ACC 331- Chapter 10 Part 1

Randy owns and rents a residential duplex that he purchased 17 years ago in the month of May. The purchase price was $250,000. During August of the current year, Randy sold the duplex. What is the amount of depreciation that can be deducted in the current year (rounded to the nearest dollar)?

Since August is the month of the sale, the full year's depreciation should be multiplied by 7.5/12. 5681

Ethan's Eggroll House, a calendar year corporation, purchased a new computer and printer in January for $1,500. In February, the business purchased a new oven for $1,200. No other assets were purchased during the year. How much depreciation will be taken on these items in the current year if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation? $300 computer; $171 oven $300 computer; $240 oven $375 computer; $300 oven $525 computer; $420 oven $525 computer; $300 oven $214 computer; $171 oven

$300 computer; $171 oven Reason: The computer has a 5-year recovery period ($1,500 x 20%), and the oven has a 7-year recovery period ($1,200 x 14.29%).

The MACRS recovery period for computers and peripheral equipment, cars, and light general-purpose trucks is years. The recovery period for office furniture, fixtures, machinery, and equipment is years.

-5 -7

Mark's Markers purchased a building and land for $750,000. An appraisal determined that two-thirds of the cost should be attributed to the building and one-third should be attributed to the land. Consequently, Mark's Markers will use a cost basis of $ ___ the building and $____ the land.

-500,000 -250000

_ property is any property such as clothing, a home, or a car, that is for purposes OTHER THAN use in a trade, business, or income-producing venture. Machinery, furniture, and any other tangible property other than buildings and land is designated as_property. The term that includes buildings and land is_property.

-personal-use -personal -real

Match the method of cost allocation to the nature of the asset being expensed over a specific time period: Depreciation Amortization Depletion

-tangible personal and real property (except land) -intangible assets -natural resources

Barbara's Bakery purchased three new 7-year assets last year. She chose NOT to use Section 179 immediate expensing or take bonus depreciation. The furnishings were purchased for $15,000 in April, the equipment for $6,000 in July, and the appliances for $40,000 in November. What amount of depreciation expense is allowable in the current (second) year of ownership? $16,163 $16,806 $14,939 $16,072

16,072

Which depreciation method is most likely to be used by profitable businesses with high marginal tax rates? Alternative depreciation system Straight-line depreciation Units of activity depreciation method MACRS 200% declining balance

200%

Profitable businesses will likely use ______ depreciation while companies with lower marginal rates that are expected to rise over time will likely use ______ depreciation. straight-line; 200% declining balance 200% declining balance; 150% declining balance 200% declining balance; straight-line straight-line; 150% declining balance

200%/ straight line

Harry received 100 shares of stock from his aunt as a gift. Harry's aunt purchased the stock 10 years ago for $20 per share. The stock was worth $50 per share on the date Harry received the gift. Harry sold the stock for $60 per share. What is the amount of Harry's basis in the stock?

2000 Reason: Gift basis is calculated as the basis of the gift giver unless FMV on the date of gift is less than the gift giver's basis.

Tom purchased a 7-year asset for his business in February, three years ago, at a cost of $4,500. It is being depreciated using the half-year convention for MACRS. He did not deduct any bonus depreciation and or take a Sec. 179 expense in the year of purchase. The asset was sold in April of year 4. How much depreciation will Tom deduct for the asset in year 4?

281

Pixie's Pizza House, a calendar year corporation, purchased a delivery truck in February for $15,000 (no other assets were purchased that year). How much depreciation will be taken on the truck in the current year if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation?

3000

Paula's Pastries expanded its facilities by building an addition to make room for a larger kitchen. The original building was constructed 12 years earlier and is being depreciated using a 39-year recovery period. The cost of the new addition will be depreciated over_years.

39

The mid-quarter convention is used for all assets purchased during the year when more than % of the tangible ______property purchased is placed in service during the fourth quarter of the year.

40 personal

Harry inherited 100 shares of stock from his aunt upon her death. Harry's aunt purchased the stock 10 years ago for $20 per share. The stock was worth $50 per share on the date she died. What is the amount of Harry's basis in the stock? $20 $2000 $5000 $50

5000

Barbara's Bakery purchased appliances (7 year property) in quarter 4 of Year 1. The original cost of the appliances was $40,000 and she did NOT use bonus depreciation or Section 179 expensing in the year of purchase. The mid-quarter convention has been used for the calculation of depreciation. If Barbara sells the appliances in March of Year 4, she will be able to deduct $Blank of depreciation in the year of sale. 14.06% from MACRS

703

Angie's Cupcake Shop bought 7-year property furniture in February of Year 1 and sold it in May of Year 3. The original cost of the furniture was $8,200. Assuming Angie is using the MACRS half-year convention for the furniture, her depreciation deduction in the year of sale will be $ .

