Exam 7: Property Acquisitions and Cost Recovery Deductions

Powell Inc.was incorporated and began operations on October 1 and adopted a calendar year for tax purposes.Powell paid $4,200 to the attorney who handled the corporate formation.Which of the following statements is true?

Jaboy Inc.was incorporated three years ago.In its first year,Jaboy capitalized $72,000 organizational and start-up costs for tax purposes.However,it expensed these costs for financial statement purposes.Which of the following statements is true?

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

Which of the following statements about MACRS is false?

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

Kaskar Company,a calendar year taxpayer,paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building.Kaskar place the realty in service on September 29.Refer to the appropriate MACRS Table in Chapter 7 to compute Kaskar's first-year depreciation on the realty.

Marz Inc.made a $75,000 cash expenditure this year (year 0).Use Appendix A of your textbook provided to compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years,beginning in year 0.Marz has a 30% marginal tax rate and uses a 7% discount rate.

Deitle Inc.manufactures small appliances.This year,Deitle capitalized $3,679,000 indirect costs to inventory for book purposes and $3,865,000 indirect costs to inventory for tax purposes.The consequence of the different accounting methods is a $186,000:

Four years ago,Bettis Inc.paid a $5 million lump-sum price to purchase a business.Bettis allocated $600,000 of the price to goodwill.Which of the following statements is true?

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.

Mr.and Mrs.Schulte paid a $750,000 lump-sum price to purchase a business.At date of purchase,the appraised FMVs of the balance sheet assets were: Which of the following statements is true?

Molton Inc.made a $60,000 cash expenditure this year (year 0).Use Appendix A of your textbook provided to compute the after-tax cost if Molton must capitalize the expenditure and amortize it ratably over three years,beginning in year 0.Molton has a 35% marginal tax rate and uses a 7% discount rate.

Which of the following intangible assets is not amortizable for tax purposes?

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

Merkon Inc.must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent.The purchased asset would be 3-year recovery property that Merkon could use for four years,after which the asset would have no salvage value.Assuming a 35% tax rate,an 8% discount rate,and no Section 179 deduction or 50% bonus depreciation,which of the following statements is true? Use Appendix A,Table 7-2.(Round discount factor(s)to 3 decimal places.)

NRW Company,a calendar year taxpayer,purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building.NRW placed the realty in service on August 2,2017. a.Compute NRW's MACRS depreciation with respect to the realty for 2017 and 2018. b.Compute NRW's adjusted basis in the land and building on December 31,2018. c.How would your answer to a.change if the building was a manufacturing plant instead of an apartment complex?

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.

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.

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

Lovely Cosmetics Inc.incurred $785,000 research costs on the development of its formula for a new line of face creams.Lovely obtained a 17-year patent on the formula from the U.S.government.Which of the following statements is true?