Full Test Bank Ch7 Property Acquisitions and Cost Recovery

Principles of Taxation for Business and Investment Planning, 23e (Jones)

Chapter 7 Property Acquisitions and Cost Recovery Deductions

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

Difficulty: 1 Easy

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

3) 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.

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

4) Environmental clean-up costs are generally deductible in the year incurred.

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

7) Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.

Explanation: Sales tax must be capitalized as part of the cost of the asset.

Difficulty: 2 Medium

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

8) 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.

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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.

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

10) 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.

Difficulty: 3 Hard

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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.

Difficulty: 2 Medium

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

12) 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.

Explanation: The rent must be capitalized to inventory under the unicap rules.

Difficulty: 2 Medium

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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

Difficulty: 2 Medium

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 2 Medium

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.; 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

18) Hextone Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $14,890, and first-year MACRS depreciation was $27,090. As a result of this book/tax difference, Hextone recorded a $2,562 deferred tax liability.

Difficulty: 2 Medium

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

19) 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.

Explanation: Mallow recorded a $3,738 deferred tax liability.

Difficulty: 2 Medium

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

20) KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November 13. This was KJD's only purchase of tangible personalty this year. KJD must use a midquarter convention to compute MACRS depreciation on the equipment.

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

22) Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 12. The MACRS depreciation calculation assumes that the building was placed in service on May 15 (midquarter).

Explanation: The MACRS calculation for buildings uses a midmonth convention.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

23) 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.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

24) Richland Company purchased an asset in 2016 for $50,000 and sold it in 2019. The asset was 7-year recovery property. Richland's 2019 MACRS depreciation on the asset was $6,245.

Explanation: MACRS depreciation was $3,123 ([$50,000 × 12.49%] × 50% [half-year]).

Difficulty: 3 Hard

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

25) An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

26) BriarHill Inc. purchased four items of tangible personalty in 2019 at a total cost of $3,579,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Explanation: Because BriarHill purchased more than $3,570,000 of qualifying property, its limited dollar amount is reduced to zero.

Difficulty: 2 Medium

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

27) Conant Company purchased only one item of tangible personalty in 2019. The cost of the item was $2,589,700. Conant can elect to expense $1,020,000 of this cost.

Explanation: Conant can elect to expense $980,300 of the cost ($1,020,000 − [$2,589,700 − $2,550,000]).

Difficulty: 3 Hard

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

28) NLT Inc. purchased only one item of tangible personalty in 2019. 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. 

Explanation: NLT can elect to expense the entire cost but it can deduct only $7,100 of this expense.

Difficulty: 3 Hard

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

29) A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

Explanation: The first $5,000 of organizational costs are deductible in the year incurred.

Difficulty: 2 Medium

Topic: Percentage Depletion

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

30) 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.

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

31) The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.

Explanation: The cost is depreciable under MACRS.

Difficulty: 2 Medium

Topic: Percentage Depletion

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

33) 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.

Difficulty: 2 Medium

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

34) Selkie Inc. paid a $2 million lump sum to purchase a business. According to the contract, the seller of the business is prohibited from engaging in a similar business for 18 months. Selkie allocated $300,000 of the purchase price to this covenant not to compete. Selkie may amortize the $300,000 over 15 years.

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

35) Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

Explanation: Firms can deduct the greater of cost depletion or percentage depletion.

Difficulty: 2 Medium

Topic: Depletion of Natural Resources

Learning Objective: 07-10 Distinguish between cost depletion and percentage depletion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Depletion of Natural Resources

Learning Objective: 07-10 Distinguish between cost depletion and percentage depletion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

39) 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.

Difficulty: 1 Easy

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

40) Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false?

A) Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years.

B) Poole must capitalize the expenditure if it extends the estimated useful life of an existing asset by three years.

C) Poole must capitalize the expenditure if it results in a long-term economic benefit to the company.

D) None of the above is false.

Difficulty: 1 Easy

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

41) 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.

A) $41,632

B) $48,206

C) $45,052

D) None of the above

Explanation: $60,000 before-tax cost − $4,200 ($20,000 year 0 deduction × 21%) − $3,927 ($20,000 year 1 deduction × 21% × 0.935 discount factor) − $3,667 ($20,000 year 2 deduction × 21% × 0.873 discount factor).

