Question 1

When the IRS audits a tax return,it is most likely to scrutinize the tax consequences of a/an:

Accepted Answer

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

Question 2

If Congress enacts legislation late in the year that is retroactive to the beginning of the year,the legislation increases:

Accepted Answer

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

Question 3

The present value of a dollar available in a future period increases as the discount rate increases.

Accepted Answer

A) True 
 B)False

Question 4

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 5

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

Accepted Answer

A) True 
 B)False

Question 6

The tax cost of a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 7

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 the above is 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 above is true.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Omar Inc.paid a $24,000 expense,only $10,000 of which was deductible.Which of the following statements is false?

Accepted Answer

A) If Omar's marginal tax rate is 10%,the after-tax cost of the expense is $9,000. 
B) Regardless of Omar's marginal tax rate,the before-tax cost of the expense is $24,000. 
C) If Omar's marginal tax rate is 30%,the after-tax cost of the expense is $21,000. 
D) The after-tax cost of the expense depends on Omar's marginal tax rate. 
A) If Omar's marginal tax rate is 10%,the after-tax cost of the expense is $9,000. 
B) Regardless of Omar's marginal tax rate,the before-tax cost of the expense is $24,000. 
C) If Omar's marginal tax rate is 30%,the after-tax cost of the expense is $21,000. 
D) The after-tax cost of the expense depends on Omar's marginal tax rate.

Question 12

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 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

Private market transactions create an opportunity for bilateral tax planning.

Accepted Answer

A) True 
 B)False

Question 16

The tax savings from a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 17

Reid Inc.received a $90,000 cash payment,only $50,000 of which was taxable income.If Reid's marginal tax rate is 40%,compute Reid's after-tax cash flow.

Accepted Answer

A) $54,000 
B) $50,000 
C) $30,000 
D) None of the above 
A) $54,000 
B) $50,000 
C) $30,000 
D) None of the above

Question 18

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 19

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 20

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow.Which of the following statements is false?

Accepted Answer

A) If the cash inflow is not taxable income,the current-year tax cost of the transaction is zero. 
B) If the cash inflow is taxable income and BMX's marginal tax rate is 25%,the tax cost of the transaction is $5,000. 
C) If the cash inflow is taxable income and BMX's marginal tax rate is 35%,the tax cost of the transaction is $7,000. 
D) None of the above is false. 
A) If the cash inflow is not taxable income,the current-year tax cost of the transaction is zero. 
B) If the cash inflow is taxable income and BMX's marginal tax rate is 25%,the tax cost of the transaction is $5,000. 
C) If the cash inflow is taxable income and BMX's marginal tax rate is 35%,the tax cost of the transaction is $7,000. 
D) None of the above is false.

When the IRS audits a tax return,it is most likely to scrutinize the tax consequences of a/an:

If Congress enacts legislation late in the year that is retroactive to the beginning of the year,the legislation increases:

The present value of a dollar available in a future period increases as the discount rate increases.

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?

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

The tax cost of a transaction represents a cash inflow.

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?

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

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

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

Omar Inc.paid a $24,000 expense,only $10,000 of which was deductible.Which of the following statements is false?

The arm's length transaction presumption:

Which of the following is not a related party transaction?

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

Private market transactions create an opportunity for bilateral tax planning.

The tax savings from a transaction represents a cash inflow.

Reid Inc.received a $90,000 cash payment,only $50,000 of which was taxable income.If Reid's marginal tax rate is 40%,compute Reid's after-tax cash flow.

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

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

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow.Which of the following statements 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

When the IRS audits a tax return,it is most likely to scrutinize the tax consequences of a/an:

If Congress enacts legislation late in the year that is retroactive to the beginning of the year,the legislation increases:

The present value of a dollar available in a future period increases as the discount rate increases.

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?

An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

The tax cost of a transaction represents a cash inflow.

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?

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

The tax cost of a transaction depends on the taxpayer's average tax rate for the year.

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

Omar Inc.paid a $24,000 expense,only $10,000 of which was deductible.Which of the following statements is false?

The arm's length transaction presumption:

Which of the following is not a related party transaction?

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

Private market transactions create an opportunity for bilateral tax planning.

The tax savings from a transaction represents a cash inflow.

Reid Inc.received a $90,000 cash payment,only $50,000 of which was taxable income.If Reid's marginal tax rate is 40%,compute Reid's after-tax cash flow.

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

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

BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow.Which of the following statements 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