Question 1

Kaskar Company, a calendar year taxpayer, paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building. Kaskar place the realty in service on September 29. Refer to the appropriate MACRS Table in Chapter 7 to compute Kaskar's first-year depreciation on the realty.

Accepted Answer

A)  $31,830 
B)  $35,544 
C)  $22,470 
D)  None of the above

Question 2

Follen Company is a calendar year taxpayer. On September 1, Follen signed a 24-month lease on 3,800 square feet of commercial office space. Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease. It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements. The rewiring qualifies as five-year recovery property. Compute Follen's first-year cost recovery deductions relating to the lease space.

Accepted Answer

The answer of Follen Company is a calendar year taxpayer....

Question 3

An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.

Accepted Answer

A) True 
 B)False

Question 4

Durna Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $874,000, and the second purchase was equipment costing $660,000. Both assets are 7-year recovery property. Durna placed the machine in service on March 27 and the equipment in service on December 14. How many months of MACRS depreciation is Durna allowed for each asset?

Accepted Answer

A)  Durna is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment. 
B)  Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment. 
C)  Durna is allowed 1.5 months of depreciation for both the machine and the equipment. 
D)  Durna is allowed six months of depreciation for both the machine and the equipment.

Question 5

Tregor Inc., which manufactures plastic components, rents equipment on a monthly basis for use in its manufacturing process. The monthly rent is a deductible expense when incurred.

Accepted Answer

A) True 
 B)False

Question 6

NLT Inc. purchased only one item of tangible personalty in 2016. The cost of the item was $24,000. NLT's taxable income before any Section 179 deduction was $7,100. NLT can elect Section 179 for only $7,100 of the cost of the property.

Accepted Answer

A) True 
 B)False

Question 7

Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.

Accepted Answer

A)  The lease is an intangible asset and therefore has a zero basis to Colby. 
B)  The lease has a zero basis because Colby obtained the lease at no cost. 
C)  $52,200. 
D)  None of the above

Question 8

Mann Inc. paid $7,250 to a leasing agent to negotiate Mann's 36-month lease for 18,000 square feet of space in a new commercial building. For tax purposes, Mann must:

Accepted Answer

A)  Capitalize the $7,250 cost as a nonamortizable intangible asset. 
B)  Capitalize the $7,250 cost and amortize it over 36 months. 
C)  Capitalize the $7,250 cost and depreciate it as 5-year recovery property. 
D)  Deduct the $7,250 cost in the year of payment.

Question 9

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800

Accepted Answer

A)  Unfavorable permanent book/tax difference 
B)  Favorable permanent book/tax difference 
C)  Unfavorable temporary book/tax difference 
D)  Favorable temporary book/tax difference

Question 10

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2016. Kemp made one asset purchase: manufacturing equipment costing $543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made the Section 179 election with respect to the equipment, compute Kemp's 2016 cost recovery deduction.

Accepted Answer

A)  $543,600 
B)  $524,915 
C)  $506,230 
D)  None of the above

Question 11

Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price. Compute Pettit's book basis and tax basis in the equipment.

Accepted Answer

A)  Book basis $30,000; tax basis $170,000 
B)  Book and tax basis $200,000 
C)  Book basis $200,000; tax basis $30,000 
D)  Book and tax basis $30,000

Question 12

Which of the following expenditures must be capitalized for tax purposes?

Accepted Answer

A)  Intangible drilling and development costs 
B)  Leasehold costs 
C)  Research and development costs 
D)  Advertising expenditures

Question 13

Which of the following statements concerning business goodwill is false?

Accepted Answer

A)  If a business creates goodwill by developing a loyal customer base and generating brand name recognition, the tax basis in the goodwill is zero. 
B)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis is not amortized for financial reporting purposes. 
C)  When a taxpayer purchases a business and capitalizes the cost allocated to goodwill, the cost basis may be amortized over 15 years for tax purposes. 
D)  The tax deduction for goodwill amortization is an unfavorable book/tax difference.

Question 14

Szabi Inc., a calendar year taxpayer, purchased two assets during 2016: a machine costing $380,000 and computer equipment costing $403,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

Accepted Answer

A)  Szabi should elect to expense the $380,000 cost of the machine and $120,000 of the cost of the computer equipment. 
B)  Szabi should elect to expense the $403,500 cost of the computer equipment machine and $96,500 of the cost of the machine. 
C)  Szabi must elect to expense $250,000 of the cost of the machine and $250,000 of the cost of the computer equipment. 
D)  Szabi is indifferent as to which costs to expense.