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

42) Marz Inc. made a $75,000 cash expenditure this year (year 0). Use Appendix A of your textbook provided to compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Marz has a 21% marginal tax rate and uses a 7% discount rate.

A) $49,344

B) $56,316

C) $60,258

D) None of the above

Explanation: $75,000 before-tax cost − $5,250 ($25,000 year 0 deduction × 21%) − $4,909 ($25,000 year 1 deduction × 21% × 0.935 discount factor) − $4,583 ($25,000 year 2 deduction × 21% × 0.873 discount factor).

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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.

Difficulty: 1 Easy

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

44) 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?

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.

Difficulty: 3 Hard

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

45) Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true?

A) Elcox is allowed to deduct the $2.3 million cost on this year's tax return only if it expenses the advertising costs for financial statement purposes.

B) Elcox must capitalize the $2.3 million cost.

C) Elcox is allowed to deduct the $2.3 million cost.

D) The $2.3 million cost results in an unfavorable book/tax difference.

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

46) 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?

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.

Explanation: Lovely's tax basis in the patent is zero. The accounting treatment of research and experimental expenditures typically is the same for book and tax purposes.

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

47) Zola Inc. paid a $10,000 legal fee to the attorney who resolved a dispute over Zola's title to investment land. Zola's auditors required the corporation to expense the payment for financial statement purposes. The tax law required Zola to capitalize the payment to the basis of the land. This difference in accounting treatment results in a:

A) Deferred tax asset

B) Deferred tax liability

C) Permanent unfavorable book/tax difference

D) Permanent favorable book/tax difference

Explanation: The capitalized expense is an unfavorable temporary difference that will reverse when Zola sells the land.

Difficulty: 2 Medium

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

48) Which of the following statements about the tax treatment of research and experimental expenditures is true?

A) The treatment violates the tax principle of conservatism.

B) The treatment creates a favorable book/tax difference.

C) The treatment minimizes the after-tax cost of the expenditures.

D) Both the treatment violates the tax principle of conservatism and the treatment minimizes the after-tax cost of the expenditures are true.

Explanation: The tax principle of conservatism inhibits the premature deduction of expenditures that result in future economic benefits. The preferential deduction for research and experimental expenditures violates this principle.

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

49) 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?

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.

Explanation: The IDC associated with productive wells undeniably result in a long-term economic benefit.

Difficulty: 2 Medium

Topic: Deductible Expense or Capitalized Cost?

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

50) 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.

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

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

51) Which of the following statements about tax basis is false?

A) The tax basis in an asset can never be negative.

B) Tax basis represents the taxpayer's unrecovered dollars invested in the asset.

C) Tax basis reflects the asset's fair market value.

D) Every asset owned by the taxpayer has a tax basis.

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

52) 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.

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

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

53) 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.

A) -0-.

B) $216,000.

C) Inger's tax basis equals its manufacturing cost of the 12,000 containers.

D) None of the above

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

54) Moses Inc. purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge. Which of the following is true?

A) Moses' tax basis in the furniture is $8,842.

B) Moses' tax basis in the furniture is $8,692, and it can deduct the delivery charge.

C) Moses' tax basis in the furniture is $8,350, and it can deduct the sales tax.

D) Moses' tax basis in the furniture is $8,200, and it can deduct the sales tax and delivery charge.

Difficulty: 1 Easy

Topic: The Critical Role of Tax Basis

Learning Objective: 07-02 Define tax basis and adjusted basis.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

55) Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000. Which of the following statements is true?

A) Kassim's book basis and tax basis in the asset is $275,000.

B) Kassim's book basis is $275,000, but its tax basis is $35,000.

C) Kassim's book basis and tax basis in the asset is $35,000.

D) If Kassim is a cash basis taxpayer, its initial tax basis in the asset is zero.

Difficulty: 1 Easy

Topic: Leveraged Cost Basis

Learning Objective: 07-03 Explain how leverage can reduce the after-tax cost of assets.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

56) 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:

A) Permanent unfavorable book/tax difference

B) Permanent favorable book/tax difference

C) Temporary unfavorable book/tax difference

D) Temporary favorable book/tax difference

Explanation: The $186,000 additional capitalized costs for tax purposes were expensed for book purposes and therefore result in a $186,000 excess of taxable income over book income.

Difficulty: 2 Medium

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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) The unicap rules apply to all taxpayers with inventory, regardless of size.

