Chapter 7 - Chapter 7 Property Acquisitions and Cost...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 7 - Property Acquisitions and Cost Recovery Deductions Chapter 7 Questions and Problems for Discussion 1. The tax law presumes that no expenditure is deductible unless a specific statutory rule allows  the deduction. Furthermore, if the tax treatment of a business expenditure is uncertain, the  expense must be capitalized to an asset account rather than deducted in the computation of  taxable income.  2. 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.  3. Cost recovery deductions are not based on current cash outflows. In other words, these  deductions reduce capitalized costs rather than the firm’s cash account. However, the tax  savings from a cost recovery deduction represents a positive cash flow.  4. Cost recovery deductions have no relationship to any decline in value of the property to which  the deduction relates. Taxpayers may claim cost recovery deductions even if the value of the  property increases over time.  5. Tax basis represents the unrecovered investment in a business asset. If the owner of the asset  has recovered her entire investment in the form of cost recovery deductions, the basis of the  asset is zero. An asset may not have a negative tax basis.  6. Because land is a nonwasting (nondepreciable) asset, capitalized soil and water conservation  expenditures are recovered in the year the land is sold.  7. Because Corporation J’s insurance premiums related to assets used in the production of  inventory, the unicap rules require that the premiums be capitalized to inventory rather than  deducted. Corporation K is a service business with no inventory. Therefore, its insurance  premiums are  period  rather than  product  costs and can be deducted.   8. In a period of inflation in which the most recently purchased goods are the most expensive, the  LIFO costing convention maximizes cost of goods sold and minimizes the capitalized cost of  inventory. Consequently, the LIFO method minimizes current income, which is good from a tax  perspective but bad from a financial reporting perspective. Firms cannot use LIFO for tax and  another method for financial reporting and, thus, must take the good with the bad.  9. The capitalized cost of a depreciable asset could be different for tax purposes than for financial  statement purposes. The time period over which the cost is recovered could be different. The 
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern