Tax 4001- Midterm Study Guide Exam With
Complete Solutions
Donatoni Corporation owns 40% of Market, Incorporated voting common stock.
During the current year, Donatoni received a $30,000 dividend from Market.
Donatoni must report the dividend as gross income, and is allowed a $15,000
dividends-received deduction. True or False? - ANSWER False
DRD is .65* $30,000= $19,500
Hextone Incorporated, which has a 21% tax rate, purchased a new business
asset. First-year book depreciation was $14,890, and first-year MACRS
depreciation was $27,090. As a result of this book/tax difference, Hextone
recorded a $2,562 deferred tax liability. True or False? - ANSWER True
Depreciation (MACRS) $27,090
Depreciation (SL) $14,890
Temporary Difference $12,200
Tax Rate 21%
Deferred Tax Liability = $2562
Which of the following statements about methods of accounting is false?
a. The IRS has the right to determine if a taxpayer's method of accounting
clearly reflects the taxpayer's income.
b. Taxpayers must use the same method of accounting to compute taxable
income as they use to compute financial statement income.
c. A taxpayer engaged in more than one business can use a different method of
accounting for each business.
d. A taxpayer must request permission from the IRS to change its method of
accounting for tax purposes. - ANSWER b.
All types of business and investment real properties are like-kind. True or False?
- ANSWER True
Vane Company, a calendar year taxpayer, incurred the following expenditures in
the pre-operating phase of a new health and fitness center.
Rent on commercial space $4,800
Utilities
$735
Staff hiring and training
,$3,920
Newspaper advertising
$960
Total $10,415
Which of the following statements is true?
a. If Vane already operates seven other health and fitness centers, it can deduct
the $10,415 pre-operating expenditures of the eighth center as expansion costs.
b. If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment.
c. If the new center represents a new business for Vane, it must capitalize the
$10,415 pre-operating expenditures.
d. None of these choices are true. - ANSWER a.
Explanation:
If the new center represents a new business for Vane, it can deduct $5,000 of
the pre-operating expenditures and must capitalize the remaining $5,415.
Purchased goodwill is amortizable both for book and tax accounting purposes.
True or False? - ANSWER False
Which of the following statements most accurately defines taxable income from
business operations?
a. Revenues from business transactions less expenses.
b. Gross income from whatever source derived less allowable deductions.
c. Gross income from whatever source derived less expenses.
d. Gross income from the sales of goods or performance of services less
allowable deductions. - ANSWER b.
Song Company, a calendar year taxpayer, purchased a total of $2,774,400
tangible personalty in 2022. How much of this cost can Song elect to expense
under Section 179?
a. $0
b. $1,080,000
c. $2,774,400
d. $1,005,600 - ANSWER d.
Explanation:
, (1,080,000- (2,774,400-2,700,000))= $1,005,600
Mr. and Mrs. Plame sold an investment asset to their grandson Leonard.
Because Leonard is a related party, the Plames do not recognize any gain or
loss realized on sale. True or False? - ANSWER False
Explanation:
The Plames would recognize gain on the sale; only losses on sales to related
parties are disallowed.
D&R Company, a calendar year corporation, purchased $1,116,000 of
equipment on August 3. This was D&R'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 D&R's first and second-year MACRS depreciation. (Disregard the
Section 179 deduction and bonus depreciation in making your calculation.)
a. First year $79,738; second year $273,308
b. First year $159,476; second year $273,308
c. First year $159,476; second year $234,253
d. None of these choices are correct - ANSWER b.
Explanation:
First year $1,116,000*.1429= $159,476
Second year
$1,116,000*.2449= $273,308
Teco Incorporated and MW Company exchanged like-kind assets. Teco's asset
had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an
$87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as
part of the exchange. Which of the following statements is false?
a. Teco's realized gain is $26,100 and recognized gain is -0-.
b. Teco's basis in its newly acquired asset is $61,400.
c. MW's basis in its newly acquired asset is $35,600.
d. MW's realized gain is $59,400 and recognized gain is $7,500. - ANSWER c.
RRK, a calendar year, accrual basis taxpayer, is involved in a legal dispute over
an alleged trademark violation. At the end of the year, RRK's accountant
recorded a $750,000 accrued expense for the estimated settlement cost of the
dispute. Which of the following statements is true?
