Question 1

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 simply accounting and tax measures of an asset's cost basis. Fair market value is a separate concept and may not necessarily be reflected by these measures.

Question 2

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

Accepted Answer

Purchased goodwill is no longer amortizable for tax accounting purposes under the current tax law in the United States. However, it is still amortizable for book accounting purposes.

Question 3

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 4

Richland Company purchased an asset in 2014 for $50,000 and sold it in 2017.The asset was 7-year recovery property.Richland's 2017 MACRS depreciation on the asset was $6,245.

Accepted Answer

The asset was sold in 2017, so Richland Company would not claim depreciation for that year. Depreciation is only claimed for the period the asset is owned and used in the business.

Question 5

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 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 IRS, firms are allowed to deduct percentage depletion even if the adjusted tax basis of the asset is zero. This is because percentage depletion is based on the gross income from the property, not the adjusted tax basis.

Question 7

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 of the given statements are true. Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years, extends the estimated useful life of an existing asset by three years or results in a long-term economic benefit to the company. Therefore, none of the statements is false.

Question 8

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 is according to the generally accepted accounting principles (GAAP) and the Internal Revenue Service (IRS) regulations.

Question 9

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 for a new business must be capitalized and cannot be deducted, but certain expansion costs of an existing business may be immediately deductible under certain circumstances.

Question 10

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 11

BriarHill Inc.purchased four items of tangible personalty in 2017 at a total cost of $2,579,000.BriarHill cannot elect to expense any of the cost of the property under Section 179.

Accepted Answer

Section 179 is a tax deduction that allows businesses to expense the cost of certain tangible personal property rather than capitalizing and depreciating it over time. However, BriarHill Inc. cannot elect to expense any of the cost of the property under Section 179.

Question 12

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 answer of The uniform capitalization rules generally allow many...

Question 13

NLT Inc.purchased only one item of tangible personalty in 2017.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 14

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 on June 12, it is not considered to be in service during the second quarter for tax purposes. Therefore, the midquarter convention does not apply and the regular MACRS depreciation method can be used.

Question 15

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 16

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

The allocation of $300,000 to the covenant not to compete indicates that it has a separate economic value and can be amortized over its expected useful life, which in this case is 15 years.

Question 17

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

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) depreciation for buildings is indeed based on the straight-line method. This means that the cost of the building is spread out over a set number of years, with the same amount of depreciation being taken each year. The number of years varies based on the type of building and its useful life, as determined by the IRS.

Question 18

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 19

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 20

Conant Company purchased only one item of tangible personalty in 2017.The cost of the item was $2,039,700.Conant can elect to expense $510,000 of this cost.

Accepted Answer

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

Quiz 7: Property Acquisitions and Cost Recovery Deductions