Question 1

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases:

Accepted Answer

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

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

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. B

Question 4

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 5

The tax savings from a transaction represents a cash inflow.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Mr. Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income. If Mr. Trail's marginal tax rate is 40%, compute his after-tax cash flow from the transaction.

Accepted Answer

A)  $20,000 
B)  $24,000 
C)  $34,000 
D)  $40,000 
A)  $20,000 
B)  $24,000 
C)  $34,000 
D)  $40,000

Question 8

Mr. Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?

Accepted Answer

A)  If the cash flow is not taxable income, the before-tax and after-tax cash flows from the transaction are equal. 
B)  If the cash flow is not taxable income, the NPV of the transaction is $30,000. 
C)  Mr. Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate. 
D)  None of the above is true. 
A)  If the cash flow is not taxable income, the before-tax and after-tax cash flows from the transaction are equal. 
B)  If the cash flow is not taxable income, the NPV of the transaction is $30,000. 
C)  Mr. Quest's discount rate for computing the NPV of the transaction depends on his marginal tax rate. 
D)  None of the above is true.

Question 9

Mr. Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate.

Accepted Answer

A)  $259,185 
B)  $277,348 
C)  $290,310 
D)  None of the above 
A)  $259,185 
B)  $277,348 
C)  $290,310 
D)  None of the above

Question 10

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances. If Hower decides not to take the deduction, it is reducing:

Accepted Answer

A)  Audit risk 
B)  Tax law uncertainty 
C)  Business risk 
D)  None of the above 
A)  Audit risk 
B)  Tax law uncertainty 
C)  Business risk 
D)  None of the above

Question 11

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 12

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

Accepted Answer

A)  15% 
B)  20% 
C)  25% 
D)  30% 
A)  15% 
B)  20% 
C)  25% 
D)  30%

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

Accepted Answer

A)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero. 
B)  If the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
C)  If only $17,500 of the expense is deductible, Ms. Teague's after-tax cost is $14,000. 
D)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero and, if the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
A)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero. 
B)  If the expense is deductible, Ms. Teague's after-tax cost is $28,000. 
C)  If only $17,500 of the expense is deductible, Ms. Teague's after-tax cost is $14,000. 
D)  If the expense is nondeductible, Ms. Teague's after-tax cost is zero and, if the expense is deductible, Ms. Teague's after-tax cost is $28,000.

Question 15

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Accepted Answer

A) True 
 B)False

Question 16

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period.   If Mrs. Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

Accepted Answer

A)  $61,453 
B)  $52,771 
C)  $47,781 
D)  None of the above 
A)  $61,453 
B)  $52,771 
C)  $47,781 
D)  None of the above

Question 17

Which of the following statements about public market transactions is true?

Accepted Answer

A)  The parties negotiate directly with each other. 
B)  The parties must engage in unilateral instead of bilateral tax planning. 
C)  The parties are not transacting at arm's length. 
D)  Both parties have flexibility in determining the legal and financial characteristics of the transaction. 
A)  The parties negotiate directly with each other. 
B)  The parties must engage in unilateral instead of bilateral tax planning. 
C)  The parties are not transacting at arm's length. 
D)  Both parties have flexibility in determining the legal and financial characteristics of the transaction.

Question 18

The tax law prohibits related party transactions.

Accepted Answer

A) True 
 B)False

Question 19

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

Accepted Answer

A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of the above is false. 
A)  Ms. Kent's annual before-tax cash flow from this investment is $16,000. 
B)  If the interest is tax-exempt, Ms. Kent's annual after-tax cash flow is $16,000. 
C)  If the interest is taxable, Ms. Kent's annual after-tax cash flow is $6,400. 
D)  None of the above is false.

Question 20

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

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases:

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

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.

The tax savings from a transaction represents a cash inflow.

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

Mr. Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income. If Mr. Trail's marginal tax rate is 40%, compute his after-tax cash flow from the transaction.

Mr. Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?

Mr. Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate.

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances. If Hower decides not to take the deduction, it is reducing:

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.

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

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

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. If Mrs. Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

Which of the following statements about public market transactions is true?

The tax law prohibits related party transactions.

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

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

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

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases:

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

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.

The tax savings from a transaction represents a cash inflow.

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

Mr. Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income. If Mr. Trail's marginal tax rate is 40%, compute his after-tax cash flow from the transaction.

Mr. Quest plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true?

Mr. Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate.

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances. If Hower decides not to take the deduction, it is reducing:

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.

Rarke Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal.

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

Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true?

A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. If Mrs. Biggs' marginal tax rate over the three year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction.

Which of the following statements about public market transactions is true?

The tax law prohibits related party transactions.

Ms. Kent has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false?

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

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