1) Assuming a 25 percent tax rate, compute the after-tax cost of $23,000 worth of advertising costs. (part c) a) $23,000
Because the advertising cost is deductible, its after-tax cost is $17,250 ($23,000 – [$23,000 × 25%]). d) $27,500
2) In 2013, Firm A paid $50,000 cash to purchase a tangible business asset. In 2013 and 2014, it deducted $3,140 and $7,200 depreciation with respect to the asset. Firm A’s marginal tax rate in both years was 35 percent. Compute Firm A’s adjusted basis in the asset at the end of each year. (part b) a) 2013: $39,660; 2014: $29,320
b) 2013: $46,860; 2014: $39,660
Initial cost basis$50,000
Year 1 depreciation (3,140)
Adjusted basis at end of 2013$46,860
Year 2 depreciation (7,200)
Adjusted basis at end of 2014$39,660
c) 2013: $50,000; 2014: $50,000
d) 2013: $47,959; 2014: $43,279
3) Refer to the facts in problem 2 above. Now assume that Firm A borrowed $50,000 to purchase the asset. In each year, it paid $3,800 annual interest on the debt. The interest payments were deductible. How does this change in facts affect Firm A’s adjusted basis in the asset at the end of each year? (part b) a) It decreases the basis by $3,800 each year.
b) It decreases the basis by $2,470 ($3,800 – [$3,800 x 35% tax rate]). c) It increases the basis by $3,800 each year.
d) It has no effect on the basis.
The use of leverage has no effect on Firm A’s adjusted basis in the asset. 4) Company XYZ manufactures a tangible product and sells the product at wholesale. In its first year of operations, XYZ manufactured 1,000 units of product and incurred $200,000 direct material cost and $130,000 direct labor
costs. For financial statement purposes, XYZ capitalized $85,000 indirect costs to inventory. For tax purposes, it had to capitalize $116,000 indirect costs to inventory under the unicap rules. At the end of its first year, XYZ held 260 units in inventory. Compute XYZ’s cost of goods sold for book purposes and for tax purposes. a) Book: $415,000; Tax: $446,000
b) Book: $307,100; Tax: $330,040
Company XYZ’s cost of goods sold for its first year of operations is computed as follows. BookTax
Direct material cost$200,000$200,000
Direct labor cost130,000130,000
Indirect costs 85,000116,000
Total cost of 1,000 units$415,000$446,000
Cost of ending inventory (260 units)(107,900)(115,960)
Cost of goods sold (740 units)$307,100$330,040
[$415,000/1,000 = $415 each unit of inventory (book)]
[$446,000/1,000 = $446 each unit of inventory (tax)]
c) Book: $107,900; Tax: $115,960
d) Book: $350,400; Tax: $298,700
5) Herelt Inc., a calendar year taxpayer, purchased equipment for $383,600 and placed it in service on April 1, 2014. The equipment was seven-year recovery property, and Herelt used the half-year convention to compute MACRS depreciation. Compute Herelt’s MACRS depreciation for 2016 if it disposes of the equipment on February 9, 2016. (part c) a) $25,483
Herelt’s MACRS depreciation for the year of disposition is based on the half-year convention. Thus, 2016 depreciation is $33,546 (50% [$383,600 × 17.49%]).
6) The Section 179 expense election applies to what type of assets? a) Only startup expenses.
b) Intangible assets.
c) Depreciable personalty.
d) Only residential real property.
7) Start-up costs may be only partially deductible in the year incurred, but expansion costs are fully deductible in the year incurred. a) True
8) Bonus depreciations allows the purchaser of qualified tangible personal property to take an extra depreciation deduction in the year acquired. a) True
9) What are two tax recovery methods used frequently in the natural resource industry? a) Allocable & non-allocable recovery.
b) Cost & percentage depletion.
c) Going-concern value & goodwill impairment.
d) Leasehold costs & leasehold improvements.
10) For both financial reporting purposes and tax purposes, goodwill is capitalized and only expensed when impaired. a) True