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Exam 7: Property Acquisitions and Cost Recovery Deductions

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Question 61

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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 $49,640 on its current-year financial statements. Which of the following statements 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.

E) None of the above
F) A) and C)

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Question 62

Multiple Choice

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

A) If Lisle uses LIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes.
B) If Lisle uses FIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes.
C) Lisle is not allowed to use LIFO to compute the cost of goods sold for tax purposes.
D) None of the above statements is true.

E) All of the above
F) B) and D)

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Question 63

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

The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes.

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?

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: $\begin{array} { l r } \text { Accounts receivable } & \$ 38,000 \\\text { Inventory } & \mathbf { 4 1 5 , 0 0 0 } \\\text { Fixtures and equipment } & \underline { 147,000 } \\& \$ \underline { \underline { 600,000 } }\end{array}$ Which of the following statements is true?

Which of the following statements about the tax treatment of research and experimental expenditures is true?

Richland Company purchased an asset in 2013 for $50,000 and sold it in 2016. The asset was 7-year recovery property. Richland's 2016 MACRS depreciation on the asset was $6,245.

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 the Section 179 deduction and bonus depreciation in making your calculation.)

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, 2016. a. Compute NRW's MACRS depreciation with respect to the realty for 2016 and 2017. b. Compute NRW's adjusted basis in the land and building on December 31, 2017. c. How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?

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.

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.

Moses Inc. purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge. Which of the following is true?

If a business expenditure creates or enhances an identifiable asset with a useful life substantially beyond the current year, the expenditure must be capitalized.

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

Which of the following statements about the computation of cost of goods sold is true?