Question 1

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800:

Accepted Answer

A)  Unfavorable permanent book/tax difference 
B)  Favorable permanent book/tax difference 
C)  Unfavorable temporary book/tax difference 
D)  Favorable temporary book/tax difference

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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. 
-This year, Bettis' auditors required Bettis to write the goodwill down to $500,000 and record a $100,000 impairment expense. Because of the accounting treatment of goodwill, Bettis has a current:

Accepted Answer

A)  $60,000 unfavorable temporary book/tax difference 
B)  $100,000 unfavorable temporary book/tax difference 
C)  $100,000 unfavorable permanent book/tax difference 
D)  $40,000 favorable temporary book/tax difference

Question 4

In 2017, Rydin Company purchased one asset costing $38,400 and elected to expense the entire cost. However, Rydin could only deduct $21,000 of the Section 179 expense because of the taxable income limitation. In 2018, Rydin purchased tangible personalty costing $990,000. Rydin's taxable income without regard to any Section 179 deduction was $1,912,400. Compute Rydin's 2018 Section 179 deduction.

Accepted Answer

A)  $17,400 
B)  $1,000,000 
C)  $1,007,400 
D)  $0

Question 5

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.

Accepted Answer

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 6

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?

Accepted Answer

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 7

Which of the following capitalized cost is not amortizable for tax purposes?

Accepted Answer

A)  Purchase cost of a partnership interest 
B)  Purchase cost of business goodwill 
C)  Leasehold cost 
D)  Purchase cost of a patent

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Question 17

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?

Accepted Answer

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

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

Question 20

Ingol, Inc. was organized on June 1 and began business on September 13. Ingol elected a calendar year for tax purposes. The corporation incurred $60,300 of legal and other professional fees attributable to its formation. How much of these costs can Ingol deduct on its first tax return?

Accepted Answer

A)  -0- 
B)  $1,340 
C)  $6,229 
D)  None of the above

Exam 7: Property Acquisitions and Cost Recovery Deductions

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800:

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.

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?

Which of the following capitalized cost is not amortizable for tax purposes?

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.

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.

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

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

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

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.

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

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

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.

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

Ingol, Inc. was organized on June 1 and began business on September 13. Ingol elected a calendar year for tax purposes. The corporation incurred $60,300 of legal and other professional fees attributable to its formation. How much of these costs can Ingol deduct on its first tax return?