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Tax Chapter 7

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1. Kigin Company spent $240,000 to clean up hazardous waste that had contaminated land used in Kigin's business. Which of the following statements is true? A. Kigin must capitalize the $240,000 expenditure to the cost of the land. B. If Kigin purchased the land in an uncontaminated state, it can deduct the $240,000 because the expenditure is merely returning the land to its original condition. C. Kigin can deduct the $240,000 as a repair expense. D. None of the above is true.

Inger Associates, which manufactures plastic containers, recently sold 12,000 containers to R&A Inc. The selling price per container was $18. R&A paid for the containers by transferring 864 shares of its common stock to Inger. On date of payment, R&A stock was selling on Nasdaq at $250 per share. Compute Inger's tax basis in the R&A stock. A. -0- B. $216,000 C. Inger's tax basis equals its manufacturing cost of the 12,000 containers. D. None of the above

Song Company, a calendar year taxpayer, purchased a total of $2,800,000 tangible personalty in 2018. How much of this cost can Song elect to expense under Section 179? A. $300,000 B. $700,000 C. $1,000,000 D. $2,800,000

Which of the following statements about tax basis is false? 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 taxpayer has a tax basis.

Which of the following statements about the depletion deduction is false? A. Firms can deduct the greater of cost depletion or percentage depletion for the year. B. Percentage depletion is a tax preference item. C. The depletion deduction can never exceed the unrecovered cost basis in the depletable asset. D. Percentage depletion is not based on any actual decrease in the expected productive value of a mine or well.

JebSim Inc. was organized on June 1 and began business on August 18. 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? A. -0- B. $699 C. $5,000 D. $5,560

Which of the following statements about MACRS is false? A. Depreciable assets are assumed to have no residual or salvage value. B. Every depreciable asset is assigned to one of ten recovery periods. C. Allowable depreciation methods are based on the assets assigned recovery period. D. None of the above 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.

False

Cosmo Inc. purchased an asset costing $67,500 by paying $13,500 cash at date of purchase and giving the seller a 5-year interest-bearing note for the $54,000 balance. Cosmo's tax basis in the asset is $13,500.

False

Environmental clean-up costs are deductible in the year incurred.

False

Research and experimental expenditures are deductible unless they result in the development of a patented formula or process.

False

The MACRS calculation is based on the estimated useful life of the depreciable asset.

False

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.

False

Conant Company purchased only one item of tangible personalty in 2010. The cost of the item was $595,700. Conant can elect to expense $134,000 of this cost.

False (Conant can elect to expense $68,300 of the cost ($134,000 - [$595,700 - $530,000]).)

Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

False (Firms can deduct the greater of cost depletion or percentage depletion.)

The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.

False (The cost is depreciable under MACRS)

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

False (The first $5,000 of organizational costs are deductible.)

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.

False (The rent must be capitalized to inventory under the unicap rules.)

Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. Which of the following statements is true? A. The accounting treatment of the goodwill does not result in any book/tax difference in the current year. B. This year, Bettis has a $40,000 unfavorable temporary difference because of the accounting treatment of goodwill. C. This year, Bettis has a $40,000 favorable temporary difference because of the accounting treatment of goodwill. D. None of the above is true.

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center. Rent on commecial space $6000, Utilities $1490, Staff hiring and training $5270, Television advertising $1600 = $14360. The Puloso Center opened its doors for business on March 21, 2010. How much of the start-up expenditures can Puloso deduct in 2010? A. -0- B. $5,000 C. $5,520 D. $14,360

c (Puloso can deduct $5,000 of the start-up expenditures and is allowed a $520 amortization deduction ([$9,360 capitalized cost/180 months] * 10 months beginning in March).)

Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3- year note for $240,000. Which of the following statements is true? A. Kassim's book basis and tax basis in the asset is $275,000 B. Kassim's book basis is $275,000, but its tax basis is $35,000. C. Kassim's book basis and tax basis in the asset is $35,000. D. If Kassim is a cash basis taxpayer, its initial tax basis in the asset is zero.

Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000. Which of the following statements is true? A. Kassim's book basis and tax basis in the asset is $275,000 B. Kassim's book basis is $275,000, but its tax basis is $35,000. C. Kassim's book basis and tax basis in the asset is $35,000. D. If Kassim is a cash basis taxpayer, its initial tax basis in the asset is zero.

