Question 1

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.

Accepted Answer

The answer of Firms engaged in the extraction of natural...

Question 2

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.

Accepted Answer

The answer of Conant Company purchased only one item of...

Question 3

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.

Accepted Answer

The answer of This year,Nigle Inc.'s auditors required the corporation...

Question 4

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).

Accepted Answer

The building was placed in service after May 15, so it is not considered midquarter. Instead, it would use the half-year convention for depreciation.

Question 5

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.

Accepted Answer

This is true. The $300,000 allocated to the covenant not to compete can be amortized over the term of the covenant, which is 18 months, or can be spread out over a longer period of time up to a maximum of 15 years.

Question 6

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.

Accepted Answer

The answer of NLT Inc.purchased only one item of tangible...

Question 7

A firm must capitalize start-up expenditures of a new business in excess of $5,000 but may deduct expansion costs of an existing business.

Accepted Answer

Start-up expenditures are considered costs incurred before a business starts operating and are required to be capitalized if they exceed $5,000. On the other hand, expansion costs relate to an existing business and may be deducted as ordinary and necessary business expenses.

Question 8

Stanley Inc.,a calendar year taxpayer,purchased a building and placed it in service on June 3.The MACRS depreciation calculation assumes that the building was placed in service on June 15.

Accepted Answer

The answer of Stanley Inc.,a calendar year taxpayer,purchased a building...

Question 9

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.

Accepted Answer

The asset was sold in 2019, so Richland Company would not claim MACRS depreciation for that year. Depreciation is only applicable while the asset is owned and used by the company.

Question 10

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

Accepted Answer

MACRS depreciation for buildings uses the straight-line method, which means that the same amount of depreciation is taken each year over the useful life of the building.

Question 11

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

Accepted Answer

Purchased goodwill is no longer amortizable for tax accounting purposes since the enactment of the Tax Cuts and Jobs Act in 2017. However, it may still be amortized for book accounting purposes.

Question 12

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.

Accepted Answer

BriarHill cannot elect to expense any of the cost of the property under Section 179, so the full cost of the property must be capitalized.

Question 13

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

Accepted Answer

The answer of The capitalized cost of tangible leasehold improvements...

Question 14

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

Accepted Answer

Adjusted book basis and adjusted tax basis are accounting and tax-related values that reflect the cost of an asset less accumulated depreciation and certain adjustments. These values are not necessarily indicative of the asset's current fair market value, which may be significantly higher or lower than its book or tax basis.

Question 15

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.

Accepted Answer

The uniform capitalization rules require certain direct and indirect costs associated with inventory to be capitalized for tax purposes, not expensed.

Question 16

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

Accepted Answer

The cost basis of an asset does include the portion of the purchase price paid through debt financing. This is because the debt financing is part of the total cost of acquiring the asset.

Question 17

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.

Accepted Answer

All the statements are true as they describe scenarios where capitalization is required according to accounting principles.

Question 18

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

Accepted Answer

This statement is in accordance with the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) which require businesses to capitalize any expenditure that leads to the creation or enhancement of an asset that provides economic benefits for more than one accounting period. This means that such expenditures are not recognized as expenses in the current period in which they occur but are instead recorded as assets and amortized over their useful lives.

Question 19

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

Accepted Answer

This is true as long as the asset is a natural resource, such as oil and gas, and meets other requirements for percentage depletion.

Question 20

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

Accepted Answer

The answer of A corporation that incurs $28,500 organization costs...

Quiz 7: Property Acquisitions and Cost Recovery Deductions