Difficulty: 2 Medium

Topic: Inventories and Cost of Goods Sold; Depletion of Natural Resources

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.; 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

58) 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.

A) $4,711,400

B) $4,751,000

C) $4,790,600

D) $5,288,600

Explanation: The additional capitalization of indirect costs under unicap results in a $39,600 unfavorable difference and the excess of tax COGS over book COGS results in a $249,000 favorable difference. Thus, taxable income is $4,790,600 ($5,000,000 − $209,400 net favorable difference).

Difficulty: 3 Hard

Topic: Inventories and Cost of Goods Sold; Amortization of Intangible Assets

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.; 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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.

Explanation: Businesses cannot use LIFO for tax purposes unless they also use LIFO to prepare their financial statements.

Difficulty: 2 Medium

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

60) 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:

A) Deferred tax asset

B) Deferred tax liability

C) Permanent favorable book/tax difference

D) Permanent unfavorable book/tax difference

Difficulty: 2 Medium

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

61) 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?

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.

Difficulty: 3 Hard

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

62) Which of the following statements concerning MACRS depreciation is true?

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.

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

63) Which of the following statements about MACRS is false?

A) Depreciable assets are assumed to have no residual or salvage value.

B) Every depreciable asset is assigned to one of ten recovery periods.

C) Allowable depreciation methods are based on the assets assigned recovery period.

D) None of the above is false.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

64) Dorian, a calendar year corporation, purchased $1,568,000 of equipment on May 3. This was Dorian's only purchase of depreciable property for the year. If the equipment has a 10-year recovery period, refer to Table 7.2 and compute Dorian's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

A) First year $156,800; second year $282,240

B) First year $78,400; second year $282,240

C) First year $156,800; second year $245,016

D) None of the above

Explanation: First year $156,800 ($1,568,000 × 0.10); second year $282,240 ($1,568,000 × 0.18)

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

65) D&R Company, a calendar year corporation, purchased $1,116,000 of equipment on August 3. This was D&R's only purchase of depreciable property for the year. If the equipment has a 7-year recovery period, refer to Table 7.2 and compute D&R's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

A) First year $79,738; second year $273,308

B) First year $159,476; second year $273,308

C) First year $159,476; second year $234,253

D) None of the above

Explanation: First year $159,476 ($1,116,000 × 0.1429); second year $273,308 ($1,116,000 × 0.2449)

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

66) Gowda Inc., a calendar year taxpayer, purchased $1,496,000 of equipment on March 23. This was Gowda's only purchase of depreciable property for the year. If the equipment has a 7-year recovery period, refer to Table 7.2 and compute Gowda's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

A) First year $106,889; second year $366,370

B) First year $106,889; second year $340,193

C) First year $213,778; second year $183,185

D) None of the above

Explanation: First year $213,778; second year $366,370.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

67) 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 this year?

A) Six months

B) Two and one-half months

C) One and one-half months

D) None of the above

Explanation: The midquarter convention applies because Cobly placed more than 40% (100%) of its depreciable personalty into service in the fourth quarter.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

68) Durna Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $874,000, and the second purchase was equipment costing $660,000. Both assets are 7-year recovery property. Durna placed the machine in service on March 27 and the equipment in service on December 14. How many months of MACRS depreciation is Durna allowed for each asset this year?

A) Durna is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment.

B) Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment.

C) Durna is allowed 1.5 months of depreciation for both the machine and the equipment.

D) Durna is allowed six months of depreciation for both the machine and the equipment.

Explanation: The midquarter convention applies because Durna placed more than 40% (43%) of its depreciable personalty into service in the fourth quarter.

Difficulty: 3 Hard

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

69) 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 this year?

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.

Explanation: The midquarter convention does not apply because Essco placed only 37% of its depreciable personalty into service in the fourth quarter.

Difficulty: 3 Hard

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

70) Kaskar Company, a calendar year taxpayer, paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building. Kaskar place the realty in service on September 29. Refer to the appropriate MACRS Table in Chapter 7 to compute Kaskar's first-year depreciation on the realty.

A) $31,830

B) $35,544

C) $22,470

D) None of the above

Explanation: Based on Table 7.3 for residential real property, first-year MACRS for the building placed in service in the 9th month is $3,000,000 × 1.061%.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

71) 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.

