Exam 7: Property Acquisitions and Cost Recovery Deductions

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

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

Dorian, a calendar year corporation, purchased $1,568,000 of equipment on May 3. This was Dorian's only purchase of depreciable property for the year. If the equipment has a 10-year recovery period, refer to Table 7.2 and compute Dorian's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

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.

Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true?

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

Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.

Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false?

Uqua Inc. purchased a depreciable asset for $189,000. First-year depreciation for book purposes was $22,000, and first-year MACRS depreciation was $37,800. If Uqua's marginal tax rate is 35%, the excess tax depreciation results in a $5,530:

Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true?

Zola Inc. paid a $10,000 legal fee to the attorney who resolved a dispute over Zola's title to investment land. Zola's auditors required the corporation to expense the payment for financial statement purposes. The tax law required Zola to capitalize the payment to the basis of the land. This difference in accounting treatment results in a:

Hextone Inc., which has a 35% 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 $4,270 deferred tax liability.

JebSim Inc. was organized on June 1 and began business on August 10. JebSim elected a calendar year for tax purposes. The corporation incurred $25,160 of legal and other professional fees attributable to its formation. How much of these costs can JebSim deduct on its first tax return?

Inger Associates, which manufactures plastic containers, recently sold 12,000 containers to R&A Inc. The selling price per container was $18. R&A paid for the containers by transferring 864 shares of its common stock to Inger. On date of payment, R&A stock was selling on Nasdaq at $250 per share. Compute Inger's tax basis in the R&A stock.

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?

Mann Inc. negotiated a 36-month lease on office space in a new commercial building. Mann paid $19,000 to a local carpenter to construct special-purpose shelving in the rented office. For tax purposes, Mann must:

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 12. The MACRS depreciation calculation assumes that the building was placed in service on May 15 (midquarter).

B&P Inc., a calendar year corporation, purchased only one operating asset during 2016: $599,900 of computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2016.

Which of the following statements concerning MACRS depreciation is true?

This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return.