ACCT 330 Intermediate Accounting I Exam 2 Study Set, University of
Kansas School of Business, 2026/2027 – 257-Question GAAP & FASB
Codification Examination with Verified Solution
Maxcom Incorporated purchased 15 passenger automobiles for use by its sales force.
Which of the following statements is true?
A. Maxcom's annual tax depreciation on the passenger automobiles is computed under
MACRS.
B. Maxcom's annual tax depreciation on the passenger automobiles may be limited to
an amount less than MACRS depreciation.
C. Maxcom must use the straight-line method to depreciate the passenger automobiles
for tax purposes.
D. Even though Maxcom purchased the automobiles for business use, Maxcom is not
allowed any tax depreciation for the automobiles. - ANSWER-B
Which of the following does not result in a permanent book/tax difference?
A. Business meal and entertainment expense
B. Nondeductible fines and penalties
C. Premiums paid on key-person life insurance policies
D. All of the above result in a permanent book/tax difference. - ANSWER-D
Which of the following statements about tax policy objectives regarding business
expenses is false?
A. Lobbying expenses are not deductible because Congress does not want to subsidize
political activities.
B. By disallowing a tax deduction, Congress increases the after-tax cost of undesirable
expenditures.
,C. The tax treatment of meals and entertainment expenses is intended to make the law
more equitable.
D. The business interest expense limitation increases the disparity between the tax
treatment of debt and equity financing. - ANSWER-D
Which of the following business expenses always results in a difference between
taxable income and book income?
A. Client entertainment
B. Salary expense
C. Interest expense
D. Rent expense - ANSWER-A
Which of the following statements describes a permanent book/tax difference?
A. A revenue item included in current taxable income but not reported on the income
statement until next year
B. A revenue item reported on the current income statement but not included in taxable
income until an indefinite future year
C. An expense (or loss) is realized for book purposes but never recognized for tax
purposes
D. An expense reported on the current income statement but deducted on next year's
tax return - ANSWER-C
Tax expense per books is based on:
A. Before-tax book income adjusted for temporary differences
B. Before-tax book income adjusted for permanent differences
C. Before-tax book income
D. Before-tax book income adjusted for both permanent and temporary differences -
ANSWER-B
Which of the following statements about tax basis is false?
A. Tax basis represents the taxpayer's unrecovered dollars invested in the asset.
B. Every asset owned by the taxpayer has a tax basis.
C. The tax basis in an asset can never be negative.
D. Tax basis reflects the asset's fair market value - ANSWER-D
Mr. Beck sold real property with a $140,000 adjusted basis for $255,000. The buyer
paid $148,000 cash and assumed Mr. Beck's $107,000 mortgage on the realty. Mr.
Beck's realized gain or loss on sale is: - ANSWER-115k gain
(255-140)
Which of the following assets is not a Section 1231 asset?
A. Business equipment held for four years
B. Office furniture held for eight months
C. Land used in a business and held for 16 years
D. All of these choices are Section 1231 assets - ANSWER-B
Winslow Company sold investment land to an unrelated purchaser. The purchaser paid
$250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow
,its $580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on
sale. - ANSWER-$1,430,000
(cash+ mortgage assumed+ note)
Which of the following is a Section 1231 asset?
A. Business inventory
B. Business accounts receivable
C. Supplies used in a business
D. None of these choices are Section 1231 assets - ANSWER-D
Which of the following is a capital asset?
A. Supplies used in a business
B. Business inventory
C. Land used in a business
D. None of these choices are correct - ANSWER-D
A basic premise of federal income tax law is that an expense is deductible unless the
Internal Revenue Code specifically prohibits the deduction. - ANSWER-False
The after-tax cost of an expenditure is minimized when the expenditure is deductible in
the current year. - ANSWER-True
The expense of adapting an existing asset to a new or different use must be capitalized
to the cost of the asset for tax purposes. - ANSWER-True
Environmental clean-up costs are deductible in the year incurred. - ANSWER-False
Research and experimental expenditures are deductible unless they result in the
development of a patented formula or process. - ANSWER-False
Repair costs incurred to keep a tangible asset in good working order must be
capitalized to
the cost of the asset. - ANSWER-False
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. - ANSWER-False (Sales tax must be capitalized as part of the cost of the asset.)
Burton Company acquired new machinery by performing professional services worth
$8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250. -
ANSWER-True
Cosmo Inc. purchased an asset costing $67,500 by paying $13,500 cash at date of
purchase
and giving the seller a 5-year interest-bearing note for the $54,000 balance. Cosmo's
tax basis in the asset is $13,500. - ANSWER-False
The difference between the before-tax cost and after-tax cost of an asset equals the net
present value of the tax savings from any cost recovery deductions with respect to the
asset. - ANSWER-True
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. - ANSWER-True
Tregor Inc., which manufactures plastic components, rents equipment on a monthly
basis
, for use in its manufacturing process. The monthly rent is a deductible expense. -
ANSWER-False (The rent must be capitalized to inventory under the unicap rules.)