A) $136,380

B) $102,720

C) $96,300

D) None of the above

Explanation: Based on Table 7.4 for nonresidential real property, first-year MACRS for the building placed in service in the 5th month is $6,000,000 × 1.605%.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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.

Difficulty: 2 Medium

Topic: Limited Depreciation for Passenger Automobiles

Learning Objective: 07-06 Determine the limitation on depreciation of passenger automobiles.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

73) Norwell Company purchased $1,413,200 of new business equipment on July 10, 2019. This was Norwell's only asset purchase for its 2019 taxable year. Compute Norwell's total tax depreciation deduction for this 7-year recovery property. 

A) $1,413,200

B) $201,946

C) $1,021,848

D) $1,026,134

Explanation: $1,020,000 Section 179 deduction + $393,200 100% bonus depreciation.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

74) Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2019. Which of the following statements is true?

A) Laven can elect to expense $561,240 of the cost with a Section 179 deduction.

B) Laven can elect to expense $510,000 of the cost. The $51,240 remaining cost is capitalized and is not depreciable.

C) Laven can expense the entire $561,240 cost using 100% bonus depreciation.

D) The amount of the cost that Laven can elect to expense depends on Laven's 2017 taxable income.

Difficulty: 2 Medium

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

75) Belsap Inc., a calendar year taxpayer, purchased a total of $590,000 depreciable personalty during May 2019. Which of the following statements is true?

A) Belsap can elect to expense 100% of the cost.

B) The amount of cost that Belsap can elect to expense depends on Belsap's 2017 taxable income.

C) Belsap can elect to expense $510,000 of the cost. The $80,000 remaining cost is capitalized and subject to MACRS depreciation.

D) Belsap can elect to expense $510,000 of the cost. The $80,000 remaining cost is capitalized and is not depreciable.

Explanation: The taxable income limitation applies to the deduction for the Section 179 expense and not the expense itself.

Difficulty: 2 Medium

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

76) Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2019. 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 2019 cost recovery deduction.

A) $1,543,600

B) $1,077,680

C) $1,000,000

D) None of the above

Explanation: $1,020,000 Section 179 expense deduction + $523,600 100% bonus depreciation.

Difficulty: 2 Medium

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

77) Pyle Inc., a calendar year taxpayer, generated over $10 million taxable income in 2019. 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 2019 cost recovery deduction.

A) $1,000,000

B) $1,026,777

C) $1,007,226

D) $1,322,000

Explanation: $1,020,000 Section 179 deduction + $302,000 × 2.244%. Note that the property does NOT qualify for bonus depreciation.

Difficulty: 3 Hard

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

78) Song Company, a calendar year taxpayer, purchased a total of $2,574,400 tangible personalty in 2019. How much of this cost can Song elect to expense under Section 179?

A) -0-

B) $1,020,000

C) $2,574,400

D) $995,600

Explanation: Song can elect to expense $995,600 of the cost ($1,020,000 limited dollar amount − [$2,574,400 − $2,550,000]).

Difficulty: 3 Hard

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

79) W&F Company, a calendar year taxpayer, purchased a total of $2,594,700 tangible personalty in 2019. How much of this cost can W&F elect to expense under Section 179?

A) -0-

B) $44,700

C) $975,300

D) $1,020,000

Explanation: W&F can elect to expense $965,300 of the cost ($1,020,000 limited dollar amount − [$2,594,700 − $2,550,000]).

Difficulty: 3 Hard

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

80) Broadus, a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2019. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true?

A) Broadus can elect to expense only $92,600 of the cost of the personalty under Section 179.

B) Broadus can elect to expense the $128,300 cost of the personalty under Section 179 but can deduct only $92,600 of the expense.

C) Broadus can elect to expense only $35,700 of the cost of the personalty under Section 179.

D) Broadus can elect to expense the $128,300 cost of the personalty under Section 179 but can deduct only $35,700 of the expense.

Difficulty: 1 Easy

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

81) Szabi Inc., a calendar year taxpayer, purchased two assets during 2019: 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?

A) Under Section 179, Szabi should elect to expense the $380,000 cost of the machine and $130,000 of the cost of the computer equipment.

B) Under Section 179, Szabi should elect to expense the $403,500 cost of the computer equipment machine and $106,500 of the cost of the machine.

C) Under Section 179, Szabi must elect to expense $255,000 of the cost of the machine and $255,000 of the cost of the computer equipment.

