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. 

Question 31

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. 

Question 32

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months. 

Question 33

The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes. 

Question 34

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

Question 35

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

Question 36

If a business expenditure creates or enhances an identifiable asset with a useful life substantially beyond the current year, the expenditure must be capitalized. 

Question 37

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. 

Question 38

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.  

Question 39

An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value. 

Question 40

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. 

Question 41

Which of the following statements about the computation of cost of goods sold is true? 

A) Manufacturing and retail businesses must use the specific identification method for tax purposes.
B) Manufacturing and retail businesses must use the FIFO costing convention for tax purposes.
C) Manufacturing and retail businesses must use the LIFO costing convention for tax purposes.
D) Manufacturing and retail businesses that use the LIFO costing convention for tax purposes must also use LIFO for book purposes.

Question 42

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

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 43

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.  

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

Question 44

Hoopin Oil Inc. was allowed to deduct $5.3 million of intangible drilling and development costs on this year's tax return. Which of the following statements is false?  

A) The deduction is a tax preference for Hoopin.
B) The deduction minimizes Hoopin's after-tax cost of locating and preparing oil wells for production.
C) Hoopin was allowed to deduct the costs only because they did not result in any long-term economic benefit.
D) None of the above is false.

Question 45

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: 

A) Permanent unfavorable book/tax difference
B) Permanent favorable book/tax difference
C) Temporary unfavorable book/tax difference
D) Temporary favorable book/tax difference

Question 46

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?  

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 47

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

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 48

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. 

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

Question 49

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

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 50

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. 

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

Question 51

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: 

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

Question 52

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. 

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 53

Molton Inc. made a $60,000 cash expenditure this year (year 0). Use Appendix A of your textbook provided to compute the after-tax cost if Molton must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Molton has a 21% marginal tax rate and uses a 7% discount rate. 

A) $41,632
B) $48,206
C) $45,052
D) None of the above

Question 54

Which of the following statements about tax basis is false?  

A) The tax basis in an asset can never be negative.
B) Tax basis represents the taxpayer's unrecovered dollars invested in the asset.
C) Tax basis reflects the asset's fair market value.
D) Every asset owned by the taxpayer has a tax basis.

Question 55

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. 

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

Question 56

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? 

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 57

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? 

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 58

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: 

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

Question 59

Which of the following statements about the tax treatment of research and experimental expenditures is true? 

A) The treatment violates the tax principle of conservatism.
B) The treatment creates a favorable book/tax difference.
C) The treatment minimizes the after-tax cost of the expenditures.
D) Both the treatment violates the tax principle of conservatism and the treatment minimizes the after-tax cost of the expenditures are true.

Question 60

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

A) The distinction between a repair expense and a capital improvement is clearly defined by the tax law.
B) Businesses typically incur repair expenses on a regular and recurring basis.
C) Repair expenses do not substantially increase the value of the repaired asset.
D) Repair expenses do not substantially increase the useful life of the repaired asset.

Question 61

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.  

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

Question 62

Broadus, a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2018. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true? 

A) Broadus can elect to expense only $92,600 of the cost of the personalty under Section 179.
B) Broadus can elect to expense the $128,300 cost of the personalty under Section 179 but can deduct only $92,600 of the expense.
C) Broadus can elect to expense only $35,700 of the cost of the personalty under Section 179.
D) Broadus can elect to expense the $128,300 cost of the personalty under Section 179 but can deduct only $35,700 of the expense.

Question 63

Cobly Company, a calendar year taxpayer, made only one asset purchase this year: machinery costing $1,932,500. The machinery is 7-year recovery property, and Cobly placed it in service on October 12. How many months of MACRS depreciation on the machinery is Cobly allowed? 

A) Six months
B) Two and one-half months
C) One and one-half months
D) None of the above

Question 64

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?  

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 65

Gowda Inc., a calendar year taxpayer, purchased $1,496,000 of equipment on March 23. This was Gowda'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 Gowda's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.) 