Question 15

Maxcom Inc. purchased 15 passenger automobiles for use by its sales force. Which of the following statements is true?

Accepted Answer

A)  Maxcom must use the straight-line method to depreciate the passenger automobiles for tax purposes. 
B)  Maxcom's annual tax depreciation on the passenger automobiles may be limited to an amount less than MACRS depreciation. 
C)  Maxcom's annual tax depreciation on the passenger automobiles is computed under MACRS. 
D)  Even though Maxcom purchased the automobiles for business use, Maxcom is not allowed any tax depreciation for the automobiles.

Question 16

Terrance Inc., a calendar year taxpayer, purchased used equipment for $2,765,000 and placed it in service on March 4, 2016. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2016.
a. Compute Terrance's tax depreciation with respect to the equipment for 2016 and 2017.
b. Compute Terrance's adjusted basis in the equipment in December 31, 2017.
c. How would your answer to a. change if the equipment was new instead of used?

Accepted Answer

The answer of Terrance Inc., a calendar year taxpayer, purchased...

Question 17

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center. $$\begin{array} { l r } 
\text { Rent on commercial space } & \$ 6,000 \
\text { Utilities } & \mathbf { 1 , 4 9 0 } \
\text { Staff hiring and training } & \mathbf { 5 , 2 7 0 } \
\text { Television advertising } & \underline { 1,600 } \
 &\underline { \mathbf { \$1 4 , 3 6 0 } }
\end{array}$$ The Puloso Center opened its doors for business on March 21, 2016. How much of the start-up expenditures can Puloso deduct in 2016?

Accepted Answer

A)  -0- 
B)  $5,000 
C)  $5,520 
D)  $14,360

Question 18

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the

Accepted Answer

A)  Mid-month convention 
B)  Mid-quarter convention 
C)  Mid-year convention 
D)  Daily pro-ration method

Question 19

Ingol Inc. was organized on June 1 and began business on September 13. Ingol elected a calendar year for tax purposes. The corporation incurred $60,300 of legal and other professional fees attributable to its formation. How much of these costs can Ingol deduct on its first tax return?

Accepted Answer

A)  -0- 
B)  $1,340 
C)  $6,229 
D)  None of the above

Question 20

Pyle Inc., a calendar year taxpayer, generated over $10 million taxable income in 2016. Pyle made one asset purchase: new transportation equipment costing $322,000. The equipment has a 5-year recovery period and was placed in service on February 9. Assuming that Pyle made the Section 179 election with respect to the equipment, compute Pyle's 2016 cost recovery deduction.

Accepted Answer

A)  $193,200 
B)  $322,000 
C)  $64,400 
D)  $500,000

Exam 7: Property Acquisitions and Cost Recovery Deductions

An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.

Tregor Inc., which manufactures plastic components, rents equipment on a monthly basis for use in its manufacturing process. The monthly rent is a deductible expense when incurred.

NLT Inc. purchased only one item of tangible personalty in 2016. The cost of the item was $24,000. NLT's taxable income before any Section 179 deduction was $7,100. NLT can elect Section 179 for only $7,100 of the cost of the property.

Colby Company performed professional services for M&E Inc. In exchange for the services, M&E gave Colby a 12-month lease on commercial office space. M&E could have charged $4,350 monthly rent for the space on the open market. Compute Colby's tax basis in the lease.

Mann Inc. paid $7,250 to a leasing agent to negotiate Mann's 36-month lease for 18,000 square feet of space in a new commercial building. For tax purposes, Mann must:

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800

Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price. Compute Pettit's book basis and tax basis in the equipment.

Which of the following expenditures must be capitalized for tax purposes?

Which of the following statements concerning business goodwill is false?

Szabi Inc., a calendar year taxpayer, purchased two assets during 2016: a machine costing $380,000 and computer equipment costing $403,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

Maxcom Inc. purchased 15 passenger automobiles for use by its sales force. Which of the following statements is true?

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the

Ingol Inc. was organized on June 1 and began business on September 13. Ingol elected a calendar year for tax purposes. The corporation incurred $60,300 of legal and other professional fees attributable to its formation. How much of these costs can Ingol deduct on its first tax return?