Moses Inc. purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge. Which of the following is true? A. Moses's tax basis in the furniture is $8,842. B. Moses's tax basis in the furniture is $8,692, and it can deduct the delivery charge. C. Moses's tax basis in the furniture is $8,350, and it can deduct the sales tax. D. Moses's tax basis in the furniture is $8,200, and it can deduct the sales tax and delivery

Which of the following statements concerning deductible repair expenses is false? A. The distinction between a repair expense and a capital improvement is clearly defined by the tax law. B. Businesses typically incur repair expenses on a regular and recurring basis. C. Repair expenses do not substantially increase the value of the repaired asset. D. Repair expenses do not substantially increase the useful life of the repaired asset.

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

A (Based on Table 7.3 for residential real property, first-year MACRS for the building placed in service in the 9 th month is $3,000,000 * 1.061%.)

Lovely Cosmetics Inc. incurred $785,000 research costs on the development of its formula for a new line of face creams. Lovely obtained a 17-year patent on the formula from the U.S. government. Which of the following statements is true? A. Lovely is allowed to deduct the $785,000 research costs. B. Lovely's tax basis in its patent is $785,000. C. The $785,000 cost results in a favorable book/tax difference. D. Both a. and b. are true.

A (Lovely's tax basis in the patent is zero. The accounting treatment of research and experimental expenditures typically is the same for book and tax purposes.)

Zola Inc. paid a $10,000 legal fee to the attorney who resolved a dispute over Zola's title to investment land. Zola's auditors required the corporation to expense the payment for financial statement purposes. The tax law required Zola to capitalize the payment to the basis of the land. This difference in accounting treatment results in a: A. Deferred tax asset B. Deferred tax liability C. Permanent unfavorable book/tax difference D. Permanent favorable book/tax difference

A (The capitalized expense is an unfavorable temporary difference that will reverse when Zola sells the land.)

Kigin Company spent $240,000 to clean up hazardous waste that had contaminated land used in Kigin's business. Which of the following statements is true? A. Kigin must capitalize the $240,000 expenditure to the cost of the land. B. If Kigin purchased the land in an uncontaminated state, it can deduct the $240,000 because the expenditure is merely returning the land to its original condition. C. Kigin can deduct the $240,000 as a repair expense. D. None of the above is true.

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. 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

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

B (

Cobly Company, a calendar year taxpayer, made only one asset purchase this year: machinery costing $1,932,500. The machinery is 7-year recovery property, and Cobly placed it in service on October 12. How many months of MACRS depreciation on the machinery is Cobly allowed? A. Six months B. Two and one-half months C. One and one-half months D. None of the above

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. 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

Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true? A. Elcox is allowed to deduct the $2.3 million cost on this year's tax return only if it expenses the advertising costs for financial statement purposes. B. Elcox must capitalize the $2.3 million cost. C. Elcox is allowed to deduct the $2.3 million cost. D. The $2.3 million cost results in an unfavorable book/tax difference.

WR&Z Company, a calendar year taxpayer, paid $6,400,000 for a commercial office building and allocated $400,000 of the cost to the land and $6,000,000 of the cost to the building. WR&Z place the realty in service on May 11. Refer to the appropriate MACRS Table in Chapter 7 to compute WR&Z's first-year depreciation on the realty. A. $136,380 B. $102,720 C. $96,300 D. None of the above

C (Based on Table 7.4 for nonresidential real property, first-year MACRS for the building placed in service in the 5 th month is $6,000,000 * 1.605%.)

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

C (The $186,000 additional capitalized costs for tax purposes were expensed for book purposes and therefore result in a $186,000 excess of taxable income over book income.)

Hoopin Oil Inc. was allowed to deduct $5.3 million of intangible drilling and development costs on this year's tax return. Which of the following statements is false? A. The deduction is a tax preference for Hoopin. B. The deduction minimizes Hoopin's after-tax cost of locating and preparing oil wells for production. C. Hoopin was allowed to deduct the costs because they did not result in any long-term economic benefit. D. None of the above is false.