Complete Solutions
Donatoni Corporation owns 40% of Market, Incorporated voting common stock.
During the current year, Donatoni received a $30,000 dividend from Market.
Donatoni must report the dividend as gross income, and is allowed a $15,000
dividends-received deduction. True or False? - ANSWER False
DRD is .65* $30,000= $19,500
Hextone Incorporated, which has a 21% tax rate, purchased a new business
asset. First-year book depreciation was $14,890, and first-year MACRS
depreciation was $27,090. As a result of this book/tax difference, Hextone
recorded a $2,562 deferred tax liability. True or False? - ANSWER True
Depreciation (MACRS) $27,090
Depreciation (SL) $14,890
Temporary Difference $12,200
Tax Rate 21%
Deferred Tax Liability = $2562
Which of the following statements about methods of accounting is false?
a. The IRS has the right to determine if a taxpayer's method of accounting
clearly reflects the taxpayer's income.
b. Taxpayers must use the same method of accounting to compute taxable
income as they use to compute financial statement income.
c. A taxpayer engaged in more than one business can use a different method of
accounting for each business.
d. A taxpayer must request permission from the IRS to change its method of
accounting for tax purposes. - ANSWER b.
All types of business and investment real properties are like-kind. True or False?
- ANSWER True
Vane Company, a calendar year taxpayer, incurred the following expenditures in
the pre-operating phase of a new health and fitness center.
Rent on commercial space $4,800
Utilities
$735
Staff hiring and training
,$3,920
Newspaper advertising
$960
Total $10,415
Which of the following statements is true?
a. If Vane already operates seven other health and fitness centers, it can deduct
the $10,415 pre-operating expenditures of the eighth center as expansion costs.
b. If Vane is a cash basis taxpayer, it can deduct $10,415 in the year of payment.
c. If the new center represents a new business for Vane, it must capitalize the
$10,415 pre-operating expenditures.
d. None of these choices are true. - ANSWER a.
Explanation:
If the new center represents a new business for Vane, it can deduct $5,000 of
the pre-operating expenditures and must capitalize the remaining $5,415.
Purchased goodwill is amortizable both for book and tax accounting purposes.
True or False? - ANSWER False
Which of the following statements most accurately defines taxable income from
business operations?
a. Revenues from business transactions less expenses.
b. Gross income from whatever source derived less allowable deductions.
c. Gross income from whatever source derived less expenses.
d. Gross income from the sales of goods or performance of services less
allowable deductions. - ANSWER b.
Song Company, a calendar year taxpayer, purchased a total of $2,774,400
tangible personalty in 2022. How much of this cost can Song elect to expense
under Section 179?
a. $0
b. $1,080,000
c. $2,774,400
d. $1,005,600 - ANSWER d.
Explanation:
, (1,080,000- (2,774,400-2,700,000))= $1,005,600
Mr. and Mrs. Plame sold an investment asset to their grandson Leonard.
Because Leonard is a related party, the Plames do not recognize any gain or
loss realized on sale. True or False? - ANSWER False
Explanation:
The Plames would recognize gain on the sale; only losses on sales to related
parties are disallowed.
D&R Company, a calendar year corporation, purchased $1,116,000 of
equipment on August 3. This was D&R'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 D&R's first and second-year MACRS depreciation. (Disregard the
Section 179 deduction and bonus depreciation in making your calculation.)
a. First year $79,738; second year $273,308
b. First year $159,476; second year $273,308
c. First year $159,476; second year $234,253
d. None of these choices are correct - ANSWER b.
Explanation:
First year $1,116,000*.1429= $159,476
Second year
$1,116,000*.2449= $273,308
Teco Incorporated and MW Company exchanged like-kind assets. Teco's asset
had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an
$87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as
part of the exchange. Which of the following statements is false?
a. Teco's realized gain is $26,100 and recognized gain is -0-.
b. Teco's basis in its newly acquired asset is $61,400.
c. MW's basis in its newly acquired asset is $35,600.
d. MW's realized gain is $59,400 and recognized gain is $7,500. - ANSWER c.
RRK, a calendar year, accrual basis taxpayer, is involved in a legal dispute over
an alleged trademark violation. At the end of the year, RRK's accountant
recorded a $750,000 accrued expense for the estimated settlement cost of the
dispute. Which of the following statements is true?
