Tax Ch. 7
Six years ago, Alpha Corporation purchased goodwill at a cost of $200,000. No impairments of the goodwill have been recorded, and Alpha has deducted $80,000 of tax amortization over these six years. If Alpha's tax rate is 21%, what amount of deferred tax asset or liability should appear on its balance sheet related to goodwill?
$16,800 deferred tax liability
When an asset acquisition qualifies for cost recovery through MACRS, bonus depreciation, and Section 179, identify the order in which these provisions are applied in determining the total deduction.
1. Section 179 2. Bonus Depreciation 3.MACRS
Which of the following statements regarding the use of the LIFO inventory costing convention for tax purposes is false?
A firm using LIFO for financial reporting purposes is required to use LIFO for tax purposes.
Which of the following are common business acquisition intangibles?
Accounting records Covenant not to compete
When the cost of an asset will be recovered using both bonus depreciation and MACRS, ____________is calculated first, basis of the asset is reduced, and _____________is then calculated.
Bonus; MACRS
Which of the following inventory-related indirect costs must be capitalized for tax purposes under the uniform capitalization rules?
Compensation of officers supervising the production function Employee benefits for officers supervising the production function
Which of the following are considered start-up costs for tax purposes?
Costs of investigating the purchase of a business Preoperational costs of a new business
Which of the following are common business acquisition intangibles? (Select all that apply.)
Covenant not to compete Accounting records
Which of the following are common business acquisition intangibles?
Customer contracts Supplier relationships
Which of the following are part of an asset's cost basis?
Fair market value of services performed in exchange for the asset Sales tax paid by the purchaser Fair market value of a note given to the seller in exchange for the asset
Which of the following statements regarding inventory costing conventions is false?
For tax purposes, most large manufacturing and retail businesses use the specific identification method of inventory costing.
Which of the following are common sources of cost recovery book/tax differences?
Goodwill Start-up cost amortization
Which of the following statements regarding the interaction of bonus depreciation and the Section 179 deduction is true?
If property qualifies for both incentives, Section 179 is applied first and bonus depreciation is applied second.
Which of the following statements regarding goodwill book/tax differences are true?
If the firm records a goodwill impairment expense, such expense is not tax-deductible and produces an unfavorable book/tax difference. Because goodwill is not amortizable for book purposes, the annual tax amortization deduction creates a favorable book/tax difference.
Which of the following independent events would result in an increase in cost of goods sold?
Increase in cost of inventory purchases Increase in current production costs Decrease in inventory on hand at year end
Which of the following clearly capital expenditures qualify for preferential tax deductions?
Installation of wheel chair ramps at a restaurant Research costs leading to the creation of new computer technology
Which of the following statements regarding preferential deductions for oil and gas producers is true?
Intangible drilling and development costs include wages, fuel, and supplies that contribute to the drilling of an oil or gas well.
Which of the following statements regarding inventory book/tax differences is true?
Inventory book/tax differences arise when indirect costs are capitalized to inventory for tax purposes that were expensed on the books.
Which of the following are common sources of cost recovery book/tax differences?
Inventory costing Organizational cost amortization Bonus depreciation
Which of the following are considered organizational costs for tax purposes?
Legal fees to form a new entity Registration fees under state law
Which of the following are common sources of cost recovery book/tax differences?
MACRS depreciation Goodwill amortization
Which of the following statements regarding depreciation book/tax differences is false?
MACRS depreciation typically causes book depreciation to exceed tax depreciation in the early years of an asset's recovery life.
Which of the following asset acquisitions qualify for bonus depreciation?
New or used tangible personal property acquired after Set. 27, 2017 New tangible personal property acquired prior to Sept. 28, 2017 Computer software
Which of the following asset acquisitions qualify for bonus depreciation?
New tangible personal property acquired prior to Sept. 28, 2017 Computer software New or used tangible personal property acquired after Set. 27, 2017
Which of the following asset acquisitions is considered qualifying property for purposes of the Section 179 deduction?
