TAX 4001 midterm Exam Questions with
100% Correct Answers
1. 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. - ANSWER - The greater the length of time that the payment of a tax is deferred, the
less the tax costs in NPV terms.
2.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. - ANSWER
- The U.S. government has jurisdiction to tax Fey.
3.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. - ANSWER - This year, Toby has a $40,000 favorable
temporary difference because of the accounting treatment of goodwill.
40,000 = 600,000 * 12/180
4.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. - ANSWER - None of these choices are true.
5. 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. - ANSWER - Assumes that
each party is dealing in its own economic self-interest
6. 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 false?
- If Ms. Lui's taxable income is $33,400, her average tax rate is 5%.
- If Mr. Bell's taxable income is $519,900, his marginal tax rate is 12%.
- If Ms. Vern's taxable income is $188,000, her average tax rate is 7.2%.
- None of the choices are false. - ANSWER - None of the choices are false.
7.On April 2, a calendar year taxpayer paid a $750,000 lump-sum price to purchase a business.
The appraised FMVs of the balance sheet assets were:
- None of these choices are false.
- The taxpayer's amortization deduction for the current year is $7,500.
- The taxpayer may amortize the $150,000 cost for both book and tax purposes.
- The taxpayer must capitalize $150,000 of the cost as purchased goodwill. - ANSWER -
The taxpayer may amortize the $150,000 cost for both book and tax purposes.
, 8. A calendar year taxpayer made only one asset purchase this year: machinery costing
$1,932,500. The machinery is 7-year recovery property, and was placed into service on October
12. How many months of MACRS depreciation on the machinery is allowed this
year? - One and one-half months
- None of these choices are
correct - Two and one-half months
- Six months - ANSWER - One and one-half months
9.Based on the information provided in the table below and assuming a 21% marginal tax
rate, compute tax expense per books and taxes payable.
Book income before tax $ 2,405,600
Net permanent differences (512,000)
Net temporary differences (189,000)
Taxable income $ 1,704,600
Tax expense per books $612,570; tax payable $357,966.
Tax expense per books $357,966; tax payable $397,656.
None of these choices are correct
Tax expense per books $397,656; tax payable $357,966. - ANSWER - Tax expense per books
$397,656; tax payable $357,966.
Tax expense per books = (2,405,600-512,000) * .21
10.Which of the following statements is true?
- None of the choices are true.
- Regressive rate structures are illegal in the United States.
- A proportionate rate structure is the only structure resulting in vertical equity.
- A tax with a graduated rate structure must be either regressive or progressive. - ANSWER - A
tax with a graduated rate structure must be either regressive or progressive.
100% Correct Answers
1. 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. - ANSWER - The greater the length of time that the payment of a tax is deferred, the
less the tax costs in NPV terms.
2.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. - ANSWER
- The U.S. government has jurisdiction to tax Fey.
3.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. - ANSWER - This year, Toby has a $40,000 favorable
temporary difference because of the accounting treatment of goodwill.
40,000 = 600,000 * 12/180
4.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. - ANSWER - None of these choices are true.
5. 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. - ANSWER - Assumes that
each party is dealing in its own economic self-interest
6. 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 false?
- If Ms. Lui's taxable income is $33,400, her average tax rate is 5%.
- If Mr. Bell's taxable income is $519,900, his marginal tax rate is 12%.
- If Ms. Vern's taxable income is $188,000, her average tax rate is 7.2%.
- None of the choices are false. - ANSWER - None of the choices are false.
7.On April 2, a calendar year taxpayer paid a $750,000 lump-sum price to purchase a business.
The appraised FMVs of the balance sheet assets were:
- None of these choices are false.
- The taxpayer's amortization deduction for the current year is $7,500.
- The taxpayer may amortize the $150,000 cost for both book and tax purposes.
- The taxpayer must capitalize $150,000 of the cost as purchased goodwill. - ANSWER -
The taxpayer may amortize the $150,000 cost for both book and tax purposes.
, 8. A calendar year taxpayer made only one asset purchase this year: machinery costing
$1,932,500. The machinery is 7-year recovery property, and was placed into service on October
12. How many months of MACRS depreciation on the machinery is allowed this
year? - One and one-half months
- None of these choices are
correct - Two and one-half months
- Six months - ANSWER - One and one-half months
9.Based on the information provided in the table below and assuming a 21% marginal tax
rate, compute tax expense per books and taxes payable.
Book income before tax $ 2,405,600
Net permanent differences (512,000)
Net temporary differences (189,000)
Taxable income $ 1,704,600
Tax expense per books $612,570; tax payable $357,966.
Tax expense per books $357,966; tax payable $397,656.
None of these choices are correct
Tax expense per books $397,656; tax payable $357,966. - ANSWER - Tax expense per books
$397,656; tax payable $357,966.
Tax expense per books = (2,405,600-512,000) * .21
10.Which of the following statements is true?
- None of the choices are true.
- Regressive rate structures are illegal in the United States.
- A proportionate rate structure is the only structure resulting in vertical equity.
- A tax with a graduated rate structure must be either regressive or progressive. - ANSWER - A
tax with a graduated rate structure must be either regressive or progressive.
