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ACCT 4611 test 2 study guide

by: Lindsay Taylor

ACCT 4611 test 2 study guide TAX 4611

Marketplace > East Carolina University > Accounting > TAX 4611 > ACCT 4611 test 2 study guide
Lindsay Taylor
GPA 3.47

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short answer and word problems to study for exam 2 in Hagan's tax class
Tax For Decision Making
Dr. Hagan
Study Guide
Taxes, Accounting
50 ?




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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.


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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  


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