Question 1

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 2

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

Accepted Answer

A) True 
 B)False

Question 3

The arm's length transaction presumption is unreliable for transactions between related parties.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

Accepted Answer

A) True 
 B)False

Question 7

Mr. and Mrs. Dean own an investment that generated $60,000 cash revenue and required $12,000 cash expenses this year. The Deans' marginal tax rate is 25%. Which of the following statements is true?

Accepted Answer

A) If only $52,000 of the revenue is taxable, but all the expenses are deductible, the Deans' after-tax cash flow is $40,000. 
B) If the revenue is taxable, but only $8,500 of the expenses are deductible, the Deans' after-tax cash flow is $38,625. 
C) The Deans' before-tax cash flow is $48,000. 
D) Statements B.and C.are true. 
A) If only $52,000 of the revenue is taxable, but all the expenses are deductible, the Deans' after-tax cash flow is $40,000. 
B) If the revenue is taxable, but only $8,500 of the expenses are deductible, the Deans' after-tax cash flow is $38,625. 
C) The Deans' before-tax cash flow is $48,000. 
D) Statements B.and C.are true.

Question 8

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

Accepted Answer

A) A taxpayer's marginal rate can change with every transaction. 
B) As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C) As the marginal rate increases, the tax savings from a deduction increases. 
D) Statements A.and C.are true. 
A) A taxpayer's marginal rate can change with every transaction. 
B) As the marginal rate increases, the tax cost of an income-generating transaction decreases. 
C) As the marginal rate increases, the tax savings from a deduction increases. 
D) Statements A.and C.are true.

Question 9

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 10

Related party transactions occur in a public market.

Accepted Answer

A) True 
 B)False

Question 11

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 12

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

Accepted Answer

A) If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow. 
B) If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow. 
C) If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow. 
D) None of the above is false. 
A) If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow. 
B) If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow. 
C) If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow. 
D) None of the above is false.

Question 13

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period.   If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate, compute the NPV of the transaction.

Accepted Answer

A) $59,340 
B) $55,996 
C) $50,413 
D) None of the above 
A) $59,340 
B) $55,996 
C) $50,413 
D) None of the above

Question 14

Use the present value tables included in Appendix A of your textbook to compute the NPV of $12,500 received in year 5 at a 6% discount rate.

Accepted Answer

A) $8,745.5 
B) $9,337.5 
C) $9,900 
D) None of the above 
A) $8,745.5 
B) $9,337.5 
C) $9,900 
D) None of the above

Question 15

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 16

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.

Question 17

Ms. Card bought an investment that will generate the following cash flows over a three-year period.   If Ms. Card's marginal tax rate over the three year period is 40% and she uses a 6% discount rate, compute the NPV of the transaction.

Accepted Answer

A) $94,129 
B) $84,964 
C) $62,373 
D) None of the above 
A) $94,129 
B) $84,964 
C) $62,373 
D) None of the above

Question 18

Which of the following statements about discount rates is false?

Accepted Answer

A) A discount rate for computing NPV cannot change from one period to the next. 
B) The discount rate for a risky investment should be higher than the discount rate for a risk-free investment. 
C) Discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
D) Statements A.and C.are false. 
A) A discount rate for computing NPV cannot change from one period to the next. 
B) The discount rate for a risky investment should be higher than the discount rate for a risk-free investment. 
C) Discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. 
D) Statements A.and C.are false.

Question 19

When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.

Accepted Answer

A) True 
 B)False

Question 20

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 B.and C.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 B.and C.are true.

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

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

The arm's length transaction presumption is unreliable for transactions between related parties.

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

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

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

Mr. and Mrs. Dean own an investment that generated $60,000 cash revenue and required $12,000 cash expenses this year. The Deans' marginal tax rate is 25%. Which of the following statements is true?

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

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

Related party transactions occur in a public market.

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

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate, compute the NPV of the transaction.

Use the present value tables included in Appendix A of your textbook to compute the NPV of $12,500 received in year 5 at a 6% discount rate.

The arm's length transaction presumption

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

Ms. Card bought an investment that will generate the following cash flows over a three-year period. If Ms. Card's marginal tax rate over the three year period is 40% and she uses a 6% discount rate, compute the NPV of the transaction.

Which of the following statements about discount rates is false?

When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.

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?

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 a Present Value of $1 B Present Value of Annuity of $1 C 2013 Income Tax Rates

Filters

Exam 3: Taxes As Transaction Costs

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

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

The arm's length transaction presumption is unreliable for transactions between related parties.

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

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

Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.

Mr. and Mrs. Dean own an investment that generated $60,000 cash revenue and required $12,000 cash expenses this year. The Deans' marginal tax rate is 25%. Which of the following statements is true?

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

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

Related party transactions occur in a public market.

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

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. If the Raths' marginal tax rate over the three year period is 20% and they use a 6% discount rate, compute the NPV of the transaction.

Use the present value tables included in Appendix A of your textbook to compute the NPV of $12,500 received in year 5 at a 6% discount rate.

The arm's length transaction presumption

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

Ms. Card bought an investment that will generate the following cash flows over a three-year period. If Ms. Card's marginal tax rate over the three year period is 40% and she uses a 6% discount rate, compute the NPV of the transaction.

Which of the following statements about discount rates is false?

When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.

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?

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 a Present Value of $1 B Present Value of Annuity of $1 C 2013 Income Tax Rates

Filters