Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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?

Accepted Answer

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 5

Mann Inc. paid $7,250 to a leasing agent to negotiate Mann's 36-month lease for 18,000 square feet of space in a new commercial building. For tax purposes, Mann must:

Accepted Answer

A)  Capitalize the $7,250 cost as a nonamortizable intangible asset. 
B)  Capitalize the $7,250 cost and amortize it over 36 months. 
C)  Capitalize the $7,250 cost and depreciate it as 5-year recovery property. 
D)  Deduct the $7,250 cost in the year of payment.

Question 6

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:

Accepted Answer

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 7

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

Accepted Answer

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 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements about amortization deductions is false?

Accepted Answer

A)  Amortization deductions result in the recovery of the capitalized cost of an intangible asset. 
B)  Amortization is computed ratably (on a straight-line basis) over the asset's determinable life. 
C)  Amortization deductions reduce the tax basis of the amortized asset. 
D)  None of the above is false.

Question 10

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?

Accepted Answer

A)  -0- 
B)  $699 
C)  $5,000 
D)  $5,560

Question 11

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:

Accepted Answer

A)  Mid-month convention 
B)  Mid-quarter convention 
C)  Mid-year convention 
D)  Daily pro-ration method

Question 12

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.

Accepted Answer

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

Question 13

Mann Inc. negotiated a 36-month lease on office space in a new commercial building. Mann paid $19,000 to a local carpenter to construct special-purpose shelving in the rented office. For tax purposes, Mann must:

Accepted Answer

A)  Capitalize the $19,000 cost and amortize it over 36 months. 
B)  Deduct the $19,000 cost in the year of payment. 
C)  Capitalize the $19,000 cost as a nonamortizable leasehold improvement. 
D)  Capitalize the $19,000 cost and depreciate it over the applicable MACRS recovery period.

Question 14

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

Question 15

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.

Accepted Answer

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

Question 16

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

Accepted Answer

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 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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.

Question 20

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.

Accepted Answer

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

Exam 7: Property Acquisitions and Cost Recovery Deductions

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.

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

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.

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?

Mann Inc. paid $7,250 to a leasing agent to negotiate Mann's 36-month lease for 18,000 square feet of space in a new commercial building. For tax purposes, Mann must:

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:

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

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.

Which of the following statements about amortization deductions is false?

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?

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:

Mann Inc. negotiated a 36-month lease on office space in a new commercial building. Mann paid $19,000 to a local carpenter to construct special-purpose shelving in the rented office. For tax purposes, Mann must:

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

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.

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.

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?

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.