A) First year $106,889; second year $366,370
B) First year $106,889; second year $340,193
C) First year $213,778; second year $183,185
D) None of the above

Question 66

Which of the following statements about MACRS 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 67

Essco Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $836,000, and the second purchase was equipment costing $494,000. Both assets are 7-year recovery property. Essco placed the machine in service on July 21 and the equipment in service on October 14. How many months of MACRS depreciation is Essco allowed for each asset?  

A) Essco is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment.
B) Essco is allowed 7.5 months depreciation for the machine and 1.5 months of depreciation for the equipment.
C) Essco is allowed 1.5 months of depreciation for both the machine and the equipment.
D) Essco is allowed six months of depreciation for both the machine and the equipment.

Question 68

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 21%. Which of the following statements is true? 

A) The book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities.
B) The book/tax difference in depreciation results in a $899 deferred tax asset.
C) The $4,280 difference between book and tax depreciation is unfavorable.
D) Both the book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities and the $4,280 difference between book and tax depreciation is unfavorable are true.

Question 69

Norwell Company purchased $1,413,200 of new business equipment on July 10, 2018. This was Norwell's only asset purchase for its 2018 taxable year. Compute Norwell's total tax depreciation deduction for this 7-year recovery property.  

A) $1,413,200
B) $201,946
C) $1,021,848
D) $1,026,134

Question 70

W&F Company, a calendar year taxpayer, purchased a total of $2,034,700 tangible personalty in 2018. How much of this cost can W&F elect to expense under Section 179? 

A) -0-
B) $34,700
C) $965,300
D) $1,000,000

Question 71

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.) 

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 72

WR&Z Company, a calendar year taxpayer, paid $6,400,000 for a commercial office building and allocated $400,000 of the cost to the land and $6,000,000 of the cost to the building. WR&Z place the realty in service on May 11. Refer to the appropriate MACRS Table in Chapter 7 to compute WR&Z's first-year depreciation on the realty. 

A) $136,380
B) $102,720
C) $96,300
D) None of the above

Question 73

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2018. Kemp made one asset purchase: used manufacturing equipment costing $1,543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made the Section 179 election with respect to the equipment, compute Kemp's 2018 cost recovery deduction. 

A) $1,543,600
B) $1,077,680
C) $1,000,000
D) None of the above

Question 74

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

A) Maxcom must use the straight-line method to depreciate the passenger automobiles for tax purposes.
B) Maxcom's annual tax depreciation on the passenger automobiles may be limited to an amount less than MACRS depreciation.
C) Maxcom's annual tax depreciation on the passenger automobiles is computed under MACRS.
D) Even though Maxcom purchased the automobiles for business use, Maxcom is not allowed any tax depreciation for the automobiles.

Question 75

Pyle Inc., a calendar year taxpayer, generated over $10 million taxable income in 2018. Pyle made one asset purchase: new heating and air conditioning system for existing nonresidential real property at a cost of $1,322,000. The system has a 39-year recovery period and was placed in service on February 9. Assuming that Pyle made the Section 179 election with respect to the acquisition, compute Pyle's 2018 cost recovery deduction. 

A) $1,000,000
B) $1,007,226
C) $1,008,256
D) $1,322,000

Question 76

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

A) Belsap can elect to expense 100% of the cost.
B) The amount of cost that Belsap can elect to expense depends on Belsap's 2017 taxable income.
C) Belsap can elect to expense $510,000 of the cost. The $80,000 remaining cost is capitalized and subject to MACRS depreciation.
D) Belsap can elect to expense $510,000 of the cost. The $80,000 remaining cost is capitalized and is not depreciable.

Question 77

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

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 78

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.) 

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 79

Which of the following statements concerning MACRS depreciation is true?  

A) MACRS depreciation for the year in which an asset is placed in service or sold is based on the number of days the asset was used in the year.
B) MACRS depreciation for buildings is not accelerated but is computed using the straight-line method.
C) The recovery period under MACRS is based on the estimated useful life of the particular asset under consideration.
D) Salvage value is taken into account in computing MACRS depreciation.

Question 80

Song Company, a calendar year taxpayer, purchased a total of $2,534,400 tangible personalty in 2018. How much of this cost can Song elect to expense under Section 179? 

A) -0-
B) $1,000,000
C) $2,534,400
D) $965,600