Question 1

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 2

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 3

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 4

NLT Inc. purchased only one item of tangible personalty in 2016. 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 5

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...

Question 6

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, which are costs incurred before a business begins operations, must be capitalized if they exceed $5,000. However, expansion costs of an existing business can be deducted in the year they are incurred.

Question 7

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

Accepted Answer

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

Question 8

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 statements are true according to generally accepted accounting principles, so none of the statements is false.

Question 9

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 does not qualify for midquarter convention. The depreciation calculation should be based on the half-year convention.

Question 10

Richland Company purchased an asset in 2013 for $50,000 and sold it in 2016. The asset was 7-year recovery property. Richland's 2016 MACRS depreciation on the asset was $6,245.

Accepted Answer

The asset was sold in 2016, so Richland Company would not claim any MACRS depreciation for that year. Depreciation is only applicable while the asset is owned and used by the company.

Question 11

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 includes any portion of the purchase price paid through debt financing. This is because the debt financing is considered part of the total cost of acquiring the asset.

Question 12

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 concepts that reflect the historical cost of the asset and its depreciation over time. They do not take into account changes in the asset's fair market value. Therefore, these concepts do not provide any direct information about the current fair market value of the asset.

Question 13

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 14

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. Percentage depletion allows businesses to deduct a certain percentage of their gross income from the property, without regard to the adjusted tax basis of the asset. This can result in a deduction that exceeds the actual cost of the property.

Question 15

BriarHill Inc. purchased four items of tangible personalty in 2016 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 allows businesses to expense the cost of certain tangible property in the year it was acquired instead of depreciating it over time. However, BriarHill Inc. cannot elect to expense any of the cost of the property under Section 179.

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

This statement is true. Selkie can amortize the $300,000 allocated to the covenant not to compete over 15 years.

Question 17

Conant Company purchased only one item of tangible personalty in 2016. The cost of the item was $2,009,700. Conant can elect to expense $500,000 of this cost.

Accepted Answer

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

Question 18

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 impairment expense on purchased goodwill is not tax-deductible according to the IRS regulations. Therefore, Nigle cannot deduct the $150,000 impairment expense on this year's tax return.

Question 19

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

Accepted Answer

MACRS depreciation for buildings is based on the straight-line method over a 39-year period.

Question 20

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 the basic principle of capitalization of expenditures under generally accepted accounting principles (GAAP).

Quiz 7: Property Acquisitions and Cost Recovery Deductions