IMChap007_2017.pdf - Chapter 07 Property Acquisitions and...

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Chapter 07 - Property Acquisitions and Cost Recovery Deductions 7-3 c. The cost of land is not currently deductible or depreciable, thus the after-tax cost is $125,000. d. Because intangible drilling costs are currently deductible, their after-tax cost is $22,770 ($34,500 – [$34,500 × 34%]). 3. a. $6,866 cost basis ($5,950 purchase price + $416 sales tax + $500 installation cost) b. $169,600 cost basis (FMV of stock exchanged for inventory) c. $7,000 cost basis (FMV of services exchange for machinery) d. $20,000 cost basis 4. Adjusted tax basis is $58,000 = $25,000 cash paid on purchase + $80,000 acquisition debt + $2,000 freight + $7,000 capital improvements - $56,000 depreciation. The cost of repairs is deductible when incurred. 5. a. The $52,000 excess of taxable income over book income is an unfavorable difference resulting in an $18,200 deferred tax asset ($52,000 × 35%). b. The temporary difference will reverse in the year that ZeZe disposes of the land. 6. a. Year 1 Year 2 Cost of asset $(50,000) Tax savings: Annual depreciation × 35% 1,099 $2,520 Net cash flow $(48,901) $2,520 b. Initial cost basis $50,000 Year 1 depreciation (3,140) Adjusted basis at end of Year 1 $46,860 Year 2 depreciation (7,200) Adjusted basis at end of Year 2 $39,660 7. a. Year 1 Year 2 Cost of asset $(50,000) Debt proceeds 50,000 Interest expense (3,800) $(3,800) Tax savings: Interest deduction × 35% 1,330 1,330 Annual depreciation × 35% 1,099 2,520 Net cash flow $(1,371) $50 b. The use of leverage has no effect on Firm A’s adjusted basis in the asset. 8. a. Year 0 Year 1 Cost of asset $(50,000) Tax savings: Annual depreciation of $25,000 × 35% 8,750 $8,750 Net cash flow $(41,250) $8,750 Discount factor (8%) .926 Present value $(41,250) $8,103 NPV of after-tax cost $(33,147)
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