Question 1

Which of the following statements concerning related party transactions is false?

Accepted Answer

A)  The federal tax law prohibits related party transactions. 
B)  Related parties enjoy significant flexibility in controlling the tax consequences of their transactions. 
C)  A related party transactions is more likely to be scrutinized relative to a public transaction to ensure it meets an arm's length standard. 
D)  The IRS always disallows any favorable tax consequences of related party transactions. 
A)  The federal tax law prohibits related party transactions. 
B)  Related parties enjoy significant flexibility in controlling the tax consequences of their transactions. 
C)  A related party transactions is more likely to be scrutinized relative to a public transaction to ensure it meets an arm's length standard. 
D)  The IRS always disallows any favorable tax consequences of related party transactions.

Question 2

Omar Inc. paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense.

Accepted Answer

A)  $24,000 
B)  $18,000 
C)  $16,800 
D)  $10,800 
A)  $24,000 
B)  $18,000 
C)  $16,800 
D)  $10,800

Question 3

Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Accepted Answer

A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of the above is false. 
A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of the above is false.

Question 4

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Accepted Answer

A)  15% 
B)  20% 
C)  25% 
D)  30% 
A)  15% 
B)  20% 
C)  25% 
D)  30%

Question 5

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate.

Accepted Answer

A)  $14,018.00 
B)  $14,623.35 
C)  $15,647.25 
D)  None of the above 
A)  $14,018.00 
B)  $14,623.35 
C)  $15,647.25 
D)  None of the above

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statement about private market transactions is false?

Accepted Answer

A)  Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
B)  The parties negotiate directly with each other. 
C)  The parties are dealing at arm's length. 
D)  The parties must engage in unilateral instead of bilateral tax planning. 
A)  Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
B)  The parties negotiate directly with each other. 
C)  The parties are dealing at arm's length. 
D)  The parties must engage in unilateral instead of bilateral tax planning.

Question 8

Related party transactions occur in a public market.

Accepted Answer

A) True 
 B)False

Question 9

Mr Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate using Appendix A.

Accepted Answer

A)  $259,185 
B)  $277,348 
C)  $290,310 
D)  None of the above 
A)  $259,185 
B)  $277,348 
C)  $290,310 
D)  None of the above

Question 10

Yawl Inc. must choose between two business opportunities. Opportunity 1 will generate $40,000 before-tax cash flow in years 0, 1, and 2, with a $7,000 annual tax cost.

Accepted Answer

Opportunity 2 will also generate $40,000

Question 11

Arm's length business transactions can occur in:

Accepted Answer

A)  Private markets 
B)  Public markets 
C)  Fictitious markets 
D)  Both private and public markets 
A)  Private markets 
B)  Public markets 
C)  Fictitious markets 
D)  Both private and public markets

Question 12

Leto Inc. has $500,000 in an investment paying 8% annual taxable interest. Each year, the corporation incurs a $3,000 nondeductible cash expense relating to the investment. If Leto's marginal tax rate is 35%, compute the annual after-tax cash flow.

Accepted Answer

A)  $23,000 
B)  $24,050 
C)  $37,000 
D)  None of the above. 
A)  $23,000 
B)  $24,050 
C)  $37,000 
D)  None of the above.

Question 13

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

Accepted Answer

A)  If the cash outflow is deductible and BMX's marginal tax rate is 20%, the tax savings from the transaction is $4,000. 
B)  If the cash outflow is deductible and BMX's marginal tax rate is 30%, the tax savings from the transaction is $6,000. 
C)  If the cash outflow is not deductible, the current-year tax savings of the transaction is zero. 
D)  All of the above are true. 
A)  If the cash outflow is deductible and BMX's marginal tax rate is 20%, the tax savings from the transaction is $4,000. 
B)  If the cash outflow is deductible and BMX's marginal tax rate is 30%, the tax savings from the transaction is $6,000. 
C)  If the cash outflow is not deductible, the current-year tax savings of the transaction is zero. 
D)  All of the above are true.

Question 14

Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

Accepted Answer

A)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero. 
B)  If the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
C)  If only $17,500 of the expense is deductible, Ms. Teague's after-tax cost is $14,000. 
D)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero and, if the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
A)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero. 
B)  If the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
C)  If only $17,500 of the expense is deductible, Ms. Teague's after-tax cost is $14,000. 
D)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero and, if the expense is deductible, Ms. Teague's after-tax cost is $28,000.

Question 15

A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Every business transaction results in a current tax cost or tax savings.

Accepted Answer

A) True 
 B)False

Question 18

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

Accepted Answer

A)  If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow. 
B)  If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow. 
C)  If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow. 
D)  None of the above is false. 
A)  If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow. 
B)  If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow. 
C)  If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow. 
D)  None of the above is false.

Question 19

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 the 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 the choices are true.

Question 20

Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of:

Accepted Answer

A)  Marginal tax rate uncertainty 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty 
A)  Marginal tax rate uncertainty 
B)  Financial risk 
C)  Audit risk 
D)  Tax law uncertainty

Which of the following statements concerning related party transactions is false?

Omar Inc. paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense.

Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate.

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

Which of the following statement about private market transactions is false?

Related party transactions occur in a public market.

Mr Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate using Appendix A.

Yawl Inc. must choose between two business opportunities. Opportunity 1 will generate $40,000 before-tax cash flow in years 0, 1, and 2, with a $7,000 annual tax cost.

Arm's length business transactions can occur in:

Leto Inc. has $500,000 in an investment paying 8% annual taxable interest. Each year, the corporation incurs a $3,000 nondeductible cash expense relating to the investment. If Leto's marginal tax rate is 35%, compute the annual after-tax cash flow.

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.

Which of the following is not a related party transaction?

Every business transaction results in a current tax cost or tax savings.

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

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?

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

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

Which of the following statements concerning related party transactions is false?

Omar Inc. paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense.

Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate.

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

Which of the following statement about private market transactions is false?

Related party transactions occur in a public market.

Mr Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate using Appendix A.

Yawl Inc. must choose between two business opportunities. Opportunity 1 will generate $40,000 before-tax cash flow in years 0, 1, and 2, with a $7,000 annual tax cost.

Arm's length business transactions can occur in:

Leto Inc. has $500,000 in an investment paying 8% annual taxable interest. Each year, the corporation incurs a $3,000 nondeductible cash expense relating to the investment. If Leto's marginal tax rate is 35%, compute the annual after-tax cash flow.

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.

Which of the following is not a related party transaction?

Every business transaction results in a current tax cost or tax savings.

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

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?

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

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