C (The IDC associated with productive wells undeniably result in a long-term economic benefit.)

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

C (The additional capitalization of indirect costs under unicap results in a $39,600 unfavorable difference and the excess of tax COGS over book COGS results in a $249,000 favorable difference. Thus, taxable income is $4,790,600 ($5,000,000 - $209,400 net favorable difference).)

Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false? A. Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years. B. Poole must capitalize the expenditure if it extends the estimated useful life of an existing asset by three years. C. Poole must capitalize the expenditure if it results a long-term economic benefit to the company. D. None of the above is false.

Which of the following statements about amortization deductions is false? 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.

Which of the following statements about the uniform capitalization (unicap) rules is false? A. The unicap rules determine the annual costs that firms must capitalize to inventory for tax purposes. B. The unicap rules may require capitalization of more indirect costs to inventory for tax purposes than for book purposes. C. The unicap rules may result in a book/tax difference for cost of goods sold. D. None of the above is false.

Which of the following statements about the computation of cost of goods sold is true? A. Manufacturing and retail businesses must use the specific identification method for tax purposes. B. Manufacturing and retail businesses must use the FIFO costing convention for tax purposes. C. Manufacturing and retail businesses must use the LIFO costing convention for tax purposes. D. Manufacturing and retail businesses that use the LIFO costing convention for tax purposes must also use LIFO for book purposes.

D (Businesses cannot use LIFO for tax purposes unless they also use LIFO to prepare their financial statements.)

Which of the following statements about the tax treatment of research and experimental expenditures is true? A. The treatment violates the tax principle of conservatism. B. The treatment creates a favorable book/tax difference. C. The treatment minimizes the after-tax cost of the expenditures. D. Both a. and c. are true.

D (The tax principle of conservatism inhibits the premature deduction of expenditures that result in future economic benefits. The preferential deduction for research and experimental expenditures violates this principle.)

In an inflationary economy, the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.

False

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

False

Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.

False

In an inflationary economy, the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.

False (In an inflationary economy, the use of LIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.)

Richland Company purchased an asset in 2006 for $50,000 and sold it in 2009. The asset was 7-year recovery property. Richland's 2009 MACRS depreciation on the asset was $6,245.

False (MACRS depreciation was $3,123 ([$50,000 * 12.49%] * 50% [half-year]))

Mallow Inc., which has a 35% tax rate, purchased a new business asset. First-year book depreciation was $37,225, and first-year MACRS depreciation was $55,025. As a result of this book/tax difference, Mallow recorded a $6,230 deferred tax asset.

False (Mallow recorded a $6,230 deferred tax liability.)

NLT Inc. purchased only one item of tangible personalty in 2010. The cost of the item was $124,000. NLT's taxable income before any Section 179 deduction was $77,100. NLT can elect to expense only $77,100 of the cost of the property.

False (NLT can elect to expense the entire cost but it can deduct only $77,100 of this expense.)

Cosmo Inc. paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset. Cosmo's tax basis in the asset is $15,200, and it can deduct the sales tax.

False (Sales tax must be capitalized as part of the cost of the asset.)

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 12. The MACRS depreciation calculation assumes that the building was placed in service on May 15 (midquarter).

False (The MACRS calculation for buildings uses a midmonth convention.)

A book/tax difference resulting from application of the unicap rules to manufactured inventory reverses in the year in which the inventory is sold.

True

A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.

True

A firm must capitalize any start-up expenditures of a new business in excess of $5,000 but may deduct any expansion costs of an existing business.

True

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

True

Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250.

True

Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.

True

Hextone Inc., which has a 35% tax rate, purchased a new business asset. First-year book depreciation was $14,890, and first-year MACRS depreciation was $27,090. As a result of this book/tax difference, Hextone recorded a $4,270 deferred tax liability.

True

KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November 13. This was KJD's only purchase of tangible personalty this year. KJD must use a midquarter convention to compute MACRS depreciation on the equipment.

True

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.

True

MACRS depreciation for buildings is based on the straight-line method.

True

Selkie Inc. paid a $2 million lump sum to purchase a business. According to the contract, the seller of the business is prohibited from engaging in a similar business for 18 months. Selkie allocated $300,000 of the purchase price to this covenant not to compete. Selkie may amortize the $300,000 over 15 years.

