Question 1

Which of the following committees is not involved in the tax writing process?

Accepted Answer

The Judiciary committee is not involved in the tax writing process. The Ways and Means committee and Senate Finance committee are both responsible for tax writing, while the Joint Conference committee is responsible for reconciling any differences between the House and Senate versions of tax legislation.

Question 2

CK Corporation can invest $100,000 in a project. After taxes, the project is expected to generate $40,000 of net income the first year and $75,000 of net income the second year. If the company uses a 10 percent discount rate to evaluate projects, what is the project's net cash flow?

Accepted Answer

$40,000 x .909 = $36,360; $75,000 x .826 = $61,950; $36,360 + $61,950 - $100,000 = ($1,690)

Question 3

How much tax can be saved if John shifts $2,000 of income to his 18 year old dependent son? John is in the 25 percent tax bracket and his son has no other income that is taxable in 2017.

Accepted Answer

$2,000 x .25 = $500; ($2,000 - $1,050) x .10 = $95; $500 - $95 = $405

Question 4

What effect does an increased discount rate have on project evaluations?

Accepted Answer

An increased discount rate increases the cost of capital, which decreases the net present value (NPV) of future cash flows. Therefore, an increased discount rate has a negative impact on project evaluations as it reduces the attractiveness of a project.

Question 5

Which of the following is the highest authority for tax research?

Accepted Answer

The Internal Revenue Code (IRC) is the highest authority for tax research as it contains the actual laws passed by Congress related to taxation. Treasury Regulations, Revenue Procedures, and Revenue Rulings are all interpretations and guidance issued by the IRS, which are subservient to the IRC.

Question 6

Crispen Corporation can invest in a project that costs $400,000. The project is expected to have an after-tax return of $250,000 in each of years 1 and 2. Crispen normally uses a 10 percent discount rate to evaluate projects but feels it should use 12 percent to compensate for inflation. How much difference does the rate make in the after-tax net present value of the project?

Accepted Answer

10%: $250,000 x (.909 + .826) = $433,750; 12%: $250,000 x (.893 + .797) = $422,500; $433,750 - $422,500 = $11,250

Question 7

An open-fact situation means that

Accepted Answer

An open-fact situation refers to scenarios where the client's transactions have not yet occurred, allowing for careful planning and consideration of various options and outcomes.

Question 8

A closed-fact situation means that

Accepted Answer

A closed-fact situation means that all of the client's transactions have already occurred and the focus is on finding support for the action already taken. Therefore, option A is the best choice.

Question 9

The business purpose doctrine:

Accepted Answer

The business purpose doctrine requires that a transaction have an economic purpose other than tax avoidance. This means that the transaction must serve a valid business purpose, such as generating income or facilitating operations, and not simply be executed for the purpose of reducing taxes.

Question 10

Carl is unsure of which rate he should use as a discount rate for project evaluations, 7 percent or 10 percent. If he can invest $30,000 in a project that will return $40,000 after-tax in four years, what is the result?

Accepted Answer

$40,000 x .763 = $30,520; $30,520 - $30,000 = $520; $40,000 x .683 = $27,320; $27,320 - $30,000 = ($2,680)

Question 11

All of the following are part of the tax research process except:

Accepted Answer

All of the listed options are part of the tax research process.

Question 12

The Internal Revenue Code is divided into

Accepted Answer

The Internal Revenue Code is organized into subtitles, chapters, subchapters, and sections, which allows for a detailed and hierarchical structure of tax laws in the United States.

Question 13

Merced Company has invested $200,000 in a project. It had before tax net income of $100,000 in year 1, $150,000 in year 2, and $125,000 in year 3. What is the net present value of this project's after-tax net cash flow if Merced's discount rate is 8 percent and its marginal tax rate is 34 percent in all years?

Accepted Answer

$100,000 (1 - .34) x .926 = $61,116; $150,000 (1 - .34) x .857 = $84,843; $125,000 (1 - .34) x .794 = $65,505; $61,116 + $84,843 + $65,505 - $200,000 = $11,464

Question 14

Peanut Co. has 2 projects in which it can invest. Project X has a $300,000 initial cost and will return $600,000 before tax in year 2. Project Y has $600,000 initial cost and will return $1,000,000 before tax in year 4. The company uses an 8 percent discount rate for project evaluation and its marginal tax rate is expected to be 34 percent in all years. Which project(s) should Peanut Co. invest in?

Accepted Answer

Project X: $600,000 (1 - .34) (.857) - $300,000 = $39,372. Project Y: $1,000,000 (1 - .34)(.735) - $600,000 = ($114,900)

Question 15

Changing which of the following factors as indicated would decrease the after-tax net cash flow of a project:

Accepted Answer

The answer of Changing which of the following factors as...

Question 16

Changing which of the following factors as indicated would increase the after-tax net cash flow of a project:

Accepted Answer

Delaying expense recognition can increase the after-tax net cash flow of a project because it defers tax liabilities, allowing more cash to be used or invested in the interim.

Question 17

The primary source of tax authority that provides explanations, definitions, and examples of tax laws is the

Accepted Answer

Regulations are the primary source of tax authority that provide explanations, definitions, and examples of tax laws. They are issued by the Treasury Department and have the force of law. The Internal Revenue Code contains statutory authority, while revenue rulings and letter rulings provide guidance on specific issues.

Question 18

Jacko Corporation has two projects in which it can invest. Project A has a $500,000 initial cost and will return $700,000 after tax in 4 years. Project B has a $300,000 initial cost and its after-tax returns will be $150,000 in year 1 and $200,000 in year 2. Using a 7 percent discount rate for evaluation, which project(s) should Jacko invest in?

Accepted Answer

($700,000 x .763) - $500,000 = $34,100; ($150,000 x .935) + ($200,000 x .873) - $300,000 = $14,850

Question 19

All of the following are primary sources of tax law except:

Accepted Answer

All of the given options are primary sources of tax law. In addition, primary sources of tax law also include legislative history (including committee reports), IRS rulings and revenue procedures, and tax treaties.

Question 20

How much tax can Charles save if he holds stock on which he has a $30,000 short-term gain until he can use the applicable 15 percent long-term capital gains tax rate? He is in the 25 marginal tax rate for individuals.

Accepted Answer

(25% -15%) x $30,000 = $3,000

Quiz 2: The Tax Practice Environment