ACCT 4611 test 2 study guide
ACCT 4611 test 2 study guide TAX 4611
Popular in Tax For Decision Making
Popular in Accounting
This 6 page Study Guide was uploaded by Lindsay Taylor on Sunday October 2, 2016. The Study Guide belongs to TAX 4611 at East Carolina University taught by Dr. Hagan in Fall 2016. Since its upload, it has received 5 views. For similar materials see Tax For Decision Making in Accounting at East Carolina University.
Reviews for ACCT 4611 test 2 study guide
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/02/16
ACCT 4611 TEST 2 STUDY GUIDE, CH 6-‐9 short answer and word problems Short Answer Questions: • WHAT IS INCOME? “from whatever source derived” 1. Finding money or treasure 2. Alimony is income to those receiving it • WHAT IS A DEDUCTION? “expenditure that reduces taxable income” 1. Business expenses • WHAT IS A CREDIT? a direct reduction in a tax liability ($ for $) • HOW DOES A BUSINESS DETERMINE ITS TAX YEAR? for tax purposes, it’s always a year and it’s either calendar or fiscal; individuals can do either but usually do calendar; partnerships and S Corporations follow owner (usually calendar) • WHAT ARE THE PERMISSABLE METHODS OF ACCOUNTING FOR TAX PURPOSES? cash method, accrual method, or hybrid method • DESCRIBE THE CASH METHOD OF ACCOUNITNG AND THE ACCRUAL METHOD OF ACCOUNTING. cash: easy to manipulate; not accurate, easy accrual: preferred for tax purposes; required for high-‐level inventory • IS CONSERVATSIM THE SAME FOR FINANCIAL ACCOUNTING AND THE TAX LAW? WHY? financial acct: we like lower assets and higher liabilities so we can borrow more money; rather understate assets than overstat e and get sued by bank tax law: means taking less deductions, overstating assets, putting off taxes & pushing up income • WHAT IS A NET OPERATING LOSS? If a taxpayer’s annual business operation results in an excess of deductible expenses over gross income, this excess is labeled a net operating loss (NOL) • WHAT FACTORS DETERMINE WHETHER A BUSINESS EXPENDITURE IS A DEDUCTIBLE EXPENSE OR A CAPITALIZED COST? rent that will be used up à expense equipment that has future value à capitalize • WHAT IS TAX BASIS? like book value; depreciation is subtracted from tax basis • WHAT IS ADJUSTED BASIS? = tax basis -‐ depreciation • WHAT IS THE COST OF GOODS SOLD FORMULA? Cost of beginning Inventory + cost of goods manufactured or purchased Total cost of inventory available for sale (cost of ending inventory) _ Cost of Goods Sold • WHAT IS THE DIFFERENCE BETWEEN COST DEPLETION AND PERCENTAGE DEPLETION? cost depletion: used for natural resources; buy plot of land $100,000, natural resources on that land are depleted and sell land for $30,000. So the resources are worth $70,000 à amortize over the life of the resources and stop when you amortize full $70,000. percentage depletion: every natural resource is assigned a percentage for amortization. You take oil out of the ground, you multiply 15% (crude oil %) X $revenue to find out how much you have depleted. Even when you reach $70,000, you keep going! Just no longer “depleting” 2 • DISTINGUISH REALIZATION AND RECOGNITION. first, you determine what realized G/L is second, as is it going to affect tax return? third, is the effect immediate? lastly, you can defer recognizing gains; why would you want to? If it’s an exchange and you got no cash à defer! • WHAT IS AN INSTALLMENT SALE? only I seller-‐finance real estate • WHAT ARE THE RULES CONCERNING RELATED PARTY SALES? If a loss is incurred you cannot deduct it • WHAT IS A CAPITAL ASSET? everything except: inventory, account/notes receivable, supplies, hedging transactions, commodities, real or depreciable property, copyrights & the like, certain publications of U.S. government • WHAT IS A CAPITAL LOSS LIMITATION? individual: $3,000 corporation: $0 • WHAT ARE THE CARRYBACK AND CARRYFORWARD RULES FOR NET CAPITAL LOSSES FOR INDIVIDUALS AND CORPORATIONS? individuals can carryforward forever and cannot carryback corporations can carryback 3 years and carryforward 5 years • WHY ARE SOME SALE OR EXCHANGES TREATED AS NONTAXABLE? if you make a trade that involves no cash, what would you tax? • WHAT EFFECT DOES BOOT HAVE ON A NONTAXABLE TRANSACTION? cash given during a trade (or something else worth money used to make transaction even) boot is anything of value 3 Word Problems: 1. If a corporation operates multiple lines of business, can it elect a different overall method of accounting for each line, or must the corporation adopt one overall method? à A corporation can elect a different overall method of accounting for each of its three business ventures. 