D) Under Section 179, Szabi is indifferent as to which costs to expense.

Explanation: Szabi should expense the cost of the 7-year recovery property before the cost of the 5-year recovery property to maximize acceleration of its cost recovery deductions.

Difficulty: 2 Medium

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

82) In 2018, Rydin Company purchased one asset costing $48,400 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 2019, 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 2019 Section 179 deduction.

A) $27,400

B) $1,020,000

C) $1,047,400

D) $0

Explanation: Rydin's carryover expense from 2018 is $27,400 ($48,400 expense – $21,000 deduction). This carryover plus the $990,000 cost of qualifying property purchased in 2019 exceed the $1,020,000 limited dollar amount for the year. Consequently, Rydin's deduction is limited to $1,020,000.

Difficulty: 3 Hard

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

83) Which of the following statements about amortization deductions is false?

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.

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

84) 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 21% tax rate, an 8% discount rate, and no Section 179 deduction or bonus depreciation, which of the following statements is true? Use Appendix A, Table 7-2. (Round discount factor(s) to 3 decimal places.)

A) Merkon's after-tax cost of the purchase is $8,517 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 $8,517 more than the after-tax cost of the lease.

D) None of the choices are correct.

Explanation: Merkon's after-tax cost of the purchase is $69,193.

Merkon's after-tax cost of the lease is $77,710 ($21,725 after-tax annual deductible rent + [$21,725 × 2.577 discount factor for years 1, 2, and 3]).

Difficulty: 3 Hard

Topic: Purchase versus Leasing Decision

Learning Objective: 07-08 Incorporate depreciation deductions into the NPV computation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

A) Purchase cost of a partnership interest

B) Purchase cost of business goodwill

C) Leasehold cost

D) Purchase cost of a patent

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

86) 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?

A) -0-

B) $699

C) $5,000

D) $5,560

Explanation: JebSim can deduct $5,000 of the organizational costs and is allowed a $560 amortization deduction ([$20,160 capitalized cost/180 months] × 5 months beginning in August).

Difficulty: 3 Hard

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

87) 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?

A) -0-

B) $1,340

C) $6,229

D) None of the above

Explanation: Ingol must capitalize its $60,300 organizational costs and is allowed a $1,340 amortization deduction ([$60,300 capitalized cost/180 months] × 4 months beginning in September). The first $5,000 deduction for organizational costs does not apply in this case, as the deduction phases-out completely once total organizational costs reach $55,000 (phase-out begins at $50,000).

Difficulty: 3 Hard

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

88) 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?

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.

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

89) Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center.

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?

A) -0-

B) $5,000

C) $5,520

D) $14,360

Explanation: Puloso can deduct $5,000 of the start-up expenditures and is allowed a $520 amortization deduction ([$9,360 capitalized cost/180 months] × 10 months beginning in March).

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

90) Mann Inc., a calendar year taxpayer, incurred $49,640 start-up expenditures during the preoperating phase of a new business venture. The business started operations in November. Mann expensed the $49,640 on its current-year financial statements. Which of the following statements is true?

A) The start-up expenditures resulted in a $49,640 unfavorable book/tax difference.

B) The start-up expenditures resulted in a $44,144 unfavorable book/tax difference.

C) The start-up expenditures resulted in a $49,640 favorable book/tax difference.

D) The start-up expenditures did not result in a book/tax difference.

Explanation: Mann can deduct $5,496 of the start-up expenditures this year ($5,000 + [$44,640/180 × 2 months]). The $44,144 remaining capitalized expenditures result in an excess of taxable income over book income.

Difficulty: 3 Hard

Topic: Amortization of Intangible Assets; Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.; 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

91) Jaboy Inc. was incorporated three years ago. In its first year, Jaboy capitalized $72,000 organizational and start-up costs for tax purposes. However, it expensed these costs for financial statement purposes. Which of the following statements is true?

A) As a result of the accounting difference three years ago, Jaboy has a $4,800 favorable book/tax difference in the current year.

B) As a result of the accounting difference three years ago, Jaboy has a $4,800 unfavorable book/tax difference in the current year.

C) The accounting difference three years ago has no book/tax consequence in the current year.

D) None of the above is true.

Explanation: Jaboy's current year amortization deduction is $4,800 ($72,000/180 months × 12 months).

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets; Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.; 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

92) Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center.

Which of the following statements is true?

