Question 1

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

Accepted Answer

A)  Firms can deduct the greater of cost depletion or percentage depletion for the year. 
B)  Percentage depletion is a tax preference item. 
C)  The depletion deduction can never exceed the unrecovered cost basis in the depletable asset. 
D)  Percentage depletion is not based on any actual decrease in the expected productive value of a mine or well.

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

The answer of Follen Company is a calendar year taxpayer....

Question 5

Shelley purchased a residential apartment for $1,400,000 and placed it in service on September 5. Which of the following statements is false?

Accepted Answer

A)  Shelley must allocate the purchase price between the non-depreciable land and the depreciable building. 
B)  Shelley is allowed one half-year of MACRS depreciation with respect to the apartment building this year. 
C)  MACRS depreciation on the building is computed under the straight-line method. 
D)  None of the above statements is false.

Question 6

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.

Accepted Answer

The answer of Creighton, a calendar year corporation, reported $5,571,000...

Question 7

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center.
Rent on commercial space $\quad$$\quad$    $\quad$ $6,000
Utilities $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$1,490
Staff hiring and training $\quad$$\quad$$\quad$$\quad$$\quad$5,270
Television advertising $\quad$$\quad$$\quad$$\quad$$\quad$ 1,600
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 14,360
The Puloso Center opened its doors for business on March 21 of the current year. How much of the start-up expenditures can Puloso deduct this year?

Accepted Answer

A)  -0- 
B)  $5,000 
C)  $5,520 
D)  $14,360

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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 Lovely is allowed to deduct the $785,000 research costs and Lovely's tax basis in its patent is $785,000 are true.

Question 11

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:

Accepted Answer

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

Question 12

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.

Question 13

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?

Accepted Answer

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

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

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

Exam 7: Property Acquisitions and Cost Recovery Deductions

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

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.

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

Shelley purchased a residential apartment for $1,400,000 and placed it in service on September 5. Which of the following statements is false?

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

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.

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?

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:

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?

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?

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