Question 1

JebSim Inc. was organized on June 1, 2012, and began business on August 10. JebSim elected a calendar year for tax purposes. The corporation incurred $25,160 of legal and other professional fees attributable to its formation. How much of these costs can JebSim deduct on its first tax return?

Accepted Answer

A)  -0- 
B)  $699 
C)  $5,000 
D)  $5,560

Question 2

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 3

Which of the following statements about tax basis is false?

Accepted Answer

A)  The tax basis in an asset can never be negative. 
B)  Tax basis represents the taxpayer's unrecovered dollars invested in the asset. 
C)  Tax basis reflects the asset's fair market value. 
D)  Every asset owned by the taxpayer has a tax basis.

Question 4

Ferelli Inc. is a calendar year taxpayer. On September 1, Ferelli signed a 24-month lease on 3,600 square feet of commercial office space and paid a $3,240 fee to the agent who located the space and negotiated the lease. Ferelli paid $5,900 to install new overhead lighting in the office space. The lighting is 7-year recovery property. Compute Ferelli's current-year cost recovery deduction with respect to the $9,140 costs associated with the office space.

Accepted Answer

A)  $540 
B)  $843 
C)  $1,523 
D)  None of the above

Question 5

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 6

L&P Inc., which manufactures electrical components, purchased new equipment for use in its manufacturing process. The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules.

Accepted Answer

A) True 
 B)False

Question 7

Deitle Inc. manufactures small appliances. This year, Deitle capitalized $3,679,000 indirect costs to inventory for book purposes and $3,865,000 indirect costs to inventory for tax purposes. The consequence of the different accounting methods is a $186,000:

Accepted Answer

A)  Permanent unfavorable book/tax difference 
B)  Permanent favorable book/tax difference 
C)  Temporary unfavorable book/tax difference 
D)  Temporary favorable book/tax difference

Question 8

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 3. The MACRS depreciation calculation assumes that the building was placed in service on June 15.

Accepted Answer

A) True 
 B)False

Question 9

This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)  Purchase cost of a partnership interest 
B)  Purchase cost of business goodwill 
C)  Leasehold cost 
D)  Purchase cost of a patent

Question 12

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 13

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center.  The Puloso Center opened its doors for business on March 21, 2011. How much of the start-up expenditures can Puloso deduct in 2011?

Accepted Answer

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

Question 14

BriarHill Inc. purchased four items of tangible personalty in 2012 at a total cost of $2,798,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A)  $4,711,400 
B)  $4,751,000 
C)  $4,790,600 
D)  $5,288,600

Question 16

On April 2, Reid Inc., a calendar year taxpayer, paid a $750,000 lump-sum price to purchase a business. The appraised FMVs of the balance sheet assets were:  Which of the following statements is false?

Accepted Answer

A)  Reid must capitalize $150,000 of the cost as purchased goodwill. 
B)  Reid may amortize the $150,000 cost for both book and tax purposes. 
C)  Reid's amortization deduction for the current year is $7,500. 
D)  None of the above is false.

Question 17

A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements about amortization deductions is false?

Accepted Answer

A)  Amortization deductions result in the recovery of the capitalized cost of an intangible asset. 
B)  Amortization is computed ratably (on a straight-line basis) over the asset's determinable life. 
C)  Amortization deductions reduce the tax basis of the amortized asset. 
D)  None of the above is false.

Question 19

The expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 7: Property Acquisitions and Cost Recovery Deductions

JebSim Inc. was organized on June 1, 2012, and began business on August 10. JebSim elected a calendar year for tax purposes. The corporation incurred $25,160 of legal and other professional fees attributable to its formation. How much of these costs can JebSim deduct on its first tax return?

Which of the following statements concerning business goodwill is false?

Which of the following statements about tax basis is false?

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:

L&P Inc., which manufactures electrical components, purchased new equipment for use in its manufacturing process. The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules.

Deitle Inc. manufactures small appliances. This year, Deitle capitalized $3,679,000 indirect costs to inventory for book purposes and $3,865,000 indirect costs to inventory for tax purposes. The consequence of the different accounting methods is a $186,000:

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 3. The MACRS depreciation calculation assumes that the building was placed in service on June 15.

This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return.

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

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

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

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center. The Puloso Center opened its doors for business on March 21, 2011. How much of the start-up expenditures can Puloso deduct in 2011?

BriarHill Inc. purchased four items of tangible personalty in 2012 at a total cost of $2,798,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

On April 2, Reid Inc., a calendar year taxpayer, paid a $750,000 lump-sum price to purchase a business. The appraised FMVs of the balance sheet assets were: Which of the following statements is false?

A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.

Which of the following statements about amortization deductions is false?

The expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.

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