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

Explanation: If the new center represents a new business for Vane, it can deduct $5,000 of the preoperating expenditures and must capitalize the remaining $5,415.

Difficulty: 3 Hard

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

93) 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:

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.

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

94) 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:

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.

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

95) 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.

A) $540

B) $843

C) $1,523

D) $1,383

Explanation: $540 amortization of leasehold cost ([$3,240/24 months] × 4 months) + $843 depreciation of leasehold improvement ($5,900 × 14.29%) = $1,383

Difficulty: 3 Hard

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

96) Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true?

A) Mr. and Mrs. Carleton are allowed to amortize the $5 million value of their business goodwill over 15 years.

B) Mr. and Mrs. Carleton have a zero tax basis in their business goodwill.

C) Mr. and Mrs. Carleton cannot amortize the $5 million value of their business goodwill because it is an intangible asset with an indeterminable life.

D) None of the above is true.

Explanation: The goodwill is a self-created asset. Only purchased goodwill has an amortizable cost basis.

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

97) Which of the following statements concerning business goodwill is false?

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.

Explanation: The tax deduction for goodwill amortization is a favorable book/tax difference.

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets; Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.; 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

98) 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?

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.

Explanation: The Schultes must capitalize $150,000 of the cost to amortizable goodwill.

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

99) 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:

Which of the following statements is false?

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.

Explanation: ([$150,000/180 months] × 9 months) = $7,500 amortization deduction. Goodwill is not amortizable under GAAP.

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

100) 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. Which of the following statements is true?

A) The accounting treatment of the goodwill does not result in any book/tax difference in the current year.

B) This year, Bettis has a $40,000 unfavorable temporary difference because of the accounting treatment of goodwill.

C) This year, Bettis has a $40,000 favorable temporary difference because of the accounting treatment of goodwill.

D) None of the above is true.

Difficulty: 2 Medium

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

101) 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:

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

Explanation: Bettis's $40,000 annual amortization deduction and its $100,000 nondeductible impairment expense net to a $60,000 unfavorable excess of taxable income over book income.

Difficulty: 3 Hard

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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.

Difficulty: 1 Easy

Topic: Depletion of Natural Resources

Learning Objective: 07-10 Distinguish between cost depletion and percentage depletion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

103) 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?

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) Both if Driller's allowable percentage depletion is $313,000, Driller will deduct cost depletion and if Driller's allowable percentage depletion is $515,000, Driller will deduct percentage depletion are both true statements.

Difficulty: 3 Hard

Topic: Depletion of Natural Resources

Learning Objective: 07-10 Distinguish between cost depletion and percentage depletion.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

104) 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:

A) Unfavorable permanent book/tax difference

B) Favorable permanent book/tax difference

C) Unfavorable temporary book/tax difference

D) Favorable temporary book/tax difference

Difficulty: 1 Easy

Topic: Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

105) 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:

A) Mid-month convention

B) Mid-quarter convention

C) Mid-year convention

D) Daily pro-ration method

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

106) Lisle Inc. manufactures small appliances in three plants in the Southeast. Which of the following statements is true?

A) If Lisle uses LIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes.

B) If Lisle uses FIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes.

C) Lisle is not allowed to use LIFO to compute the cost of goods sold for tax purposes.

D) None of the above statements is true.

Difficulty: 2 Medium

Topic: Inventories and Cost of Goods Sold

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

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.

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

108) B&P Inc., a calendar year corporation, purchased only one operating asset during 2019: $599,900 of used 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 2019.

A) $99,900

B) $71,920

C) $79,920

D) $0

Difficulty: 2 Medium

Topic: The Critical Role of Tax Basis; Section 179 Expensing Election

Learning Objective: 07-02 Define tax basis and adjusted basis.; 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

109) Which of the following intangible assets is not amortizable for tax purposes?

A) Organizational costs

B) Patent with a 12-year remaining life

C) Partnership interest

D) All of these assets are amortizable for tax purposes

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

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

A) Intangible drilling and development costs

B) Leasehold costs

C) Research and development costs

D) Advertising expenditures

Difficulty: 1 Easy

Topic: Amortization of Intangible Assets

Learning Objective: 07-01 Decide if a business expenditure should be deducted or capitalized.