True

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.

True

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.

True

The MACRS calculation ignores any salvage or residual value of an asset.

True

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

True

The difference between the before-tax cost and after-tax cost of an asset equals the net present value of the tax savings from any cost recovery deductions with respect to the asset.

True

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.

True

BriarHill Inc. purchased four items of tangible personalty in 2010 at a total cost of $1,298,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

True (Because BriarHill purchased more than $664,000 of qualifying property, its limited dollar amount is reduced to zero.)

Dorian, a calendar year corporation, purchased $1,568,000 of equipment on May 3. This was Dorian's only purchase of depreciable property for the year. If the equipment has a 10- year recovery period, refer to Table 7.2 and compute Dorian's first and second-year MACRS depreciation. (Disregard bonus depreciation in making your calculation.) A. First year $156,800; second year $282,240 B. First year $78,400; second year $282,240 C. First year $156,800; second year $245,016 D. None of the above

Which of the following capitalized cost is not amortizable for tax purposes? A. Purchase cost of a partnership interest B. Purchase cost of business goodwill C. Leasehold cost D. Purchase cost of a patent

Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. This year, Bettis's auditors required Bettis to write the goodwill down to $500,000 and record a $100,000 impairment expense. Because of the accounting treatment of goodwill, Bettis has a current: A. $60,000 unfavorable temporary book/tax difference B. $100,000 unfavorable temporary book/tax difference C. $100,000 unfavorable permanent book/tax difference D. $40,000 favorable temporary book/tax difference

a (Bettis's $40,000 annual amortization deduction and its $100,000 nondeductible impairment expense net to a $60,000 unfavorable excess of taxable income over book income.)

Vane Company, a calendar year taxpayer, incurred the following expenditures in the preoperating phase of a new health and fitness center. Rent on commecial space $4800, Utilities $735, Staff hiring and training $3920, Newspaper advertising $960 = $10,415. Which of the following statements is true? A. If Vane already operates seven other health and fitness centers, it can deduct the $10,415 preoperating expenditures of the eighth center as expansion costs. B. If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment. C. If the new center represents a new business for Vane, it must capitalize the $10,415 preoperating expenditures. D. None of the above is true.

a (If the new center represents a new business for Vane, it can deduct $5,000 of the preoperating expenditures and must capitalize the remaining $5,415.)

Jaboy Inc. was incorporated three year ago. In its first year, Jaboy capitalized $72,000 organizational and start-up costs for tax purposes. However, it expensed these costs for financial statement purposes. Which of the following statements is true? A. As a result of the accounting difference three years ago, Jaboy has a $4,800 favorable book/tax difference in the current year. B. As a result of the accounting difference three years ago, Jaboy has a $4,800 unfavorable book/tax difference in the current year. C. The accounting difference three years ago has no book/tax consequence in the current year. D. None of the above is true.

a (Jaboy's current year amortization deduction is $4,800 ($72,000/180 months * 12 months).)

Szabi Inc., a calendar year taxpayer, purchased two assets during 2010: a machine costing $80,000 and computer equipment costing $103,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true? A. Szabi should elect to expense the $80,000 cost of the machine and $64,000 of the cost of the computer equipment. B. Szabi should elect to expense the $103,500 cost of the computer equipment machine and $30,500 of the cost of the machine. C. Szabi must elect to expense $58,420 of the cost of the machine and $75,580 of the cost of the computer equipment. D. Szabi is indifferent as to which costs to expense.

a (Szabi should expense the cost of the 7-year recovery property before the cost of the 5-year recovery property to maximize acceleration of its cost recovery deductions.)

Broadas., a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2010. Broadus's taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true? A. Broadus can elect to expense only $92,600 of the cost of the personalty. B. Broadus can elect to expense the $128,300 cost of the personalty but can deduct only $92,600 of the expense. C. Broadus can elect to expense only $35,700 of the cost of the personalty. D. Broadus can elect to expense the $168,300 cost of the personalty but can deduct only $35,700 of the expense.

