Property Acquisitions And Cost Recovery Deductions

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Questions Bank

Taxes and Taxing Jurisdictions
Policy Standards for a Good Tax
Taxes as Transaction Costs
Maxims of Income Tax Planning
Tax Research
Taxable Income from Business Operations
Property Acquisitions and Cost Recovery Deductions
Property Dispositions
Nontaxable Exchanges
Sole Proprietorships
The Corporate Taxpayer
The Choice of Business Entity
Jurisdictional Issues in Business Taxation
The Individual Tax Formula
Compensation and Retirement Planning
Investment and Personal Financial Planning
Tax Consequences of Personal Activities
The Tax Compliance Process

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Question 1

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True/False

A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.

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Question 2

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True/False

The after-tax cost of an expenditure is minimized when the expenditure is deductible in the current year.

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Question 3

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True/False

The expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.

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Question 4

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True/False

Environmental clean-up costs are generally deductible in the year incurred.

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Question 5

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True/False

Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.

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Question 6

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Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.

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Question 7

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Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.

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Question 8

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Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250.

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Question 9

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Cosmo Inc. purchased an asset costing $67,500 by paying $13,500 cash at date of purchase and giving the seller a 5-year interest-bearing note for the $54,000 balance. Cosmo's tax basis in the asset is $13,500.

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Question 10

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The difference between the before-tax cost and after-tax cost of an asset equals the net present value of the tax savings from any cost recovery deductions with respect to the asset.

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Question 11

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L&P Inc., which manufactures electrical components, purchased new equipment for use in its manufacturing process. The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules.

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Question 12

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Tregor Inc., which manufactures plastic components, rents equipment on a monthly basis for use in its manufacturing process. The monthly rent is a deductible expense when incurred.

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Question 13

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A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.

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Question 14

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In an inflationary economy, the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.

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Question 15

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A book/tax difference resulting from application of the unicap rules to manufactured inventory reverses in the year in which the inventory is sold.

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Question 16

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The MACRS calculation ignores any salvage or residual value of an asset.

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Question 17

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The MACRS calculation is based on the estimated useful life of the depreciable asset.

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Question 18

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Hextone Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $14,890, and first-year MACRS depreciation was $27,090. As a result of this book/tax difference, Hextone recorded a $2,562 deferred tax liability.

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Question 19

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Mallow Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $37,225, and first-year MACRS depreciation was $55,025. As a result of this book/tax difference, Mallow recorded a $3,738 deferred tax asset.

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Question 20

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KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November 13. This was KJD's only purchase of tangible personalty this year. KJD must use a midquarter convention to compute MACRS depreciation on the equipment.

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