A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses
LIFO for financial reporting purposes. - ANSWER-True
In an inflationary economy, the use of FIFO maximizes the cost of goods sold and
minimizes the cost of ending inventory. - ANSWER-False (In an inflationary economy,
the use of LIFO maximizes the cost of goods sold and minimizes
the cost of ending inventory.)
A book/tax difference resulting from application of the unicap rules to manufactured
inventory reverses in the year in which the inventory is sold. - ANSWER-True
The MACRS calculation ignores any salvage or residual value of an asset. - ANSWER-
True
The MACRS calculation is based on the estimated useful life of the depreciable asset. -
ANSWER-False
Hextone Inc., which has a 35% 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 $4,270 deferred tax liability. - ANSWER-
True
Mallow Inc., which has a 35% tax rate, purchased a new business asset. First-year
book
depreciation was $37,225, and first-year MACRS depreciation was $55,025. As a result
of
this book/tax difference, Mallow recorded a $6,230 deferred tax asset. - ANSWER-False
(Mallow recorded a $6,230 deferred tax liability.)
KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November
13. This was KJD's only purchase of tangible personalty this year. KJD must use a
midquarter
convention to compute MACRS depreciation on the equipment. - ANSWER-True
MACRS depreciation for buildings is based on the straight-line method. - ANSWER-
True
Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on
June 12. The MACRS depreciation calculation assumes that the building was placed in
service on May 15 (midquarter). - ANSWER-False (The MACRS calculation for
buildings uses a midmonth convention.)
Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on
June 3. The MACRS depreciation calculation assumes that the building was placed in
service
on June 15. - ANSWER-True
Richland Company purchased an asset in 2006 for $50,000 and sold it in 2009. The
asset
was 7-year recovery property. Richland's 2009 MACRS depreciation on the asset was
$6,245. - ANSWER-False (MACRS depreciation was $3,123 ([$50,000 * 12.49%] * 50%
[half-year]))
An asset's adjusted book basis and adjusted tax basis convey no information about the
Kansas School of Business, 2026/2027 – 257-Question GAAP & FASB
Codification Examination with Verified Solution
Maxcom Incorporated purchased 15 passenger automobiles for use by its sales force.
Which of the following statements is true?
A. Maxcom's annual tax depreciation on the passenger automobiles is computed under
MACRS.
B. Maxcom's annual tax depreciation on the passenger automobiles may be limited to
an amount less than MACRS depreciation.
C. Maxcom must use the straight-line method to depreciate the passenger automobiles
for tax purposes.
D. Even though Maxcom purchased the automobiles for business use, Maxcom is not
allowed any tax depreciation for the automobiles. - ANSWER-B
Which of the following does not result in a permanent book/tax difference?
A. Business meal and entertainment expense
B. Nondeductible fines and penalties
C. Premiums paid on key-person life insurance policies
D. All of the above result in a permanent book/tax difference. - ANSWER-D
Which of the following statements about tax policy objectives regarding business
expenses is false?
A. Lobbying expenses are not deductible because Congress does not want to subsidize
political activities.
B. By disallowing a tax deduction, Congress increases the after-tax cost of undesirable
expenditures.
,C. The tax treatment of meals and entertainment expenses is intended to make the law
more equitable.
D. The business interest expense limitation increases the disparity between the tax
treatment of debt and equity financing. - ANSWER-D
Which of the following business expenses always results in a difference between
taxable income and book income?
A. Client entertainment
B. Salary expense
C. Interest expense
D. Rent expense - ANSWER-A
Which of the following statements describes a permanent book/tax difference?
A. A revenue item included in current taxable income but not reported on the income
statement until next year
B. A revenue item reported on the current income statement but not included in taxable
income until an indefinite future year
C. An expense (or loss) is realized for book purposes but never recognized for tax
purposes
D. An expense reported on the current income statement but deducted on next year's
tax return - ANSWER-C
Tax expense per books is based on:
A. Before-tax book income adjusted for temporary differences
B. Before-tax book income adjusted for permanent differences
C. Before-tax book income
D. Before-tax book income adjusted for both permanent and temporary differences -
ANSWER-B
Which of the following statements about tax basis is false?
