Exam 7: Property Acquisitions and Cost Recovery Deductions

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

Belsap Inc., a calendar year taxpayer, purchased a total of $590,000 depreciable personalty during May 2016. Which of the following statements is true?

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

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2016. Which of the following statements is true?

On May 1, Sessi Inc., a calendar year corporation, purchased a business for a $2 million lump-sum price. The business' balance sheet assets had the following appraised FMV. Accounts receivable \ 38,900 Inventory 450,000 Tangible personalty 225,000 Realty: Building 500,000 Land 50,000 \ a. Compute the cost basis of the goodwill acquired by Sessi Inc. on the purchase of this business. b. Compute Sessi's goodwill amortization deduction for the year of purchase. c. Use a 35 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

Which of the following statements about MACRS is false?

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

Marz Inc. made a $75,000 cash expenditure this year (year 0). 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.

This year, Zulou Industries capitalized $552,000 indirect costs to inventory for book purposes and $591,600 indirect cost to inventory under unicap. Zulou's cost of goods sold for book purposes was $2,458,000, and its cost of goods sold for tax purposes was $2,707,000. If Zulou has no other book/tax differences, and its book income is $5,000,000, compute Zulou's taxable income.

Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250.

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

Which of the following capitalized cost is not amortizable for tax purposes?

KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November 13. This was KJD's only purchase of tangible personalty this year. KJD must use a midquarter convention to compute MACRS depreciation on the equipment.

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?

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. This year, Bettis' auditors required Bettis to write the goodwill down to $500,000 and record a $100,000 impairment expense. Because of the accounting treatment of goodwill, Bettis has a current:

Purchased goodwill is amortizable both for book and tax accounting purposes.

Which of the following statements about tax basis is false?

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

Which of the following statements about the depletion deduction is false?