D&R Company, a calendar year corporation, purchased $1,116,000 of equipment on August 3. This was D&R's only purchase of depreciable property for the year. If the equipment has a 7-year recovery period, refer to Table 7.2 and compute D&R's first and second-year MACRS depreciation. (Disregard bonus depreciation in making your calculation.) A. First year $79,738; second year $273,308 B. First year $159,476; second year $273,308 C. First year $159,476; second year $234,253 D. None of the above

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: 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.

Powell Inc. was incorporated and began operations on October 1 and adopted a calendar year for tax purposes. Powell paid $4,200 to the attorney who handled the corporate formation. Which of the following statements is true? A. If Powell capitalized the $4,200 payment for financial statement purposes, it must also capitalize it for tax purposes. B. Powell can deduct the $4,200 payment on its first tax return. C. For tax purposes, Powell must capitalize the $4,200 organizational cost and amortize it over 15 years D. None of the above is true.

Uqua Inc. purchased a depreciable asset for $189,000. First-year depreciation for book purposes was $22,000, and first-year MACRS depreciation was $37,800. If Uqua's marginal tax rate is 35%, the excess tax depreciation results in a $5,530: A. Deferred tax asset B. Deferred tax liability C. Permanent favorable book/tax difference D. Permanent unfavorable book/tax difference

Which of the following statements concerning MACRS depreciation is true? A. MACRS depreciation for the year in which an asset is placed in service or sold is based on the number of days the asset was used in the year. B. MACRS depreciation for buildings is not accelerated but is computed using the straight- line method. C. The recovery period under MACRS is based on the estimated useful life of the particular asset under consideration. D. Salvage value is taken into account in computing MACRS depreciation.

On April 20, 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: AR $38000, Inventory $415000, Fixtures and Equipment $147000 = $600,000 Which of the following statements is false? 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.

b (([$150,000/180 months] * 9 months) = $7,500 amortization deduction. Goodwill is not amortizable under GAAP.)

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

b (Ingol must capitalize its $60,300 organizational costs and is allowed a $1,340 amortization deduction ([$60,300 capitalized cost/180 months] * 4 months beginning in September).)

Mann Inc., a calendar year taxpayer, incurred $49,640 start-up expenditures during the preoperating phase of a new business venture. The business started operations in November. Mann expensed the $49,625 on its current-year financial statements. Which of the following statement is true? A. The start-up expenditures resulted in a $49,640 unfavorable book/tax difference. B. The start-up expenditures resulted in a $44,144 unfavorable book/tax difference. C. The start-up expenditures resulted in a $49,640 favorable book/tax difference. D. The start-up expenditures did not result in a book/tax difference.

b (Mann can deduct $5,496 of the start-up expenditures this year ($5,000 + [$44,640/180 * 2 months]). The $44,144 remaining capitalized expenditures result in an excess of taxable income over book income.)

In 2009, Rydin Company purchased one asset costing $48,400 and elected to expense the entire cost. However, Rydin could only deduct $21,000 of the Section 179 expense because of the taxable income limitation. In 2010, Rydin purchased tangible personalty costing $140,000. Rydin's taxable income without regard to any Section 179 deduction was $2,912,400. Compute Rydin's 2010 Section 179 deduction. A. $140,000 B. $134,000 C. $167,400 D. $161,400

b (Rydin's carryover expense from 2009 is $27,400 ($48,400 expense - $21,000 deduction). This carryover plus the $140,000 cost of qualifying property purchased in 2010 exceed the $134,000 limited dollar amount for the year. Consequently, Rydin's deduction is limited to $134,000.)

Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true? A. Mr. and Mrs. Carleton are allowed to amortize the $5 million value of their business goodwill over 15 years. B. Mr. and Mrs. Carleton have a zero tax basis in their business goodwill. C. Mr. and Mrs. Carleton cannot amortize the $5 million value of their business goodwill because it is an intangible asset with an indeterminable life. D. None of the above is true.

b (The goodwill is a self-created asset. Only purchased goodwill has an amortizable cost basis.)

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? 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.

b (The midquarter convention applies because Durna placed more than 40% (43%) of its depreciable personalty into service in the fourth quarter.)

c (The midquarter convention applies because Cobly placed more than 40% (100%) of its depreciable personalty into service in the fourth quarter.)