Accessibility: Keyboard Navigation

Type: Static

Gradable: automatic

111) Terrance Inc., a calendar year taxpayer, purchased used equipment for $2,765,000 and placed it in service on March 4, 2019. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2019 (assume no election for Section 179 expense and no Bonus Depreciation taken).

a. Compute Terrance's tax depreciation with respect to the equipment for 2019 and 2020.

b. Compute Terrance's adjusted basis in the equipment on December 31, 2020.

a. Tax depreciation for 2019 is $395,119 ($2,765,000 × 0.1429), and tax depreciation for 2020 is $677,149 ($2,765,000 × 0.2449).

b. Terrance's adjusted basis in the equipment is $1,692,732 ($2,765,000 – $395,119 – $677,149).

Difficulty: 2 Medium

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

112) NRW Company, a calendar year taxpayer, purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building. NRW placed the realty in service on August 2, 2019.

a. Compute NRW's MACRS depreciation with respect to the realty for 2019 and 2020.

b. Compute NRW's adjusted basis in the land and building on December 31, 2020.

c. How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?

a. MACRS depreciation for 2019 is $65,472 ($4,800,000 × 0.01364), and MACRS depreciation for 2020 is $174,528 ($4,800,000 × 0.03636).

b. NRW's adjusted basis in the land is $1,000,000, and its adjusted basis in the building is $4,560,000 ($4,800,000 – $65,472 – $174,528).

c. The building's recovery period increases from 27.5 years to 39 years. MACRS depreciation for 2019 is $46,224 ($4,800,000 × 0.00963), and MACRS depreciation for 2020 is $123,072 ($4,800,000 × 0.02564).

Difficulty: 1 Easy

Topic: The MACRS Framework

Learning Objective: 07-05 Describe and apply the MACRS framework.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

113) Elakin Inc., a calendar year taxpayer, paid $1,339,000 for new machinery (seven-year recovery property) placed in service on August 29, 2019. The machinery was Elakin's only asset purchase during 2019, and Elakin's taxable income before any Section 179 deduction was $14 million.

a. Compute Elakin's 2019 cost recovery deduction with respect to the machinery.

b. How would your answer change if the cost of the machinery was $2,150,000 instead of $1,339,000?

c. How much Section 179 expense would be taken in part a if Elakin's taxable income before any Section 179 deduction was $281,400 instead of $14 million?

a. Elakin can elect to expense $1,020,000 of the cost of the machinery. Its 100% Bonus Depreciation deduction would be for the remaining $319,000 ($1,339,000 - $1,020,000) and would be taken for 2019.

b. Elakin can elect to expense $1,020,000 of the cost of the machinery. Its 100% Bonus Depreciation deduction would be for the remaining $1,130,000 ($2,150,000 - $1,020,000) and would be taken for 2019.

c. Elakin can deduct only $281,400 of its allowable $1,020,000 Section 179 expense.

Difficulty: 3 Hard

Topic: Section 179 Expensing Election

Learning Objective: 07-07 Calculate the Section 179 deduction and bonus depreciation.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

114) 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.

Difficulty: 2 Medium

Topic: Amortization of Intangible Assets

Learning Objective: 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

115) 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.

Difficulty: 3 Hard

Topic: Inventories and Cost of Goods Sold; The MACRS Framework; Amortization of Intangible Assets; Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.; 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.; 07-05 Describe and apply the MACRS framework.; 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual

116) On May 1, Sessi Inc., a calendar year corporation, purchased a business for a $2 million lump-sum price. The business' balance sheet assets had the following appraised FMV.

a. Compute the cost basis of the goodwill acquired by Sessi Inc. on the purchase of this business.

b. Compute Sessi's goodwill amortization deduction for the year of purchase.

c. Use a 21 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

Goodwill amortization is $32,716 ($736,100/180 months × 8 months).

The amortization deduction is a favorable temporary book/tax difference resulting in an $6,870 deferred tax liability.

Difficulty: 3 Hard

Topic: Inventories and Cost of Goods Sold; The MACRS Framework; Amortization of Intangible Assets; Cost Recovery-Related Book/Tax Differences

Learning Objective: 07-04 Compute cost of goods sold for tax purposes.; 07-11 Explain cost recovery-related book/tax differences and their effect on GAAP financial statements.; 07-05 Describe and apply the MACRS framework.; 07-09 Explain how the cost of intangibles is recovered through amortization.

Accessibility: Keyboard Navigation

Type: Static

Gradable: manual