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Exam Code: CPA-REGULATION
Exam Name: CPA Regulation
Updated: Jan 02, 2025
Q&As: 69
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Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions are met?
A. Option A
B. Option B
C. Option C
D. Option D
Correct Answer: D
Choice "d" is correct. Under the uniform capitalization rules, purchasers of inventory for resale may deduct
their marketing costs but must capitalize their off-site storage costs.
Choices "a", "b", and "c" are incorrect. Marketing costs are deductible, but off-site storage must be
capitalized.
Which of the following is subject to the Uniform Capitalization Rules of Code Sec. 263A?
A. Editorial costs incurred by a freelance writer.
B. Research and experimental expenditures.
C. Mine development and exploration costs.
D. Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts.
Correct Answer: D
Choice "d" is correct. Uniform capitalization rules apply to the following: (1) real or tangible personal property produced by the taxpayer for use in his or her trade or business; (2) real or tangible personal property produced by the taxpayer for sale to his or her customers; and (3) real or tangible personal property acquired by the taxpayer for resale, provided the taxpayer's annual average gross receipts for the preceding three years exceeds $10,000,000. Warehousing costs incurred by a manufacturing company (making inventory for sale to its customers) are subject to the Uniform Capitalization Rules. Further, they are the only item on the list that is real or tangible personal property. In this case, the inventory is not acquired for resale (it is produced by the taxpayer for sale to his or her customers), so the fact that the annual sales are $12,000,000 does not matter in this case. The sales could have been less than $10,000,000 annually, and the Uniform Capitalization Rules would still have applied. Choices "a", "b", and "c" are incorrect, based on the above discussion.
Capital assets include:
A. A corporation's accounts receivable from the sale of its inventory.
B. Seven-year MACRS property used in a corporation's trade or business.
C. A manufacturing company's investment in U.S. Treasury bonds.
D. A corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers.
Correct Answer: C
Choice "c" is correct. Investment assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in U.S. Treasury bonds. Choice "a" is incorrect. Accounts receivable generated from the sale of inventory are excluded from the statutory definition of capital assets. Choice "b" is incorrect. Depreciable property used in a trade or business is excluded from the statutory definition of capital assets. Choice "d" is incorrect. Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets.
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