Question 1

On May 1, Sessi Inc., a calendar year corporation, purchased a business for a $2 million lump-sum price. The business' balance sheet assets had the following appraised FMV.
 $\begin{array}{llr}
  \text { Accounts receivable } &\$38,900\
 \text {Inventory  } &450,000\
 \text { Tangible personality } &225,000\
 \text { Realty: } &\
 \text { Building } &500,000\
 \text { Land } &50,000\
&\$1,263,900
\end{array}$
 Compute the cost basis of the goodwill acquired by Sessi Inc. on the purchase of this business.Compute Sessi's goodwill amortization deduction for the year of purchase.Use a 21 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

Accepted Answer

The answer of On May 1, Sessi Inc., a calendar...

Question 2

NRW Company, a calendar year taxpayer, purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building. NRW placed the realty in service on August 2, 2020. Use Table 7-3 and Table 7-4.
Compute NRW's MACRS depreciation with respect to the realty for 2020 and 2021.Compute NRW's adjusted basis in the land and building on December 31, 2021.How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?

Accepted Answer

The answer of NRW Company, a calendar year taxpayer, purchased...

Question 3

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

Accepted Answer

Leasehold costs must be capitalized for tax purposes as they are considered a long-term investment in property rights.

Question 4

Creighton, a calendar year corporation, reported $5,571,000 net income before tax on its financial statements prepared in accordance with GAAP. The corporate records reveal the following information. Creighton's depreciation expense per books was $40,980, and its MACRS depreciation deduction was $77,270.Creighton capitalized $32,670 indirect expenses to manufactured inventory for book purposes and $48,020 indirect expenses to manufactured inventory under the unicap tax rules.Creighton's cost of goods sold for book purposes was $1,093,800, and its cost of goods sold for tax purposes was $1,107,200.Creighton purchased a competitor's business on May 1 and allocated $468,000 to the business' goodwill.
Compute Creighton's taxable income.

Accepted Answer

The answer of Creighton, a calendar year corporation, reported $5,571,000...

Question 5

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

The mid-quarter convention is used because more than 40% of the total depreciable basis of property was placed in service in the last quarter of the year.

Question 6

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

This is a favorable temporary book/tax difference because the MACRS depreciation deduction on the tax return is greater than the book depreciation, reducing taxable income more in the current period. This difference will reverse in future periods as the total depreciation over the asset's life will be the same for both book and tax purposes.

Question 7

Lisle Inc. manufactures small appliances in three plants in the Southeast. Which of the following statements is true?

Accepted Answer

Under U.S. GAAP, if a company chooses to use the LIFO (Last In, First Out) method for tax purposes, it is also required to use LIFO for reporting in its financial statements. This is known as the LIFO conformity rule.

Question 8

Elakin Inc., a calendar year taxpayer, paid $1,339,000 for new machinery (seven-year recovery property) placed in service on August 29, 2020. The machinery was Elakin's only asset purchase during 2020, and Elakin's taxable income before any Section 179 deduction was $14 million.Compute Elakin's 2020 cost recovery deduction with respect to the machinery.How would your answer change if the cost of the machinery was $2,150,000 instead of $1,339,000?How much Section 179 expense would be taken in part a if Elakin's taxable income before any Section 179 deduction was $281,400 instead of $14 million?

Accepted Answer

The answer of Elakin Inc., a calendar year taxpayer, paid...

Question 9

B&P Inc., a calendar year corporation, purchased only one operating asset during 2020: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2020.

Accepted Answer

B&P Inc. can elect to expense the entire cost of the used computer equipment under Section 179, up to the limit for the year. Since the equipment cost is $599,900 and is within the Section 179 limit, B&P can deduct the full amount, leaving an adjusted tax basis of $0 at the end of 2020.

Question 10

Shelley purchased a residential apartment for $1,400,000 and placed it in service on September 5. Which of the following statements is false?

Accepted Answer

Shelley is not allowed one half-year of MACRS depreciation; instead, she must use the mid-month convention for residential rental property, which means she can only claim depreciation for the portion of the month the property was in service.

Question 11

Which of the following intangible assets is not amortizable for tax purposes?

Accepted Answer

While organizational costs and patents are both amortizable for tax purposes, partnership interests are not considered intangible assets that can be amortized.

Question 12

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. Use Table 7-2.

Accepted Answer

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

Question 13

Terrance Inc., a calendar year taxpayer, purchased used equipment for $2,765,000 and placed it in service on March 4, 2020. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2020 (assume no election for Section 179 expense and no Bonus Depreciation taken). Use Table 7-2.
Compute Terrance's tax depreciation with respect to the equipment for 2020 and 2021.Compute Terrance's adjusted basis in the equipment on December 31, 2021.

Accepted Answer

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

Quiz 7: Property Acquisitions and Cost Recovery Deductions