Exam (elaborations)
TAX 4001 Midterm (1)
TAX 4001 Midterm (1)
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TAX 4001 Midterm1. Jason engaged in a transaction that generated $50,000 of cash. Assuming Jason's
marginal tax rate is 40% and only $40,000 of the income is taxable, what is Jason's
after tax cashflow?
$20,000
$40,000
$34,000
$24,000 - ANS-$34,000
(40,000*.4) = 16,000
50,000 - 16,000 = 34,000
2. Bob has $200,000 in an investment paying 8% annual interest. His marginal tax rate
is 40%. Which of the following statements is false?
- Bob's annual before-tax cash flow from this investment is $16,000.
- None of these choices are false.
- If the interest is tax-exempt, Bob's annual after-tax cash flow is $16,000.
- If the interest is taxable, Bob's annual after-tax cash flow is $6,400. - ANS-- If the
interest is taxable, Bob's annual after-tax cash flow is $6,400.
3. Frank recently traveled to another state to buy furniture and paid that state's 4% sales
tax. Frank resides in a state with a 6% sales and use tax. Which of the following
statements is true?
- None of these choices are true.
- Frank does not owe a use tax to his home state.
- Frank's use tax liability to his home state equals 6% of the purchase price of the
furniture.
- Frank's use tax liability to his home state equals 2% of the purchase price of the
furniture. - ANS-- Frank's use tax liability to his home state equals 2% of the purchase
price of the furniture.
4. Which of the following statements is false?
- A theoretical justification for a proportionate rate is its superior potential for wealth
redistribution.
- Under a proportionate rate structure, the taxpayer with the least income pays the same
percentage of income to the government as the taxpayer with the most income.
- None of the choices are false.
,- Under a proportionate rate structure, the marginal rate equals the average rate. -
ANS-- A theoretical justification for a proportionate rate is its superior potential for
wealth redistribution.
Proportionate tax: Same tax rate regardless of income
5. A taxpayer spent $2.3 million on a new advertising campaign this year. Which of the
following statements is true?
- The $2.3 million cost results in an unfavorable book/tax difference.
- The company 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.
- The company is allowed to deduct the $2.3 million cost.
- The company must capitalize the $2.3 million cost. - ANS-- The company is allowed to
deduct the $2.3 million cost.
6. ABC has the opportunity to engage in a transaction that will generate $250,000
taxable cash flow. Alternatively, CBA could engage in the transaction. However, CBA
would incur an extra $60,000 deductible cash expense with respect to the transaction.
Assume ABC Incorporated and CBA Incorporated are owned by the same family and
that ABC's marginal tax rate is 30% while CBA's marginal tax rate is 21%.Which of the
following statements is true?
- Because ABC and CBA are owned by the same family, the family is indifferent as to
which corporation engages in the transaction.
- CBA should engage in the transaction because it has the lower marginal tax rate.
- ABC should engage in the transaction to avoid the extra expense.
- ABC should engage in the transaction to generate $24,900 more after-tax cash flow. -
ANS-- ABC should engage in the transaction to generate $24,900 more after-tax cash
flow.
7. This year, DDT incurred $25 million of business interest expense, earned no business
interest income, and has adjusted taxable income of $42 million. Assuming DDT Corp
must apply the limitation on net interest expense, what is DDT's current deduction for
business interest?
- $7.5 million
- $0
- $12.6 million
- $25 million - ANS-- $12.6 million
12.6 = 42 * .3
,8. Which of the following statements is false?
- The entity variable becomes more important when Congress increases the
progressivity of the income tax.
- Tax planning strategies based on the entity variable must involve some type of income
taxed at a preferential rate.
- Tax planning strategies based on the entity variable must involve at least two different
taxpayers.
- If Congress replaced the current progressive income tax rates with a proportionate
rate applying to all taxpayers, the entity variable would no longer be a factor in tax
planning. - ANS-- Tax planning strategies based on the entity variable must involve
some type of income taxed at a preferential rate.
9. Which of the following tax policies would increase vertical equity?
- Repealing the federal estate and gift taxes
- Replacing the income tax with a national sales tax
- Replacing the progressive income tax rate structure with a flat rate
- Increasing the highest marginal income tax rate by 10% - ANS-- Increasing the highest
marginal income tax rate by 10%
10. In 2022, Driving Inc purchased assets and elected to expense the entire cost using
Section 179. However, Driving could not deduct $100,000 of the Section 179 expense
because of the taxable income limitation. In 2022, Driving purchased tangible personalty
costing $1,090,000. Driving's taxable income before any Section 179 deduction was
$1,912,400. Compute Driving's 2022 Section 179 deduction.
- $100,000
- $1,190,000
- $0
- $1,080,000 - ANS-- $1,080,000
11. Which of the following statements is true?
- The value of tax deferral increases as the taxpayer's discount rate for computing NPV
decreases.
- The greater the length of time that the payment of a tax is deferred, the less the tax
costs in NPV terms.
- The value of tax deferral increases as the taxpayer's discount rate for computing NPV
decreases and the greater the length of time that the payment of a tax is deferred, the
less the tax costs in NPV terms.
- Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is
stable over time. - ANS-- The greater the length of time that the payment of a tax is
deferred, the less the tax costs in NPV terms.
, 12. Fey is a Brazilian citizen who permanently resides in Houston, Texas. Which of the
following statements is true?
- The U.S. government has jurisdiction to tax Fey.
- The U.S. government has jurisdiction to tax Fey only on income that she earns from a
source within the United States.
- Fey can elect whether to pay tax to the United States or to Brazil.
- Under no circumstances would the U.S. government have jurisdiction to tax Fey. -
ANS-- The U.S. government has jurisdiction to tax Fey.
13. Four years ago, Toby Incorporated paid a $5 million to purchase a business. Toby
allocated $600,000 of the price to goodwill. Which of the following statements is true?
- None of these choices are true.
- This year, Toby has a $40,000 favorable temporary difference because of the
accounting treatment of goodwill.
- The accounting treatment of the goodwill does not result in any book/tax difference in
the current year.
- This year, Toby has a $40,000 unfavorable temporary difference because of the
accounting treatment of goodwill. - ANS-- This year, Toby has a $40,000 favorable
temporary difference because of the accounting treatment of goodwill.
40,000 = 600,000 * 12/180
14. Company Z, which has its home office in Atlanta, Georgia, conducts business in the
United States, Canada, and Mexico. Which of the following statements is true?
- Because Company Z must pay income tax to Georgia, it is not required to pay tax to
any other state.
- Because Company Z must pay income tax to the United States, it is not required to
pay tax to Canada or Mexico.
- Because Company Z must pay income tax to Georgia, it is not required to pay federal
income tax.
- None of these choices are true. - ANS-- None of these choices are true.
15. The arm's length transaction presumption:
- Assumes that each party is dealing in its own economic self-interest.
- Requires direct negotiation between parties to ensure an arm's length price.
- Cannot be satisfied in a private market transaction.
- Applies to both related party and unrelated party transactions. - ANS-- Assumes that
each party is dealing in its own economic self-interest
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