Question 1

One of the most significant exemptions for most people is interest on a home mortgage.

Accepted Answer

The answer of One of the most significant exemptions for...

Question 2

A progressive tax system taxes incremental income at progressively higher rates.

Accepted Answer

In a progressive tax system, those with higher incomes are required to pay a higher percentage of their income in taxes than those with lower incomes. This is achieved by dividing income into brackets and taxing each bracket at an increasing rate, so that the more you earn, the higher your tax rate.

Question 3

If machinery that cost $8,000 when new, has accumulated depreciation of $4,500, and is sold for $4,000, the gain recognized on the sale would be $4,000.

Accepted Answer

In this case, there is a loss on the sale of the machinery. The gain or loss is calculated as follows:
Sale price - (Cost - Accumulated depreciation) = Gain/Loss
$4,000 - ($8,000 - $4,500) = -$3,500 (loss)
Therefore, the answer is B, false.

Question 4

A taxpayer's average rate is the rate that will be paid on the next dollar of income.

Accepted Answer

A taxpayer's average rate is the total tax liability divided by taxable income, not the rate to be paid on the next dollar of income.

Question 5

The tax system taxes capital gains more aggressively than ordinary income.

Accepted Answer

Capital gains are often taxed at a lower rate than ordinary income, especially for long-term investments, to encourage investment and economic growth.

Question 6

The corporate tax system appears not to be progressive, but in fact it's more progressive that the personal system. Explain.

Accepted Answer

The answer of The corporate tax system appears not to...

Question 7

If it makes tax sense to finance businesses with debt, why do firms typically borrow less than half of their capital, i.e., what are the negatives of debt financing?

Accepted Answer

The answer of If it makes tax sense to finance...

Question 8

Although depreciation is a noncash expense, the government still allows the deduction on the firm's tax return.

Accepted Answer

This statement is true. Depreciation is a noncash expense that represents the gradual decrease in the value of an asset over time. Even though no cash is actually being spent, the government allows firms to deduct this expense on their tax return as a way to reduce their taxable income. This helps to offset the cost of investing in long-term assets and encourages businesses to invest in new equipment and facilities.

Question 9

The taxation of proprietorships is about the same as that of corporations.

Accepted Answer

Proprietorships are taxed differently than corporations. Proprietorships are pass-through entities, meaning that the profits and losses are reported on the owner's personal income tax return and are taxed at the personal income tax rate. Corporations, on the other hand, are taxed separately from their owners at the corporate tax rate.

Question 10

Preferred stock is referred to as a cross between debt and common equity because it has some characteristics of each.

Accepted Answer

Preferred stock has some characteristics of debt, such as fixed dividends, and some characteristics of common equity, such as no maturity date and the potential for appreciation in value.

Question 11

The corporate tax table seems dissimilar to individual tax tables in that corporate rates are not always increased as income increases.

Accepted Answer

The corporate tax table is structured so that there are different tax rates for different levels of taxable income, but the rates do not always increase as income increases. There are certain income thresholds at which the rate may change, and there are also various deductions and credits that can affect the amount of tax paid by a corporation.

Question 12

Municipal bonds are debt obligations of the states, municipalities and political subdivisions. They are exempt from federal taxation

Accepted Answer

Municipal bonds are indeed debt obligations of states, municipalities, and political subdivisions, and they are usually exempt from federal taxation. This tax-exempt status makes municipal bonds attractive to investors in higher tax brackets, as they can earn income from these bonds without having to pay federal income tax on it.

Question 13

Wealth Taxes are levied by cities and counties on the value of real estate. They are also called ad valorem taxes.

Accepted Answer

Wealth taxes (also known as property taxes or ad valorem taxes) are indeed levied by cities and counties on the value of real estate.

Question 14

The corporate tax system takes away the benefit of low rates on early income as income increases.

Accepted Answer

The corporate tax system is designed to be progressive, meaning as a corporation earns more income, the tax rate also increases. Therefore, the benefit of low rates on early income is gradually taken away as the corporation earns more money.

Question 15

The government uses the tax system to collect revenue and to incentivize people to act in ways it deems beneficial.

Accepted Answer

The government uses taxes to generate revenue but also to incentivize certain behaviors such as investing in certain industries or donating to charities.

Question 16

Congress intended preferential tax treatment on capital gains, recognizing that offering an incentive to capital investments is healthy for the economy.

Accepted Answer

Congress has intended preferential tax treatment on capital gains to offer an incentive for capital investments, which is deemed beneficial for the economy.

Question 17

A company has a loss of $15,000 this year, a profit of $3,000 last year, a profit of $8,000 two years ago, and another profit of $2,000 three years ago. It makes sense to file amended returns for the last three years.

Accepted Answer

Filing amended returns for the previous three years would not change the current year's loss. Amended returns are usually filed to correct errors or claim missed deductions from previous years, but in this case, the losses and profits from previous years cannot be used to offset the loss from the current year.

Question 18

Leverage means using borrowed money to enhance the return on an equity investment.

Accepted Answer

Leverage allows investors to increase their return on investment by using borrowed funds, which amplifies gains but also increases risks. So, the statement is true.

Question 19

The tax treatment of capital gains is a big political issue. Republicans generally favor lower rates on capital gains while Democrats do not. Why is the issue so politically sensitive?

Accepted Answer

The answer of The tax treatment of capital gains is...

Question 20

In the corporate tax system, higher-income taxpayers pay targeted rates on their whole incomes.

Accepted Answer

The answer of In the corporate tax system, higher-income taxpayers...

Quiz 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes