Chapter 11&12 Practice Test Taxation II

Beth's business purchased only one asset during the current year (a full 12-month tax year). Beth placed in service machinery (7-year property) on December 1 with a basis of $51,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2)

1281

Anne LLC purchased computer equipment (5-year property) on August 29 for $37,000 and used the half-year convention. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum depreciation expense. (Use MACRS Table 1)

2131 Explanation: The calculations are $37,000 × 0.1152 = $4,262 × 0.5 = $2,131 since the property is considered to be owned for half the year in the year of disposition.

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $800,000 for extraction rights. A geologist estimates that Santa Fe will recover 10,000 pounds of turquoise. During the current year, Santa Fe extracted 3,000 pounds of turquoise, which it sold for $510,000. What is Santa Fe's cost depletion expense for the current year?

240,000 Explanation: The depletion expense is $240,000 ($800,000/10,000) × 3,000.

Potomac LLC purchased an automobile for $30,800 on August 5, 2018. What is Potomac's depreciation expense for 2018 (ignore any possible bonus depreciation)? (Use MACRS Table 1, and Exhibit 10-10.)

6160 Explanation: A luxury auto's maximum depreciation in the first year is the lesser of $10,000 or its MACRS amount of $6,160 ($30,800 × 20 percent) for 2018.

Sairra, LLC purchased only one asset during the current year (a full 12-month tax year). Sairra placed in service furniture (7-year property) on April 16 with a basis of $31,000. Calculate the maximum depreciation expense for the current year? (ignoring §179 and bonus depreciation). (Use MACRS Table 1)

4430 Explanation The asset's recovery period is 7 years and the half-year convention applies. The calculation is $31,000 × 0.1429 = $4,430.

Wheeler LLC purchased two assets during the current year (a full 12-month tax year). Wheeler placed in service computer equipment (5-year property) on November 16 with a basis of $26,500 and furniture (7-year property) on April 20 with a basis of $17,900. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2) (Round final answer to the nearest whole number.)

4520 Explanation: The mid-quarter convention applies because more than 40% of the years' assets were placed in service in the fourth quarter of the tax year. The computer is 4th quarter property and the furniture is 2nd quarter property. The calculations are $26,500 × 0.05 = $1325 and $17,900 × 0.1785 = $3,195. The total is $4,520 ($1,325 + $3,195).

Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15th and the purchase price was $60,000. If the copyright has a remaining life of 75 months, what is the total amortization expense Jorge may deduct during the current year? (Assume not in an asset acquisition to which §197 applies

4800 Explanation: The amortization is $4,800 ($60,000/75) × 6. The amortization period on a purchased copyright is the asset's remaining useful life.

Lax, LLC purchased only one asset during the current year (a full 12-month tax year). Lax placed in service computer equipment (5-year property) on August 26 with a basis of $27,000. Calculate the maximum depreciation expense for the current year? (ignoring §179 and bonus depreciation). (Use MACRS Table 1)

5,400 Explanation: The asset's recovery period is 5 years and the half-year convention applies. The calculation is $27,000 × 0.2 = $5,400.

Jasmine started a new business in the current year. She incurred $30,000 of start-up costs. How much of the start-up costs can be immediately expensed (excluding amounts amortized over 180 months) for the year?

5000 Explantion: $5,000 of start-up expenses can be immediately expensed. The $5,000 maximum phases out dollar for dollar if more than $50,000 of start-up costs are incurred.

Tom Tom LLC purchased a rental house and land during the current year for $174,000. The purchase price was allocated as follows: $112,000 to the building and $62,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year. (Use MACRS Table 3)

5252

Clay LLC placed in service machinery and equipment (7-year property) with a basis of $3,461,000 on June 6, 2018. Assume that Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus depreciation). (Use MACRS Table 1) (Round final answer to the nearest whole number.)

528,004 Explanation: A luxury auto's maximum depreciation in the first year is the lesser of $10,000 or its MACRS amount of $6,160 ($30,800 × 20 percent) for 2018.

Bonnie Jo purchased a used camera (5-year property) for use in her sole proprietorship. The basis of the camera was $4,000. Bonnie Jo used the camera in her business 70 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter): (Use MACRS Table 156

560 Explanation: The asset's recovery period is 5 years and the half-year convention applies. The calculation is $4,000 × 0.2 × 70% = $560.

Arlington LLC purchased an automobile for $69,000 on July 5, 2018. What is Arlington's depreciation expense for 2018 if its business use percentage is 68 percent (ignore any possible bonus depreciation)? (Use MACRS Table 1, and Exhibit 10-10.)

6800 Explanation: A luxury auto's maximum depreciation in the first year is the lesser of $10,000 or its MACRS amount of $13,800 ($69,000 × 20%). That amount is then multiplied by the business use percentage to obtain $6,800 ($10,000 × 68%).

Daschle LLC completed some research and development during June of the current year. The related costs were $61,800. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization expense Daschle may deduct during the current year?

7210 Explanation: The amortization when capitalization is elected is $7,210 ($61,800/60) × 7 months. The amortization period on capitalized research and development is not less than 60 months—and 60 months is the most often elected.