A. Tax basis represents the taxpayer's unrecovered dollars invested in the asset.
B. Every asset owned by the taxpayer has a tax basis.
C. The tax basis in an asset can never be negative.
D. Tax basis reflects the asset's fair market value - ANSWER-D
Mr. Beck sold real property with a $140,000 adjusted basis for $255,000. The buyer
paid $148,000 cash and assumed Mr. Beck's $107,000 mortgage on the realty. Mr.
Beck's realized gain or loss on sale is: - ANSWER-115k gain
(255-140)
Which of the following assets is not a Section 1231 asset?
A. Business equipment held for four years
B. Office furniture held for eight months
C. Land used in a business and held for 16 years
D. All of these choices are Section 1231 assets - ANSWER-B
Winslow Company sold investment land to an unrelated purchaser. The purchaser paid
$250,000 cash, assumed Winslow's $600,000 mortgage on the land, and gave Winslow
,its $580,000 ten-year, interest-bearing note. Compute Winslow's amount realized on
sale. - ANSWER-$1,430,000
(cash+ mortgage assumed+ note)
Which of the following is a Section 1231 asset?
A. Business inventory
B. Business accounts receivable
C. Supplies used in a business
D. None of these choices are Section 1231 assets - ANSWER-D
Which of the following is a capital asset?
A. Supplies used in a business
B. Business inventory
C. Land used in a business
D. None of these choices are correct - ANSWER-D
A basic premise of federal income tax law is that an expense is deductible unless the
Internal Revenue Code specifically prohibits the deduction. - ANSWER-False
The after-tax cost of an expenditure is minimized when the expenditure is deductible in
the current year. - ANSWER-True
The expense of adapting an existing asset to a new or different use must be capitalized
to the cost of the asset for tax purposes. - ANSWER-True
Environmental clean-up costs are deductible in the year incurred. - ANSWER-False
Research and experimental expenditures are deductible unless they result in the
development of a patented formula or process. - ANSWER-False
Repair costs incurred to keep a tangible asset in good working order must be
capitalized to
the cost of the asset. - ANSWER-False
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. - ANSWER-False (Sales tax must be capitalized as part of the cost of the asset.)
Burton Company acquired new machinery by performing professional services worth
$8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250. -
ANSWER-True
Cosmo Inc. purchased an asset costing $67,500 by paying $13,500 cash at date of
purchase
and giving the seller a 5-year interest-bearing note for the $54,000 balance. Cosmo's
tax basis in the asset is $13,500. - ANSWER-False
The difference between the before-tax cost and after-tax cost of an asset equals the net
present value of the tax savings from any cost recovery deductions with respect to the
asset. - ANSWER-True
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. - ANSWER-True
Tregor Inc., which manufactures plastic components, rents equipment on a monthly
basis
, for use in its manufacturing process. The monthly rent is a deductible expense. -
ANSWER-False (The rent must be capitalized to inventory under the unicap rules.)
A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses
LIFO for financial reporting purposes. - ANSWER-True
In an inflationary economy, the use of FIFO maximizes the cost of goods sold and
minimizes the cost of ending inventory. - ANSWER-False (In an inflationary economy,
the use of LIFO maximizes the cost of goods sold and minimizes
the cost of ending inventory.)
A book/tax difference resulting from application of the unicap rules to manufactured
inventory reverses in the year in which the inventory is sold. - ANSWER-True
The MACRS calculation ignores any salvage or residual value of an asset. - ANSWER-
True
The MACRS calculation is based on the estimated useful life of the depreciable asset. -
ANSWER-False
Hextone Inc., which has a 35% 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 $4,270 deferred tax liability. - ANSWER-
True
Mallow Inc., which has a 35% tax rate, purchased a new business asset. First-year
book
depreciation was $37,225, and first-year MACRS depreciation was $55,025. As a result
of
this book/tax difference, Mallow recorded a $6,230 deferred tax asset. - ANSWER-False
(Mallow recorded a $6,230 deferred tax liability.)
KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November
13. This was KJD's only purchase of tangible personalty this year. KJD must use a
midquarter
convention to compute MACRS depreciation on the equipment. - ANSWER-True
MACRS depreciation for buildings is based on the straight-line method. - ANSWER-
True
Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on
June 12. The MACRS depreciation calculation assumes that the building was placed in
service on May 15 (midquarter). - ANSWER-False (The MACRS calculation for
buildings uses a midmonth convention.)
Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on
June 3. The MACRS depreciation calculation assumes that the building was placed in
service
on June 15. - ANSWER-True
Richland Company purchased an asset in 2006 for $50,000 and sold it in 2009. The
asset
was 7-year recovery property. Richland's 2009 MACRS depreciation on the asset was
$6,245. - ANSWER-False (MACRS depreciation was $3,123 ([$50,000 * 12.49%] * 50%
[half-year]))
An asset's adjusted book basis and adjusted tax basis convey no information about the
