Question 1

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 2

Which of the following statements concerning MACRS depreciation is true?

Accepted Answer

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 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

B&P Inc., a calendar year corporation, purchased only one operating asset during 2015: $99,900 of computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2015.

Accepted Answer

A)  $99,900 
B)  $79,920 
C)  $59,920 
D)  $0

Question 6

Which of the following statements concerning business goodwill is false?

Accepted Answer

A)  If a business creates goodwill by developing a loyal customer base and generating brand name recognition, the tax basis in the goodwill is zero. 
B)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis is not amortized for financial reporting purposes. 
C)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis may be amortized over 15 years for tax purposes. 
D)  The tax deduction for goodwill amortization is an unfavorable book/tax difference.

Question 7

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 8

Which of the following expenditures must be capitalized for tax purposes?

Accepted Answer

A)  Intangible drilling and development costs 
B)  Leasehold costs 
C)  Research and development costs 
D)  Advertising expenditures

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

Szabi Inc., a calendar year taxpayer, purchased two assets during 2014: a machine costing $380,000 and computer equipment costing $403,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

Accepted Answer

A)  Szabi should elect to expense the $380,000 cost of the machine and $120,000 of the cost of the computer equipment. 
B)  Szabi should elect to expense the $403,500 cost of the computer equipment machine and $96,500 of the cost of the machine. 
C)  Szabi must elect to expense $250,000 of the cost of the machine and $250,000 of the cost of the computer equipment. 
D)  Szabi is indifferent as to which costs to expense.

Question 11

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 12

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 13

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.

Accepted Answer

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 14

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

Accepted Answer

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 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

Question 16

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2014. Kemp made one asset purchase: manufacturing equipment costing $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 2014 cost recovery deduction.

Accepted Answer

A)  $543,600 
B)  $524,915 
C)  $506,230 
D)  None of the above

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

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Accepted Answer

A)  If Driller's allowable percentage depletion is $313,000, Driller will deduct cost depletion. 
B)  If Driller's allowable percentage depletion is $515,000, Driller will deduct percentage depletion. 
C)  If Driller's allowable percentage depletion is $515,000, Driller's depletion deduction is limited to $498,200. 
D)  Statements a. and b. are true.

Question 19

Mr. and Mrs. Schulte paid a $750,000 lump-sum price to purchase a business. At date of purchase, the appraised FMVs of the balance sheet assets were:  Which of the following statements is true?

Accepted Answer

A)  The Schultes must allocated the $750,000 cost to the balance sheet assets based on the assets' relative FMV. 
B)  The Schultes must capitalize $150,000 of the cost to nonamortizable goodwill. 
C)  The Schultes may deduct $150,000 of the cost as business goodwill. 
D)  None of the above is true.

Question 20

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

Exam 7: Property Acquisitions and Cost Recovery Deductions

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

Which of the following statements concerning MACRS depreciation is true?

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:

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

B&P Inc., a calendar year corporation, purchased only one operating asset during 2015: $99,900 of computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2015.

Which of the following statements concerning business goodwill is false?

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.

Which of the following expenditures must be capitalized for tax purposes?

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.

Szabi Inc., a calendar year taxpayer, purchased two assets during 2014: a machine costing $380,000 and computer equipment costing $403,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

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.

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.

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.

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

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.

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Mr. and Mrs. Schulte paid a $750,000 lump-sum price to purchase a business. At date of purchase, the appraised FMVs of the balance sheet assets were: Which of the following statements is true?

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