Question 1

Ms. Owen purchased 2,000 shares of General Electric common stock through her broker. This purchase is an example of a:

Accepted Answer

A)  Public market transaction 
B)  Fictitious market transaction 
C)  Private market transaction 
D)  Related party transaction 
A)  Public market transaction 
B)  Fictitious market transaction 
C)  Private market transaction 
D)  Related party transaction A

Question 2

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. D

Question 3

Which of the following statements about marginal tax rates is false?

Accepted Answer

A)  A taxpayer's marginal rate does not change over time. 
B)  As the marginal rate decreases, the after-tax cost of a deductible expense increases. 
C)  As the marginal rate decreases, the after-tax value of an income-generating transaction increases. 
D)  Statements A. and B. are false. 
A)  A taxpayer's marginal rate does not change over time. 
B)  As the marginal rate decreases, the after-tax cost of a deductible expense increases. 
C)  As the marginal rate decreases, the after-tax value of an income-generating transaction increases. 
D)  Statements A. and B. are false. A

Question 4

The tax savings from a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 5

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

Accepted Answer

A) True 
 B)False

Question 6

Citran Company will earn $150,000 revenue as payment for a three-year consulting engagement. Compute the NPV of the revenue if Citran will receive $35,000 cash immediately (year 0), $35,000 cash next year (year 1) and $80,000 cash the following year (year 2). Citran will report the revenue as taxable income in the year received. Its marginal tax rate is 30%, and it uses an 8% discount rate.

Accepted Answer

The NPV is $95,155 ($24,500 af

Question 7

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

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)  Related party transactions can never reflect 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)  Related party transactions can never reflect an arm's length standard. 
D)  The IRS always disallows any favorable tax consequences of related party transactions.

Question 8

Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

Accepted Answer

A) True 
 B)False

Question 13

Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements about different tax rates over time is false?

Accepted Answer

A)  A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4. 
B)  Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year. 
C)  A NPV calculation must assume a constant tax rate for all future periods. 
D)  A firm's future tax rate may change because of increases or decreases in future taxable income. 
A)  A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4. 
B)  Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year. 
C)  A NPV calculation must assume a constant tax rate for all future periods. 
D)  A firm's future tax rate may change because of increases or decreases in future taxable income.

Question 16

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

Accepted Answer

A)  $93,075 
B)  $88,650 
C)  $81,445.50 
D)  None of the above 
A)  $93,075 
B)  $88,650 
C)  $81,445.50 
D)  None of the above

Question 17

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

Accepted Answer

A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of the above 
A)  Public market 
B)  Private market 
C)  Secondary market 
D)  None of the above

Question 18

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 19

Holter Inc. owns an investment that generated $120,000 cash revenue and required $26,500 cash expenses this year. Holter's marginal tax rate is 30%. Which of the following statements is false?

Accepted Answer

A)  Holter's before-tax cash flow is $93,500. 
B)  If the revenue is taxable, but only $19,000 of the expenses are deductible, Holter's after-tax cash flow is $63,200. 
C)  If only $105,000 of the revenue is taxable, but all the expenses are deductible, Holter's after-tax cash flow is $69,950. 
D)  None of the above is false. 
A)  Holter's before-tax cash flow is $93,500. 
B)  If the revenue is taxable, but only $19,000 of the expenses are deductible, Holter's after-tax cash flow is $63,200. 
C)  If only $105,000 of the revenue is taxable, but all the expenses are deductible, Holter's after-tax cash flow is $69,950. 
D)  None of the above is false.

Question 20

Borden Company has the choice between two investments. Investment 1 will generate a $27,000 deductible loss this year (year 0), $15,000 taxable income in year 1, and $60,000 taxable income in year 2. Investment 2 will generate $16,000 taxable income in years 0, 1, and 2. Assume that income and loss reflect before-tax cash flow for Borden. Which opportunity should Borden choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV?

Accepted Answer

Investment 1 has a $25,613 NPV ($17,550

Ms. Owen purchased 2,000 shares of General Electric common stock through her broker. This purchase is an example of a:

Which of the following is not a related party transaction?

Which of the following statements about marginal tax rates is false?

The tax savings from a transaction represents a cash inflow.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

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

Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction.

The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.

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

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.

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

Which of the following statements about different tax rates over time is false?

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

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.

Holter Inc. owns an investment that generated $120,000 cash revenue and required $26,500 cash expenses this year. Holter's marginal tax rate is 30%. 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

Ms. Owen purchased 2,000 shares of General Electric common stock through her broker. This purchase is an example of a:

Which of the following is not a related party transaction?

Which of the following statements about marginal tax rates is false?

The tax savings from a transaction represents a cash inflow.

The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases.

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

Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction.

The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.

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

A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.

Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.

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

Which of the following statements about different tax rates over time is false?

Use the present value tables included in Appendix B of your textbook to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate.

The transacting parties can engage in bilateral tax planning when a transaction occurs in a:

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.

Holter Inc. owns an investment that generated $120,000 cash revenue and required $26,500 cash expenses this year. Holter's marginal tax rate is 30%. 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