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TAX 4001 Midterm.
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Exam of 31 pages for the course REE 3433 Chapter 3 Q at REE 3433 Chapter 3 Q (TAX 4001 Midterm.)
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TAX 4001 Midterm1. A calendar year taxpayer made two asset purchases this year. First, a machine
costing $836,000 was placed into service on July 21. Second, equipment costing
$494,000 was placed into service on October 14. Both assets are 7-year recovery
property. How many months of MACRS depreciation is the company allowed for each
asset this year?
- 1.5 months of depreciation for both the machine and the equipment.
- 7.5 months depreciation for the machine and 1.5 months of depreciation for the
equipment.
- 6 months of depreciation for both the machine and the equipment.
- 6 months depreciation for the machine and 1.5 months of depreciation for the
equipment. - ANS-- 6 months of depreciation for both the machine and the equipment.
- 494,000/1,330,000 = 37%. This means that less than 40% of the depreciable assets
were put in place during the fourth quarter, therefore, the midyear convention can be
used
1. 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
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
,100. Assuming Jessica has $100,000 in an investment paying 9% annual interest and
her marginal tax rate is 25%, which of the following statements is false?
- If the interest is taxable, Jessica's annual after-tax cash flow is $6,750.
- If the interest is tax-exempt, Jessica's annual after-tax cash flow is $9,000.
- Jessica's annual before-tax cash flow from this investment is $9,000.
- None of these choices are false. - ANS-- None of these choices are false.
101. Which of the following statements is true?
- The annual tax depreciation on passenger automobiles is always equal to the amount
computed under MACRS.
- The annual tax depreciation on passenger automobiles may be limited to an amount
less than MACRS depreciation.
- The straight-line method must be used to depreciate passenger automobiles for tax
purposes.
- No tax depreciation is allowed for passenger automobiles. - ANS-- The annual tax
depreciation on passenger automobiles may be limited to an amount less than MACRS
depreciation.
102. Which of the following statements is false?
- A single percentage that applies to the entire tax base is described as a flat rate.
- A tax base is an item, occurrence, transaction, or activity with respect to which a tax is
levied.
- When designing a tax, governments try to identify tax bases that taxpayers can easily
avoid or conceal.
- With regard to tax systems, the term revenue refers to the total tax collected by the
government. - ANS-- When designing a tax, governments try to identify tax bases that
taxpayers can easily avoid or conceal.
103. Cedarville imposes an individual income tax based on the following schedule.
Rate Income bracket
5% $-0- to $50,000
+ 8% $50,001 to $200,000
+ 12% $200,001 and above
Which of the following statements is true?
- If Mrs. Bee's taxable income is $227,000, her average tax rate is 12%.
- If Mr. Poe's taxable income is $41,200, his marginal tax rate is 8%.
- If Ms. Kaye's taxable income is $63,800, her marginal tax rate is 8%.
- None of the choices are correct. - ANS-- If Ms. Kaye's taxable income is $63,800, her
marginal tax rate is 8%.
,104. In October, XYZ Corp received a $18,000 cash payment from a tenant who leases
space in a commercial office building it owns. Assume XYZ Corp is a calendar year
accrual basis taxpayer and the payment was rent for the 18-month period beginning on
November 1. As a result of the payment, XYZ should report:
- None of these choices are correct
- $2,000 book income and taxable income
- $2,000 book income and $18,000 taxable income
- $18,000 book income and taxable income - ANS-- $2,000 book income and $18,000
taxable income
105. A calendar year accrual basis taxpayer received a $72,000 cash payment in June
from a tenant who leases space in a commercial office building. The payment was rent
for the 24-month period beginning on July 1, of the current year. As a result of the
payment, the taxpayer should report (with respect to the income received and for the
current year):
- None of these choices are correct
- $18,000 book income and taxable income
- No book income and $72,000 taxable income
- $72,000 book income and taxable income - ANS-- None of these choices are correct
Book income: $18,000 Taxable income: $72,000
106. A citator:
- Provides an editorial explanation of tax judicial decisions.
- Is published by the federal government.
- May be used to determine the status of tax judicial decisions, revenue rulings, and
revenue procedures.
- Is not an important tax research resource. - ANS-- May be used to determine the
status of tax judicial decisions, revenue rulings, and revenue procedures.
107. A calendar year accrual basis taxpayer is involved in a legal dispute over an
alleged trademark violation. At the end of the year, the taxpayer recorded a $750,000
accrued expense for the estimated settlement cost of the dispute. Which of the following
statements is true?
- The taxpayer can deduct the $750,000 accrued expense.
- The taxpayer can deduct the accrued expense only if the dispute is settled within eight
and one-half months after the close of the taxable year.
- The taxpayer can never deduct the $750,000 expense.
, - The taxpayer can't deduct the $750,000 accrued expense yet because the liability fails
the all-events test. - ANS-- The taxpayer can't deduct the $750,000 accrued expense
yet because the liability fails the all-events test.
108. Which of the following is/are not a primary source of authority for the tax law?
- A revenue ruling published by the Internal Revenue Service
- Treasury Reg. §1.351-2
- Section 162 of the Internal Revenue Code
- All of these choices are primary sources of authority - ANS-- All of these choices are
primary sources of authority
109. Varson Incorporated and Vonsell Incorporated are owned by the same family. The
family decides to purchase $150,000 of deductible advertising that will benefit the
businesses operated by both corporations. Which of the following statements is true?
- If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, the tax law
requires Vonsell to purchase the advertising.
- If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Varson can
claim a $150,000 deduction on its tax return regardless of which corporation purchases
the advertising.
- None of these choices are true.
- If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Vonsell should
purchase the advertising to minimize after-tax cost. - ANS-- None of these choices are
true.
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.
110. A calendar year taxpayer purchased $1,496,000 of equipment on March 23. If the
equipment has a 7-year recovery period, compute the first and second-year MACRS
depreciation deduction for the new equipment. (Disregard the Section 179 deduction
and bonus depreciation in making your calculation.)
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