Question 1

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 2

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 used for accounting and tax purposes and do not necessarily reflect the fair market value of an asset. The fair market value is determined through independent appraisals or market analysis.

Question 3

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 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 covenant not to compete is a form of intangible asset that can be amortized over its useful life of 15 years. Selkie allocated $300,000 of the total purchase price to this covenant not to compete, so it can be amortized in accordance with generally accepted accounting principles (GAAP).

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

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 7

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 can claim percentage depletion even if the adjusted tax basis of the asset is zero. This is because percentage depletion is based on the gross income generated by the asset, not its adjusted tax basis.

Question 8

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 the expenditure if it meets any of the three criteria listed in options A, B, or C.

Question 9

NLT Inc. purchased only one item of tangible personalty in 2015. 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

According to Section 179, the maximum deduction that can be elected for 2015 is $25,000, which is higher than the cost of the property purchased by NLT. Therefore, NLT can elect Section 179 for the full cost of $24,000.

Question 10

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 definition of a capital expenditure, which must be capitalized and recorded as an asset on the balance sheet.

Question 11

BriarHill Inc. purchased four items of tangible personalty in 2015 at a total cost of $279,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Accepted Answer

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

Question 12

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, such as a mortgage on a property.

Question 13

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

Accepted Answer

Purchased goodwill is no longer amortizable for tax accounting purposes due to changes in tax law, but it may still be amortized for book accounting purposes.

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 would not be considered in service in the second quarter. Therefore, mid-quarter depreciation rules would not apply and the building would be depreciated using the mid-month convention.

Question 15

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 16

Richland Company purchased an asset in 2012 for $50,000 and sold it in 2015. The asset was 7-year recovery property. Richland's 2015 MACRS depreciation on the asset was $6,245.

Accepted Answer

The asset was sold in 2015, so Richland Company would not claim any MACRS depreciation for that year. Depreciation stops once the asset is sold.

Question 17

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 18

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 if they exceed $5,000, while expansion costs for an existing business may be deducted.

Question 19

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 20

Conant Company purchased only one item of tangible personalty in 2015. The cost of the item was $209,700. Conant can elect to expense $25,000 of this cost.

Accepted Answer

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

Quiz 7: Property Acquisitions and Cost Recovery Deductions