Question 27

The U.S. federal income tax code (Code) permits companies to depreciate capital assets using different methods than those methods prescribed by Generally Accepted Accounting Principles (GAAP). How and why?

Group of answer choices

the Code requires companies to depreciate capital assets slower than GAAP so their taxable income will be higher, and cash income taxes higher.

The Code permits companies to depreciate capital assets faster than GAAP so their taxable income can be lower, cash income taxes lower, and thereby free cash flows higher.

GAAP requires companies to depreciate capital assets on a more accelerated basis versus the Code, which means accrued income tax expense may be higher under GAAP versus the Code, and this is to promote the conservatism principle in GAAP.

the Code requires companies to depreciate capital assets faster than GAAP so their taxable income will be higher, and cash income taxes higher.

Question 28

Four years ago, your employer purchased for $2,250,000 a new office telephone system to support its complex of office buildings. Your supervisor wants to know what its after-tax salvage value would be if it were sold today and replaced with a new system. The system purchased four years ago is being depreciated straight-line for tax purposes over 5 years to a book value of $50,000 (because when the system was purchased the Company believed it could be sold for $50,000 at the end of 5 years). Your company has a 21% marginal income tax rate for capital gains. You have done some checking around and have learned this old system has a market value of $800,000. If the company could sell the old system for this price, what would be its after-tax salvage value?

Group of answer choices

$263,500

$350,000

$247,500

$853,500

$734,900

Question 29

You and two of your friends started a wholesale distribution business to distribute hardware and lawn and garden tools. Two years ago, your business paid $120,500 for 4 acres of land for a potential new distribution center to be built in Moore, OK. Today, the market value of this land is $335,000. Your company has just analyzed a proposal to develop a new distribution center, and has determined that it will not be feasible to go forward with the proposed project. Therefore, your company will sell the land for $335,000 as planned because the proposed new distribution was determined to be infeasible. When the proposed project was being analyzed, did the land represent a relevant cash flow?

Group of answer choices

No, it was a sunk cost and not relevant.

Yes, it was an opportunity cost, and the proposed project reflected the $214,500 net gain for the land as such.

Yes, it was an opportunity cost, and the proposed project reflected the $335,000 current market value as an opportunity cost.

Yes, it was relevant to the analysis and the historical cost of the land was a sunk cost.