2. Why might cash method improve the NPV of a firm ’s cash flows over the next decade? Explain. à Under the cash method, income from the provision of goods and services is not recognized until payment for the goods and services is received, an event that usually occurs after the income is earned under the accrual method. Thus, the cash method results i n deferral from the year income is earned until the year payment is received. In a growing business, this annual deferral result is continuous. Therefore, in NPV terms, the tax cost associated with the cash method is less than the tax cost associated with the accrual method, even though each method results in the same total income recognition over the life of the business. 3. a. Assuming a 35% marginal tax rate, compute the after-‐tax cost of the following business expense: $5,600 premium on business property and casualty insurance. Because the property and casualty insurance premium is deductible, the after-‐tax cost is $3,640 ($5,600 – [$5,600 × 35%]). b. Assuming a 35% marginal tax rate, compute the after-‐tax cost of the following business expense: $1,200 fine paid to Wisconsin for violation of state law Because the fine is nondeductible, the after-‐tax cost is $1,200. c. Assuming a 35% marginal tax rate, compute the after-‐tax cost of the following business expense: $3,700 premium on key-‐person life insurance Because the life insurance premium is nondeductible, the after -‐tax cost is $3,700. 4 d. Assuming a 35% marginal tax rate, compute the after-‐tax cost of the following business expense: $50,000 political contribution Because the political contribution is nondeductible, the after -‐tax cost is $50,000. e. Assuming a 35% marginal tax rate, compute the after-‐tax cost of the following business expense: $7,800 client entertainment Because only 50 percent of the entertainment expense is deductible, the after-‐tax cost is $6,435 ($7,800 – [$3,900 × 35%]). 4. If firms were required to capitalize advertising costs and amortize over them over 20 years, what would be the potential effects on the amount of advertising firms purchased and the price that advertising companies charged? à If a deduction for advertising expense was replaced with 20-‐year amortization, the after-‐tax cost of advertising (in present value terms) would increase substantially. Presumably, firms would purchase less advertising or advertising companies would reduce their prices (before-‐tax cost) in response to such a tax law change. . 5. A firm bought a depreciable asset for $62,500. Using the half-‐year convention, compute its first-‐year MACRS depreciation if the asset is: a. A land irrigation system is 15-‐year recovery property. First-‐year MACRS is $3,125 ($62,500 × 5%). b. Duplicating equipment is 5-‐year recovery property. First-‐year MACRS is $12,500 ($62,500 × 20%). c. An ocean-‐going barge is 10-‐year recovery property. First-‐year MACRS is $6,250 ($62,500 × 10%). d. Small manufacturing tools are 3-‐year recovery property. First-‐year MACRS is $20,831 ($62,500 × 33.33%). 5 6. computer system à Section 1231 asset. 50% interest in a business partnership à Capital asset. heavy equipment for best selling product à Section 1231 asset. 7. Distinguish between a firm’s tax basis and in an asset and its equity in an asset: A firm’s tax basis in an asset includes any portion of the asset’s cost that the firm borrowed from another party to purchase the asset, even if the asset is the collateral for the debt. A firm’s equity in an asset equals the fair market value of the asset less any creditor claims on the asset. 6
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'