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

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 MACRS depreciation calculation assumes that property placed in service is deemed to have been placed in service at the midpoint of the quarter in which it was actually placed in service, except when the property is actually placed in service in the last quarter of the year, in which case it is assumed to have been placed in service at the midpoint of the last quarter. Therefore, since the building was placed in service on June 12th, it would be assumed to have been placed in service on June 1st (mid-month convention), and not on May 15th.

Question 3

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 only used for accounting and tax purposes and do not necessarily reflect the true value of the asset in the market. The fair market value of an asset is the price that the asset would sell for in an open and competitive market, which may be different from its adjusted book or tax basis.

Question 4

BriarHill Inc. purchased four items of tangible personalty in 2012 at a total cost of $2,798,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Accepted Answer

The statement confirms that BriarHill cannot elect to expense any of the cost of the property under Section 179.

Question 5

Conant Company purchased only one item of tangible personalty in 2012. The cost of the item was $595,700. Conant can elect to expense $139,000 of this cost.

Accepted Answer

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

Question 6

Marz Inc. made a $75,000 cash expenditure this year (year 0). 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 30% marginal tax rate and uses a 7% discount rate.

Accepted Answer

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

Question 7

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 the 15-year period allowed by Selkie, as long as it meets the requirements set forth by the IRS.

Question 8

NLT Inc. purchased only one item of tangible personalty in 2012. The cost of the item was $124,000. NLT's taxable income before any Section 179 deduction was $77,100. NLT can elect Section 179 for only $77,100 of the cost of the property.

Accepted Answer

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

Question 9

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 10

Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false?

Accepted Answer

All three statements are true, therefore none of them is false. Poole must capitalize an expenditure if it meets the criteria of creating a new asset with a useful life of more than one year, extending the useful life of an existing asset, or providing a long-term economic benefit to the company.

Question 11

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

Accepted Answer

MACRS depreciation for buildings is based on the straight-line method, which means that the asset is depreciated at an equal amount each year of its useful life.

Question 12

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 13

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 a source of debate and interpretation.

Question 14

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...

Question 15

Molton Inc. made a $60,000 cash expenditure this year (year 0). 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 35% marginal tax rate and uses a 7% discount rate.

Accepted Answer

Step 1: Calculate the present value of the amortized expenditure.

PV = $60,000 / (1 + 0.07) + $60,000 / (1 + 0.07)^2 + $60,000 / (1 + 0.07)^3
   = $160,641.72

Step 2: Calculate the tax savings from the amortized expenditure.

Annual amortization expense = $60,000 / 3 = $20,000
Tax savings = $20,000 x 0.35 = $7,000

Step 3: Calculate the after-tax cost of the expenditure.

Present value of amortized expenditure - tax savings = $160,641.72 - $7,000 = $153,641.72

Therefore, the after-tax cost of the expenditure is $40,344.

Question 16

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 costs incurred before a business is operating, and they must be capitalized and amortized over time. The threshold for capitalization is $5,000. On the other hand, expansion costs are incurred to increase the capacity or productivity of an existing business and are deductible in the year they were incurred.

Question 17

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

Question 18

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

Accepted Answer

Purchased goodwill is only amortizable for book accounting purposes, but not for tax accounting purposes. Instead, tax regulations allow for the deduction of goodwill as part of the cost of the acquired business over a period of 15 years.

Question 19

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 20

Richland Company purchased an asset in 2009 for $50,000 and sold it in 2012. The asset was 7-year recovery property. Richland's 2012 MACRS depreciation on the asset was $6,245.

Accepted Answer

The asset was sold in 2012, so Richland Company would not claim any MACRS depreciation for that year. Depreciation is only claimed for the period the asset is in use by the company.

Quiz 7: Property Acquisitions and Cost Recovery Deductions