Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1)
1)
Which of the following is not true about depreciation?
A)
Depreciation is a cash flow.
B)
Depreciation defers tax savings into future years.
C)
Depreciation affects the taxes paid on an alternative.
D)
Depreciation affects the cash flow of an alternative.
Answer:
A
A)
B)
C)
D)
2)
2)
How do losses carried forward affect the present value for C corporations that pay a flat tax rate of
21%?
A)
The present value decreases.
B)
The present value stays the same.
C)
The present value is zero.
D)
The present value increases.
Answer:
A
A)
B)
C)
D)
3)
3)
Tax credits reduce which of the following?
A)
Cash flow for an alternative
B)
Taxable income
C)
Tax liability
D)
A and C
Answer:
C
A)
B)
C)
D)
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4)
4)
Which of the following does not affect the decision–making process?
A)
Depreciation
B)
Capital gains taxed at the same rate as ordinary gains
C)
Losses carried forward
D)
Tax credits
Answer:
B
A)
B)
C)
D)
5)
5)
Which of the following would not be a capital gain?
A)
Sale of a capital asset for a profit
B)
Sale of depreciable property for a profit
C)
Sale of real property for a profit
D)
Payment from a construction project
Answer:
D
A)
B)
C)
D)
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
6)
Why have tax breaks been given to long–term capital gains?
Answer:
Throughout history, tax breaks have been given to capital gains held for certain lengths of time to
encourage long–term investment over short–term investment.
7)
How did cost segregation affect the restaurant example in the book?
Answer:
The present value of the tax saving using cost segregation compared to not using cost segregation was
$60,928. From this value, the present value of the cost segregation study must be subtracted to get the
net present value of performing the cost segregation. The net present value is $35,928 ($60,928 –
$25,000). The company should have a cost segregation study done.
8)
On the amortization schedule in Figure 18–4 in the text, why is the last payment smaller?
Answer:
The last payment is slightly smaller due to the rounding of the monthly payment and monthly interest.
9)
How do losses carried forward affect taxes?
Answer:
When a company has losses that must be carried forward, the tax benefits of these losses are deferred
into future years.
10)
How do fluctuations in an individual’s income affect the decision–making process?
Answer:
Fluctuations in an individual’s tax rate can affect the attractiveness of investments. When an
individual’s income goes up and down from year to year, the individual may move from one tax
bracket to another tax bracket; paying a higher marginal tax rate in years of high profit and a lower
marginal tax rate in the years of low profit.
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Answer Key
Testname: C18
1)
A
2)
A
3)
C
4)
B
5)
D
6)
Throughout history, tax breaks have been given to capital gains held for certain lengths of time to encourage
long–term investment over short–term investment.
7)
The present value of the tax saving using cost segregation compared to not using cost segregation was $60,928. From
this value, the present value of the cost segregation study must be subtracted to get the net present value of
performing the cost segregation. The net present value is $35,928 ($60,928 – $25,000). The company should have a cost
segregation study done.
8)
The last payment is slightly smaller due to the rounding of the monthly payment and monthly interest.
9)
When a company has losses that must be carried forward, the tax benefits of these losses are deferred into future
years.
10)
Fluctuations in an individual’s tax rate can affect the attractiveness of investments. When an individual’s income goes
up and down from year to year, the individual may move from one tax bracket to another tax bracket; paying a
higher marginal tax rate in years of high profit and a lower marginal tax rate in the years of low profit.
3