Question 1

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. D

Question 2

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  False

Question 3

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

Accepted Answer

A) True 
 B)False  True

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

W&F Company, a calendar year taxpayer, purchased a total of $2,004,700 tangible personalty in 2016. How much of this cost can W&F elect to expense under Section 179?

Accepted Answer

A)   -0-
B)   $4,700
C)   $495,300
D)   $25,000

Question 6

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 7

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 8

Merkon Inc. must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent. The purchased asset would be 3-year recovery property that Merkon could use for four years, after which the asset would have no salvage value. Assuming a 35% tax rate, an 8% discount rate, and no Section 179 deduction or 50% bonus depreciation, which of the following statements is true? $$\begin{array} { c c c c c r } 
\text { Year } & \text { Cost } & \text { MACRS } & \text { Tax Savings } & \text { Discount } & \text { NPV } \
\mathbf { 0 } & ( \mathbf { 8 6 , 0 0 0 ) } & \mathbf { 2 8 , 6 6 4 } & \mathbf { 1 0 , 0 3 2 } & \mathbf { n } / \mathbf { a } & ( \mathbf { 7 5 , 9 6 8 } ) \
1 & & \mathbf { 3 8 , 2 2 7 } & \mathbf { 1 3 , 3 8 0 } & \mathbf { 9 2 6 } & \mathbf { 1 2 , 3 9 0 } \
\mathbf { 2 } & & \mathbf { 1 2 , 7 3 7 } & \mathbf { 4 , 4 5 8 } & \mathbf { . 8 5 7 } & \mathbf { 3 , 8 2 1 } \
4 & & \mathbf { 6 , 3 7 2 } & \mathbf { 2 , 2 3 0 } & .794 & \underline { 1,771 } \
& & & & & ( \underline { 57,980 } )
\end{array}$$

Accepted Answer

A)   Merkon's after-tax cost of the purchase is $5,953 less than the after-tax cost of the lease.
B)   Merkon's after-tax cost of the lease is $1,374 less than the after-tax cost of the purchase.
C)   Merkon's after-tax cost of the purchase is $8,226 less than the after-tax cost of the lease.
D)   None of the above

Question 9

Mallow Inc., which has a 35% 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 $6,230 deferred tax asset.

Accepted Answer

A) True 
 B)False

Question 10

Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center. $$\begin{array} { l r } 
\text { Rent on commercial space } & \$ 4,800 \
\text { Utilities } & 735 \
\text { Staff hiring and training } & 3,920 \
\text { Newspaper advertising } & 960 \
& \$ \underline { 10,415 }
\end{array}$$ Which of the following statements is true?

Accepted Answer

A)   If Vane already operates seven other health and fitness centers, it can deduct the $10,415 preoperating expenditures of the eighth center as expansion costs.
B)   If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment.
C)   If the new center represents a new business for Vane, it must capitalize the $10,415 preoperating expenditures.
D)   None of the above is true.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Song Company, a calendar year taxpayer, purchased a total of $2,014,400 tangible personalty in 2016. How much of this cost can Song elect to expense under Section 179?

Accepted Answer

A)   -0-
B)   $500,000
C)   $2,014,400
D)   None of the above

Question 13

On April 2, Reid Inc., a calendar year taxpayer, paid a $750,000 lump-sum price to purchase a business. The appraised FMVs of the balance sheet assets were: $$\begin{array} { l r } 
\text { Accounts receivable } & \$ 38,000 \
\text { Inventory } & \mathbf { 4 1 5 , 0 0 0 } \
\text { Fixtures and equipment } & \underline { \mathbf { 1 4 7 , 0 0 0 } } \
& \underline { \underline { \mathbf { 6 0 0 , 0 0 0 } } }
\end{array}$$ Which of the following statements is false?

Accepted Answer

A)   Reid must capitalize $150,000 of the cost as purchased goodwill.
B)   Reid may amortize the $150,000 cost for both book and tax purposes.
C)   Reid's amortization deduction for the current year is $7,500.
D)   None of the above is false.

Question 14

In 2015, 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 2016, Rydin purchased tangible personalty costing $80,000. Rydin's taxable income without regard to any Section 179 deduction was $912,400. Compute Rydin's 2016 Section 179 deduction.

Accepted Answer

A)   $17,400
B)   $500,000
C)   $507,400
D)   $0

Question 15

Ferelli Inc. is a calendar year taxpayer. On September 1, Ferelli signed a 24-month lease on 3,600 square feet of commercial office space and paid a $3,240 fee to the agent who located the space and negotiated the lease. Ferelli paid $5,900 to install new overhead lighting in the office space. The lighting is 7-year recovery property. Compute Ferelli's current-year cost recovery deduction with respect to the $9,140 costs associated with the office space.

Accepted Answer

A)   $540
B)   $843
C)   $1,523
D)   $1,383

Question 16

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

Accepted Answer

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)   None of the above is false.

Question 17

Molton Inc. made a $60,000 cash expenditure this year (year 0). 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 35% marginal tax rate and uses a 7% discount rate.

Accepted Answer

A)   $41,632
B)   $40,344
C)   $38,922
D)   None of the above

Question 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 7: Property Acquisitions and Cost Recovery Deductions

Which of the following statements about amortization deductions is false?

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

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

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?

W&F Company, a calendar year taxpayer, purchased a total of $2,004,700 tangible personalty in 2016. How much of this cost can W&F elect to expense under Section 179?

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

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.

Mallow Inc., which has a 35% 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 $6,230 deferred tax asset.

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

Song Company, a calendar year taxpayer, purchased a total of $2,014,400 tangible personalty in 2016. How much of this cost can Song elect to expense under Section 179?

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

Molton Inc. made a $60,000 cash expenditure this year (year 0) . 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 35% marginal tax rate and uses a 7% discount rate.

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.

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

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.