Question 1

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

Accepted Answer

Repair costs are typically expensed in the period they are incurred, as they do not increase the useful life or improve the asset's productivity, but rather maintain it in its current condition. Only expenditures that improve an asset's useful life or productivity should be capitalized.

Question 2

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

This is true per the cost principle in accounting, which states that the initial cost of an asset should be recorded as its cost basis. In this case, the cost basis of the machinery is the value of the professional services performed by Burton Company, which is $8,250.

Question 3

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

Accepted Answer

The unicap rules require certain direct and indirect costs related to production or resale of tangible property to be capitalized into inventory costs. This can result in a book/tax difference in the value of inventory on the financial statements compared to the tax return. However, when the inventory is sold, these capitalized costs are expensed for tax purposes, resulting in a reversal of the book/tax difference.

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

In an inflationary economy, using FIFO will result in higher costs of goods sold due to the higher prices of the first goods purchased (which will be the first sold). Ending inventory will be valued at the more recent, higher prices, resulting in a higher cost of ending inventory. Therefore, LIFO would be a more appropriate inventory costing method in an inflationary economy.

Question 5

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.

Accepted Answer

The midquarter convention must be used for MACRS depreciation when more than 40% of the total cost of tangible personal property is purchased during the last quarter of the year. Since KJD only made one purchase of $923,000, which is less than 40% of the total cost of property purchased for the year, the midquarter convention is not required. However, if KJD had made additional purchases of tangible personal property during the year, it is possible that the midquarter convention would need to be used.

Question 6

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

Under the uniform capitalization (UNICAP) rules, indirect costs related to the production or acquisition of inventory must be capitalized to the cost of inventory. This includes depreciation expenses on equipment used in the manufacturing process. MACRS (Modified Accelerated Cost Recovery System) is a depreciation method used to calculate the depreciation expense for tax purposes. Therefore, MACRS depreciation on the equipment must be capitalized to the cost of inventory under the UNICAP rules.

Question 7

The expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.

Accepted Answer

According to tax laws, expenses incurred for adapting an existing asset to a new or different use are considered capital expenditures and must be capitalized to the cost of the asset for tax purposes. This allows the expense to be depreciated over the useful life of the asset.

Question 8

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

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) is based on a predetermined, fixed schedule that assigns a depreciation rate to each class of assets, not directly on the estimated useful life of the depreciable asset.

Question 9

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.

Accepted Answer

The answer of Mallow Inc.,which has a 21% tax rate,purchased...

Question 10

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

Accepted Answer

Research and experimental expenditures that result in the development of a patented formula or process are deductible as a capital expenditure and can be amortized over the life of the patent.

Question 11

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

Accepted Answer

If an expenditure is deductible in the current year, it reduces the taxpayer's taxable income and therefore reduces their tax liability. This means that the after-tax cost of the expenditure is lower than if it was not deductible.

Question 12

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

Accepted Answer

MACRS stands for Modified Accelerated Cost Recovery System, which is a tax depreciation method used in the United States. It does not take into account any salvage or residual value of an asset when calculating its depreciation expenses.

Question 13

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

Accepted Answer

Environmental clean-up costs are typically capitalized and amortized over their useful life, not deducted in the year incurred.

Question 14

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.

Accepted Answer

The answer of Tregor Inc.,which manufactures plastic components,rents equipment on...

Question 15

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.

Accepted Answer

Cosmo's tax basis in the asset should include the purchase price, sales tax, and delivery charge, totaling $16,025. Sales tax is generally included in the asset's basis and not separately deductible.

Question 16

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.

Accepted Answer

The book/tax difference is the difference between book depreciation and tax depreciation. In this case, the book depreciation is $14,890 and the MACRS depreciation is $27,090, resulting in a book/tax difference of $12,200 ($27,090 - $14,890). Since Hextone has a 21% tax rate, the deferred tax liability is calculated as $12,200 x 21% = $2,562. Therefore, the statement in the question is true.

Question 17

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

Accepted Answer

The basic premise is that an expense is not deductible unless the Internal Revenue Code specifically allows the deduction.

Question 18

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

This statement is true. The before-tax cost of an asset does not take into account any tax benefits or deductions, while the after-tax cost considers the tax implications. The difference between the two represents the net present value of the tax savings that come from cost recovery deductions, such as depreciation or amortization.

Question 19

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

Cosmo's tax basis in the asset is the total cost of the asset, which includes both the cash paid and the note payable, totaling $67,500.

Question 20

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

Accepted Answer

This is known as the LIFO conformity rule, which requires a firm to use LIFO for both tax and financial reporting purposes.

Quiz 7: Property Acquisitions and Cost Recovery Deductions