Midterm Exam Review Notes

Midterm Exam Review Notes

General Exam Information

• Date: March 4, 2025
• Duration: 1 hour 10 minutes
• Score: 9 out of 25
• Grade: 36%
• Feedback: Results available later.

Key Concepts from Exam Questions

Question 1: Tax Depreciation

• Scenario: Pond Inc. purchased a depreciable asset for $189,000.
• Depreciation:
  • Book Depreciation: $22,000
  • MACRS Depreciation: $37,800
• Marginal Tax Rate: 21%
• Answer: Excess tax depreciation results in a $3,318 Deferred Tax Liability.

Question 2: Warranty Expense Deduction

• Dart Company recorded: Warranty reserve of $70,000 for 2021.
• Expense Incurred: $24,500 from Jan 1, 2022 - Sep 15, 2022.
• Tax Deduction: Under the recurring item exception, only the $24,500 is deductible.

Question 3: Cost Basis of Purchased Asset

• Scenario: Kruger Company paid $35,000 cash and issued a note for $240,000.
• Cost Basis: Book basis and tax basis in the asset = $275,000.
• Answer: Correct statement confirmed.

Question 4: MACRS Depreciation for Realty

• Rocks Company paid $3,350,000 for a complex, with $3,000,000 allocated to the building.
• Placed in Service: September 29
• MACRS for First Year: Calculation requires MACRS table values (1.061 for September).
• Correct Answer: $31,830.

Question 5: Permanent Book/Tax Difference

• Concept: Permanent differences arise when expense/loss recognized for book purposes but not for tax.
• Correct Answer: An expense (or loss) is realized for book but never recognized for tax.

Question 6: Tax Expense and Payable

• Key Concept: Tax expense per books should equal tax payable if there are no temporary or permanent differences.
• Correct Answer: If there are no permanent differences, they do not equal.

Question 7: Taxable Income Computation

• ARA Corporation: Generated $300,000 ordinary income; included gains/losses from asset sales (gains/losses treatment affects taxable income).
• False Statement: Gain as capital and loss as ordinary = Taxable income $269,000.

Question 8: Section 1231 Gains/Losses

• Santee Inc.: Recognized net Section 1231 gains/losses; $25,000 gain in 2020.
• Characterization: $15,900 ordinary gain and $9,100 Section 1231 gain.

Question 9: Recognizing Gains and Losses

• Harris Inc.: Sales of two operating assets led to net ordinary loss due to Section 1231 losses exceeding gains.
• Correct Answer: $20,700 ordinary loss recognized.

Question 10: Selling Business Assets

• Rumsfelds' Sale: Sold business for $750,000; recognized ordinary gains.
• Correct Answer: $324,900 ordinary gain from the sale.

Question 11: Deductible Premiums on Insurance

• Swaps Company: Paid $72,000 for a casualty insurance policy.
• Correct Answer: Only $3,000 deductible in 2021.

Question 12: Business Expense Recognition

• Expenses: Client entertainment is a business expense generating differences between book and tax income.

Tax Policy Objectives

• General Principle: Tax policy affects the computation of taxable income and differences between book income and tax returns.

Conclusion

• Review questions for understanding differences in accounting principles related to tax depreciation, expense recognition, and Section 1231 assets. Be prepared for calculations and definitions in future assessments.