TAX 4001 EXAM #1 REVIEW QUESTIONS
1 - T/F
Temporary book/tax differences arising in the current tax year will reverse in one or
more future tax years. - Answer -1 - False
Out of a $24,000 expense, only $18,000 was deductible. Compute the after-tax cost of
the expense if the taxpayer has a 40% marginal tax rate. - Answer -$16,800
(18,000 x 40%)= 7,200
24,000 - 7,200 = 16800
Consider the following three $100,000 investments. The income from investment 1
would be taxed at a 37% regular tax rate, the income from investment 2 would be taxed
at a 20% preferential rate, and the income from investment 3 is tax-exempt. The
investments offer the following before-tax yields.
Investment 1: 8.25%
Investment 2: 7.5% --
Investment 3: 6.0% -- WRONG
Which investment should provides the highest after tax cashflow? - Answer -Investment
2 and investment 3 provide the same after tax cashflow.
A taxpayer purchased a residential apartment for $1,400,000 and placed it in service on
September 5. Which of the following statements is false? - Answer -One half-year of
MACRS depreciation is allowed with respect to the apartment building this year.
Which of the following statements most accurately defines taxable income from
business operations? - Answer -Gross income from whatever source derived less
allowable deductions.
Who, in most instances, bears the incidence of a state sales tax on retail goods? -
Answer -The ultimate purchaser of the goods.
A taxpayer liquidates corporate bonds and uses the proceeds to invest in municipal
bonds. This tax planning strategy may be taking advantage of the: - Answer -Character
variable
The property tax on a rental house owned by Tim increased by $100 per year. Tim
increased the monthly rent charged to his tenant, Macy, by $50 per year. Who bears the
incidence of the property tax increase? - Answer -Both Tim and Macy
, Which of the following is not a permanent book/tax difference? - Answer -NOL
carryforwards
Holter Incorporated owns an investment that generated $120,000 cash revenue and
required $26,500 cash expenses this year. Holter's marginal tax rate is 30%. Which of
the following statements is false?
- Holter's before-tax cash flow is $93,500.
- None of these choices are false.
- If only $105,000 of the revenue is taxable, but all the expenses are deductible, Holter's
after-tax cash flow is $69,950.
- If the revenue is taxable, but only $19,000 of the expenses are deductible, Holter's
after-tax cash flow is $63,200. - Answer -None of these choices are false.
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.) - Answer -First year $213,778;
second year $366,370
Angela Jones is considering two investments. The first produces $5,000 of tax-exempt
income. The second produces income that will be subject to tax at a rate of 15%. Which
of the following statements is true regarding Angela's choice? - Answer -Both if the
second investment generates $5,500 of before-tax income, Angela should choose the
first investment and if the second investment generates $6,500 of before-tax income,
Angela should choose the second investment are true.
A calendar year taxpayer, purchased a total of $2,674,400 tangible personalty in 2021.
Assuming it has $1 million in income before the deduction, how much of this cost can
the company expense under Section 179?
$995,600
$2,674,400 WRONG
$1,050,000
-0- - Answer -$1,050,000
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: - Answer -$2,000 book
income and $18,000 taxable income
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
1 - T/F
Temporary book/tax differences arising in the current tax year will reverse in one or
more future tax years. - Answer -1 - False
Out of a $24,000 expense, only $18,000 was deductible. Compute the after-tax cost of
the expense if the taxpayer has a 40% marginal tax rate. - Answer -$16,800
(18,000 x 40%)= 7,200
24,000 - 7,200 = 16800
Consider the following three $100,000 investments. The income from investment 1
would be taxed at a 37% regular tax rate, the income from investment 2 would be taxed
at a 20% preferential rate, and the income from investment 3 is tax-exempt. The
investments offer the following before-tax yields.
Investment 1: 8.25%
Investment 2: 7.5% --
Investment 3: 6.0% -- WRONG
Which investment should provides the highest after tax cashflow? - Answer -Investment
2 and investment 3 provide the same after tax cashflow.
A taxpayer purchased a residential apartment for $1,400,000 and placed it in service on
September 5. Which of the following statements is false? - Answer -One half-year of
MACRS depreciation is allowed with respect to the apartment building this year.
Which of the following statements most accurately defines taxable income from
business operations? - Answer -Gross income from whatever source derived less
allowable deductions.
Who, in most instances, bears the incidence of a state sales tax on retail goods? -
Answer -The ultimate purchaser of the goods.
A taxpayer liquidates corporate bonds and uses the proceeds to invest in municipal
bonds. This tax planning strategy may be taking advantage of the: - Answer -Character
variable
The property tax on a rental house owned by Tim increased by $100 per year. Tim
increased the monthly rent charged to his tenant, Macy, by $50 per year. Who bears the
incidence of the property tax increase? - Answer -Both Tim and Macy
, Which of the following is not a permanent book/tax difference? - Answer -NOL
carryforwards
Holter Incorporated owns an investment that generated $120,000 cash revenue and
required $26,500 cash expenses this year. Holter's marginal tax rate is 30%. Which of
the following statements is false?
- Holter's before-tax cash flow is $93,500.
- None of these choices are false.
- If only $105,000 of the revenue is taxable, but all the expenses are deductible, Holter's
after-tax cash flow is $69,950.
- If the revenue is taxable, but only $19,000 of the expenses are deductible, Holter's
after-tax cash flow is $63,200. - Answer -None of these choices are false.
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.) - Answer -First year $213,778;
second year $366,370
Angela Jones is considering two investments. The first produces $5,000 of tax-exempt
income. The second produces income that will be subject to tax at a rate of 15%. Which
of the following statements is true regarding Angela's choice? - Answer -Both if the
second investment generates $5,500 of before-tax income, Angela should choose the
first investment and if the second investment generates $6,500 of before-tax income,
Angela should choose the second investment are true.
A calendar year taxpayer, purchased a total of $2,674,400 tangible personalty in 2021.
Assuming it has $1 million in income before the deduction, how much of this cost can
the company expense under Section 179?
$995,600
$2,674,400 WRONG
$1,050,000
-0- - Answer -$1,050,000
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: - Answer -$2,000 book
income and $18,000 taxable income
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
