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 accounting and tax concepts respectively, and do not necessarily reflect the fair market value of an asset. Fair market value is determined by market conditions, supply and demand, and other external factors.

Question 2

Conant Company purchased only one item of tangible personalty in 2013. The cost of the item was $2,095,700. Conant can elect to expense $500,000 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...

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

Since the building was not placed in service on or before April 15 or on or after July 15, mid-quarter convention cannot be used for depreciation calculation. Instead, the half-year convention is used, which assumes that the property was placed in service in the middle of the year (July 1 for calendar year taxpayers) regardless of the actual placed-in-service date.

Question 5

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

This statement is true. Start-up expenditures for a new business are those costs incurred in creating an active trade or business, and the IRS requires them to be capitalized if they exceed $5,000. However, costs to expand an existing business can generally be deducted as ordinary and necessary business expenses.

Question 6

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 7

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 8

BriarHill Inc. purchased four items of tangible personalty in 2013 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

Since it's mentioned that BriarHill cannot elect to expense any of the cost of the property under Section 179, it means that none of the four items would qualify for immediate expensing under Section 179, making option A true.

Question 9

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 10

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

Accepted Answer

All of the statements are true. Poole must capitalize an expenditure if it creates a new asset with a useful life of more than one year, extends the useful life of an existing asset, or provides a long-term economic benefit to the company.

Question 11

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

Accepted Answer

While there are guidelines from the IRS to help distinguish between repairs and capital improvements, the distinction is not always clear-cut and depends on the specific facts and circumstances of each situation. Therefore, statement A is false.

Question 12

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 tax code, firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero. This is because percentage depletion is calculated based on the gross income from the asset, not the adjusted tax basis.

Question 13

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 14

Richland Company purchased an asset in 2010 for $50,000 and sold it in 2013. The asset was 7-year recovery property. Richland's 2013 MACRS depreciation on the asset was $6,245.

Accepted Answer

The asset was sold in 2013, so Richland Company would not be able to claim MACRS depreciation for that year. Depreciation stops when the asset is sold.

Question 15

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 16

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

The answer of Molton Inc. made a $60,000 cash expenditure...

Question 17

NLT Inc. purchased only one item of tangible personalty in 2013. 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 18

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

Accepted Answer

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

Question 19

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 20

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 Inc. can allocate a portion of the purchase price to a covenant not to compete and amortize it over the length of the agreement. In this case, they allocated $300,000 and can amortize it over 15 years.

Quiz 7: Property Acquisitions and Cost Recovery Deductions