W&F Company, a calendar year taxpayer, purchased a total of $603,700 tangible personalty in 2010. How much of this cost can W&F elect to expense under Section 179? A. -0- B. $73,700 C. $60,300 D. None of the above

c (W&F can elect to expense $60,300 of the cost ($134,000 limited dollar amount - [$603,700 - $530,000]))

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true? A. If Driller's allowable percentage depletion is $313,000, Driller will deduct cost depletion. B. If Driller's allowable percentage depletion is $515,000, Driller will deduct percentage depletion. C. If Driller's allowable percentage depletion is $515,000, Driller's depletion deduction is limited to $498,200. D. Statements a. and b. are true.

Lensa Inc. purchased machinery several years ago for $400,000. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 35%. Which of the following statements is true? A. The book/tax difference in depreciation results in a $1,498 decrease in Lensa's deferred tax liabilities. B. The book/tax difference in depreciation results in a $1,498 deferred tax asset. C. The $4,280 difference between book and tax depreciation is unfavorable. D. Both a. and c. are true.

Mann Inc. negotiated a 36-month lease on office space in a new commercial building. Mann paid $19,000 to a local carpenter to construct special-purpose shelving in the rented office. For tax purposes, Mann must: A. Capitalize the $19,000 cost and amortize it over 36 months. B. Deduct the $19,000 cost in the year of payment. C. Capitalize the $19,000 cost as a nonamortizable leasehold improvement. D. Capitalize the $19,000 cost and depreciate it over the applicable MACRS recovery period.

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. A. $540 B. $1,523 C. $4,083 D. None of the above

d ($540 amortization of leasehold cost ([$3,240/24 months] * 4 months) + $843 depreciation of leasehold improvement ($5,900 * 14.29%) = $1,383)

Gowda Inc., a calendar year taxpayer, purchased $1,496,000 of equipment on March 23. This was Gowda's only purchase of depreciable property for the year. If the equipment has a 7-year recovery period, refer to Table 7.2 and compute Gowda's first and second-year MACRS depreciation. (Disregard bonus depreciation in making your calculation.) A. First year $106,889; second year $366,370 B. First year $106,889; second year $340,193 C. First year $213,778; second year $183,185 D. None of the above

d (First year $213,778; second year $366,370)

d (JebSim can deduct $5,000 of the organizational costs and is allowed a $560 amortization deduction ([$20,160 capitalized cost/180 months] * 5 months beginning in August).)

Song Company, a calendar year taxpayer, purchased a total of $614,400 tangible personalty in 2010. How much of this cost can Song elect to expense under Section 179? A. -0- B. $134,000 C. $84,400 D. None of the above

d (Song can elect to expense $49,600 of the cost ($134,000 limited dollar amount - [$614,400 - $530,000]).)

Mr. and Mrs. Schulte paid a $750,000 lump-sum price to purchase a business. At date of purchase, the appraised FMVs of the balance sheet assets were: AR $38000, Inventory $415000, Fixtures and equipment $147000 = $600000. Which of the following statements is true? A. The Schultes must allocated the $750,000 cost to the balance sheet assets based on the assets' relative FMV. B. The Schultes must capitalize $150,000 of the cost to nonamortizable goodwill. C. The Schultes may deduct $150,000 of the cost as business goodwill. D. None of the above is true.

d (The Schultes must capitalize $150,000 of the cost to amortizable goodwill.)

Essco Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $836,000, and the second purchase was equipment costing $494,000. Both assets are 7-year recovery property. Essco placed the machine in service on July 21 and the equipment in service on October 14. How many months of MACRS depreciation is Essco allowed for each asset? A. Essco is allowed six months depreciation for the machine and 1.5 months of depreciation for the equipment. B. Essco is allowed 7.5 months depreciation for the machine and 1.5 months of depreciation for the equipment. C. Essco is allowed 1.5 months of depreciation for both the machine and the equipment. D. Essco is allowed six months of depreciation for both the machine and the equipment.

d (The midquarter convention does not applies because Essco placed only 37% of its depreciable personalty into service in the fourth quarter.)

Which of the following statements concerning business goodwill is false? 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.

d (The tax deduction for goodwill amortization is a favorable book/tax difference.)

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