Question 1

A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.

Accepted Answer

A) True 
 B)False  True

Question 2

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Accepted Answer

A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of these choices are correct. 
A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of these choices are correct. B

Question 3

Citran Company will earn $150,000 revenue as payment for a three-year consulting engagement. Compute the NPV of the revenue using Appendix A if Citran will received $35,000 cash immediately (year 0), $35,000 cash next year (year 1) and $80,000 cash the following year (year 2). Citran will report the revenue as taxable income in the year received. Its marginal tax rate is 30%, and it uses an 8% discount rate.

Accepted Answer

The NPV is $95,179 ($24,500 after-tax cash flow in year 0 + $22,687 discounted after-tax cash flow in year 1 [$24,500 × 0.926] + $47,992 discounted after-tax cash flow in year 2 [$56,000 × 0.857]).

Question 4

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements about marginal tax rates is true?

Accepted Answer

A)  A taxpayer's marginal rate can change with every transaction. 
B)  As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C)  As the marginal rate increases, the tax savings from a deduction increases. 
D)  Both a taxpayer's marginal rate can change with every transaction and, as the marginal rate increases, the tax savings from a deduction increases. 
A)  A taxpayer's marginal rate can change with every transaction. 
B)  As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C)  As the marginal rate increases, the tax savings from a deduction increases. 
D)  Both a taxpayer's marginal rate can change with every transaction and, as the marginal rate increases, the tax savings from a deduction increases.

Question 6

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Accepted Answer

A) True 
 B)False

Question 7

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

Accepted Answer

A) True 
 B)False

Question 8

Borden Company has the choice between two investments. Investment 1 will generate a $27,000 deductible loss this year (year 0), $15,000 taxable income in year 1, and $60,000 taxable income in year 2. Investment 2 will generate $16,000 taxable income in years 0, 1, and 2. Assume that income and loss reflect before-tax cash flow for Borden. Using the appropriate present value tables, determine which opportunity Borden should choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV (round the calculations to the nearest whole dollar)?

Accepted Answer

Investment 1 has a $25,613 NPV ($17,550

Question 9

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

Accepted Answer

A)  Ms. Leik's annual after-tax cash flow from this investment is $3,520. 
B)  If the interest is taxable but the expense is not deductible, Ms. Leik's annual after-tax cash flow from the investment is $3,400. 
C)  If the interest is tax-exempt and the expense is not deductible, Ms. Leik's annual after-tax cash flow is $5,000. 
D)  None of these choices are true. 
A)  Ms. Leik's annual after-tax cash flow from this investment is $3,520. 
B)  If the interest is taxable but the expense is not deductible, Ms. Leik's annual after-tax cash flow from the investment is $3,400. 
C)  If the interest is tax-exempt and the expense is not deductible, Ms. Leik's annual after-tax cash flow is $5,000. 
D)  None of these choices are true.

Question 10

A dollar available today is always worth more than a dollar not available until a future period.

Accepted Answer

A) True 
 B)False

Question 11

Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stockbroker. This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 12

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

Accepted Answer

A) True 
 B)False

Question 13

Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Accepted Answer

A)  Prohibited transaction 
B)  Public market transaction 
C)  Related party transaction 
D)  Arm's length transaction 
A)  Prohibited transaction 
B)  Public market transaction 
C)  Related party transaction 
D)  Arm's length transaction

Question 14

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Accepted Answer

A)  Angela should always choose the first investment because it minimizes her tax costs. 
B)  If the second investment generates $5,500 of before-tax income, Angela should choose the first investment. 
C)  If the second investment generates $6,500 of before-tax income, Angela should choose the second investment. 
D)  Both if the second investment generates $5,500 of before-tax income, Angela should choose the first investment and if the second investment generates $6,500 of before-tax income, Angela should choose the second investment are true. 
A)  Angela should always choose the first investment because it minimizes her tax costs. 
B)  If the second investment generates $5,500 of before-tax income, Angela should choose the first investment. 
C)  If the second investment generates $6,500 of before-tax income, Angela should choose the second investment. 
D)  Both if the second investment generates $5,500 of before-tax income, Angela should choose the first investment and if the second investment generates $6,500 of before-tax income, Angela should choose the second investment are true.

Question 15

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 16

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 17

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

Accepted Answer

A)  Market risk 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty 
A)  Market risk 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty

Question 18

Which of the following is not a related party transaction?

Accepted Answer

A)  Acme Corporation leases office space to Norton Company. Mr. and Mrs. Norton own Norton Company and 65% of Acme Corporation's stock. 
B)  BBD Inc. licenses a patent from Nugo Inc., which owns 82% of BBD's outstanding stock. 
C)  Beth Teal pays $15,000 a year to her gardener, Ben. Beth is Ben's grandmother. 
D)  All the transactions are between related parties. 
A)  Acme Corporation leases office space to Norton Company. Mr. and Mrs. Norton own Norton Company and 65% of Acme Corporation's stock. 
B)  BBD Inc. licenses a patent from Nugo Inc., which owns 82% of BBD's outstanding stock. 
C)  Beth Teal pays $15,000 a year to her gardener, Ben. Beth is Ben's grandmother. 
D)  All the transactions are between related parties.

Question 19

The arm's length transaction presumption:

Accepted Answer

A)  Assumes that each party is dealing in its own economic self-interest. 
B)  Cannot be satisfied in a private market transaction. 
C)  Requires direct negotiation between parties to ensure an arm's length price. 
D)  Applies to both related party and unrelated party transactions. 
A)  Assumes that each party is dealing in its own economic self-interest. 
B)  Cannot be satisfied in a private market transaction. 
C)  Requires direct negotiation between parties to ensure an arm's length price. 
D)  Applies to both related party and unrelated party transactions.

Question 20

Which of the following statements about marginal tax rates is false?

Accepted Answer

A)  A taxpayer's marginal rate does not change over time. 
B)  As the marginal rate decreases, the after-tax cost of a deductible expense increases. 
C)  As the marginal rate decreases, the after-tax value of an income-generating transaction increases. 
D)  Both a taxpayer's marginal rate does not change over time and, as the marginal rate decreases, the after-tax cost of a deductible expense increases. 
A)  A taxpayer's marginal rate does not change over time. 
B)  As the marginal rate decreases, the after-tax cost of a deductible expense increases. 
C)  As the marginal rate decreases, the after-tax value of an income-generating transaction increases. 
D)  Both a taxpayer's marginal rate does not change over time and, as the marginal rate decreases, the after-tax cost of a deductible expense increases.

A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Which of the following statements about marginal tax rates is true?

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

A dollar available today is always worth more than a dollar not available until a future period.

Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stockbroker. This transaction occurred in a private market.

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

Which of the following is not a related party transaction?

The arm's length transaction presumption:

Which of the following statements about marginal tax rates is false?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, Llcs, and S Corporations

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

Filters

Exam 3: Taxes As Transaction Costs

A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases.

Which of the following statements about marginal tax rates is true?

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit.

Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

A dollar available today is always worth more than a dollar not available until a future period.

Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stockbroker. This transaction occurred in a private market.

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:

Which of the following is not a related party transaction?

The arm's length transaction presumption:

Which of the following statements about marginal tax rates is false?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, Llcs, and S Corporations

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

Filters