Question 1

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.

Accepted Answer

Step 1: Calculate the PV of the capitalized expenditure
PV = expenditure / ((1 + r) ^ n)
PV = 60,000 / ((1 + 0.07) ^ 3)
PV = $48,206.41

Step 2: Calculate the after-tax cost
ATC = PV x (1 - tax rate)
ATC = $48,206.41 x (1 - 0.21)
ATC = $38,024.32

Step 3: Add back the tax savings from amortization
Amortization expense = expenditure / n
Amortization expense = $60,000 / 3
Amortization expense = $20,000

Tax savings from amortization = amortization expense x tax rate
Tax savings from amortization = $20,000 x 0.21
Tax savings from amortization = $4,200

ATC = $38,024.32 + $4,200
ATC = $42,224.32

Therefore, the after-tax cost is $42,224.32, which is closest to answer choice B, $48,206.

Question 2

NLT Inc. purchased only one item of tangible personalty in 2020. 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...

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

Goodwill impairment is not deductible for tax purposes. Tax laws typically do not allow deductions for the write-down of goodwill.

Question 4

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 statement is true. The $300,000 allocated to the covenant not to compete can be amortized over 15 years according to the contract.

Question 5

Richland Company purchased an asset in 2017 for $50,000 and sold it in 2020. The asset was 7-year recovery property. Richland's 2020 MACRS depreciation on the asset was $6,245. Use Table 7-2.

Accepted Answer

The question does not provide enough information to determine if the depreciation taken was fully deducted. It would depend on the method of depreciation that was used and the amount of depreciation that was taken in prior years.

Question 6

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

According to the Internal Revenue Code, firms are permitted to deduct percentage depletion based on the gross income from mineral or natural resource deposits, rather than the asset's adjusted tax basis. Therefore, the fact that the adjusted tax basis of the asset is zero does not prevent a firm from claiming percentage depletion deductions.

Question 7

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...

Question 8

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.

Accepted Answer

The answer of Marz Inc. made a $75,000 cash expenditure...

Question 9

BriarHill Inc. purchased four items of tangible personalty in 2020 at a total cost of $3,679,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Accepted Answer

The statement is true as it explicitly mentions that BriarHill cannot elect to expense any of the cost of the property under Section 179.

Question 10

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

Since the building was placed in service after May 15, it would not be considered midquarter and would be eligible for the half-year convention. Therefore, the depreciation calculation would be based on the assumption that the building was placed in service on July 1 (beginning of the second half of the year), not May 15.

Question 11

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 determined based on accounting and tax rules, respectively, and may not reflect the true fair market value of an asset.

Question 12

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 13

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 of a new business must be capitalized if they exceed $5,000, while costs associated with expanding an existing business can be deducted.

Question 14

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

According to Generally Accepted Accounting Principles (GAAP), if a business expenditure creates an identifiable asset with a useful life beyond the current year, the expenditure must be capitalized (recorded as an asset on the balance sheet) rather than expensed immediately. This is to ensure that the cost of the asset is allocated over its useful life, rather than all at once in the current period.

Question 15

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 Mid-Month Convention under MACRS assumes that all property placed in service during any month is placed in service at the midpoint of that month, which is June 15 for June.

Question 16

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 17

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 18

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

Accepted Answer

Purchased goodwill is not amortizable for tax accounting purposes according to the IRS, but it may be amortizable for book accounting purposes under certain circumstances.

Question 19

Conant Company purchased only one item of tangible personalty in 2020. The cost of the item was $2,689,700. Conant can elect to expense $1,040,000 of this cost.

Accepted Answer

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

Question 20

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

Accepted Answer

The distinction between a repair expense and a capital improvement is not always clearly defined by the tax law and can be subjective, leading to potential disputes with the IRS.

Quiz 7: Property Acquisitions and Cost Recovery Deductions