Qualified improvements to nonresidential real property Off-the-shelf computer software amortizable over 36 months Tangible depreciable personalty
Which of the following inventory-related indirect costs must be capitalized for tax purposes under the uniform capitalization rules?
Repair costs of manufacturing equipment Rent on equipment used in manufacturing Cost recovery deductions on manufacturing equipment
_____ & _____ costs that are regular and recurring in nature are generally deductible for tax purposes.
Repair; Maintenance
Which of the following are common business acquisition intangibles?
Supplier relationships Customer contracts
Which of the following statements regarding the maximum amount of deductible bonus depreciation is false?
The annual deduction for bonus deprecation is limited to taxable income as computed before this deduction.
Which of the following statements regarding the calculation of the depreciation limitation on passenger automobiles is false?
The annual depreciation permitted on passenger automobiles equals the greater of MACRS depreciation or the IRS-provided annual limitation amount.
Which of the following statements regarding qualifying property for bonus depreciation versus qualifying property for Section 179 is false?
The definitions of qualifying property for bonus depreciation and Section 179 are identical.
Which of the following statements regarding the difference between repairs and maintenance versus capital improvements is false?
The distinction between repairs and capital improvements is rarely in dispute.
Which of the following statements regarding the midmonth convention is false?
The midmonth convention can be elected by a taxpayer for any asset depreciable under MACRS.
Which of the following factors would require capitalization of an expenditure?
The tax treatment of the expenditure is uncertain. The expenditure provides significant long-term value. The expenditure creates an asset with a useful life beyond the current year.
Which of the following assets are amortized for tax purposes over an arbitrary 15-year life?
Trademarks, Gov Patents
Which of the following statements regarding the midquarter convention is true?
Under the midquarter convention, property acquisitions are treated as placed in service at the midpoint of the quarter of acquisition.
When will a book/tax difference that arises when inventory is produced, reverse?
When the inventory is sold
The midmonth convention ______
applies when computing MACRS depreciation for depreciable real property
Organizational costs ______.
are costs of forming a partnership or corporation to conduct business activities
Organizational costs ______.
are deductible in the year incurred if not in excess of $5,000
For tax purposes, start-up costs ______.
are deductible when incurred up to $5,000
In calculating MACRS depreciation, the annual percentages in the IRS depreciation tables ______.
are multiplied by the initial undepreciated basis of the asset to compute annual depreciation
Costs associated with the expansion of an existing business ______
are typically deductible as ordinary and necessary business expenses
Depreciation book/tax differences ______.
are typically favorable in the early years of an asset's recovery life are a common example of a temporary difference
Leasehold costs ______.
are upfront costs paid to acquire a lease on tangible property used in a business must be capitalized and amortized over the lease term
The adjusted tax basis of an asset ______.
declines as the taxpayer deducts MACRS depreciation on that asset represents the capitalized cost that the taxpayer has not yet deducted
The preferential tax deduction for research and experimental costs _________ the after-tax cost of the expenditures, and therefore, represents a(n) _________ federal subsidy
decreases; indirect
MACRS depreciation deductions ______.
do not represent cash outflows each year over the life of a depreciable asset
The ___ - ___ convention applies in computing MACRS depreciation of realty.
half - month
The cost of inventory sold during the year ______.
increases as inventory production costs increase
The cost of leasehold improvements ______
is recovered through MACRS depreciation over the recovery life of the asset
The tax basis of an asset ______.
may be recovered without tax cost
Cost recovery deductions ______.
provide time period variable tax savings when cost recovery occurs over the shortest possible time period
Leasehold improvement costs ______.
represent physical improvements made to leased property must be capitalized and recovered through MACRS depreciation
Most inventory book/tax differences are _______ differences producing deferred tax _______
temporary; assets
Most depreciation book/tax differences are _______ differences producing deferred tax___________
temporary; liabilities
Most purchased book/tax differences are ____ differences producing either deferred tax_______ or deferred tax______
temporary; liabilities; assets
When property qualifies for bonus depreciation, ______.
the adjusted basis of the property is reduced by the amount of bonus depreciation deducted