717

Angie's Cupcake Shop bought 7-year property furniture in February of Year 1 and sold it in May of Year 3. The original cost of the furniture was $8,200. Assuming Angie is using the MACRS half-year convention for the furniture, her depreciation deduction in the year of sale will be $

717.09

Choose the items included in the calculation of an asset's adjusted basis. (Check all that apply.) Add accumulated depreciation actually taken on the asset. Subtract prior depreciation allowed or allowable on the asset. Add additional costs for routine maintenance on the asset. Add costs necessary to prepare the asset for use in the business. Subtract ordinary repair expenses. Start with the asset's original basis.

Subtract prior depreciation allowed or allowable on the asset. Add costs necessary to prepare the asset for use in the business. Start with the asset's original basis.

Rick rents commercial warehouses to various businesses. He purchased a warehouse in May of the current year at a cost of $250,000. When calculating the warehouse depreciation in the fourth year of ownership, which column of Table 5 should Rick use? Column 4 because this is the end of the 4th year that Rick has owned the building. Column 12 because Rick has held the asset for the full 12 months in recovery year 4. Column 5 because the original purchase was made in May, the fifth month of the year.

Column 5 because the original purchase was made in May, the fifth month of the year.

Rex's Wrecks purchased $1,251,000 in new equipment during 2019. Rex wants to use Section 179 to expense the maximum amount of the purchase. If Rex is not using bonus depreciation, how much will Rex get to expense under Section 179 and what will be the adjusted basis of the assets for calculating MACRS depreciation expense? Section 179-$1,020,000; adjusted basis subject to MACRS-$231,000 Section 179-$1,251,000; adjusted basis subject to MACRS-$0 Section 179-$231,000; adjusted basis subject to MACRS-$1,020,000 The maximum Sec. 179 deduction is $1,020,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates. Section 179-$1,000,000; adjusted basis subject to MACRS-$251,000.

Correct Answer Section 179-$1,020,000; adjusted basis subject to MACRS-$231,000 Reason: The maximum Sec. 179 deduction for 2019 is $1,020,000. The basis of the asset is reduced by the Sec. 179 amount before applying MACRS or S/L depreciation rates.

True or false: In order to calculate MACRS depreciation, the business only needs to know the asset's depreciable basis, the recovery period, and which depreciation method (i.e. 200% declining balance) is used. True False

False Reason: The business also needs to know the applicable depreciation convention (e.g. half-year or mid-quarter) to be used as well as the date placed in service.

Which of the following statements is correct regarding the depreciable lives of business assets? For financial accounting, management can choose the estimated life. For tax purposes, the IRS has set recovery periods for various types of assets. For tax purposes, management can choose the estimated life. For financial accounting, GAAP has set recovery periods for various types of assets. For tax purposes, GAAP has predetermined estimated lives. For financial accounting, the IRS has set recovery periods for various types of assets. The same recovery period (or estimated life) must be used for tax purposes as for financial accounting purposes.

For financial accounting, management can choose the estimated life. For tax purposes, the IRS has set recovery periods for various types of assets.

Andrew's Art Studio, a calendar year company, purchased three assets during the year. A computer costing $1,500 was purchased in April; office furniture costing $1,800 was purchased in July; and a delivery truck costing $17,000 was purchased in October. Which of the following statements is correct regarding the depreciation of the assets (assuming no bonus deprecation is taken)? The art studio can only use Sec. 179 to expense the computer and office furniture. The truck must be depreciated using the mid-quarter convention. The art studio can use the half-year convention for the computer and the office furniture if the delivery truck is expensed under Section 179. The art studio must use the mid-quarter convention for any assets that are not expensed under Section 179. The art studio should use the half-year convention for the computer and the office furniture and the mid-quarter convention for the delivery truck.

The art studio can use the half-year convention for the computer and the office furniture if the delivery truck is expensed under Section 179.

Which of the following calculations is used to determine an asset's adjusted basis? Original basis + ordinary repairs - depreciation taken Original basis + depreciation allowed or allowable - significant improvements Original basis + significant improvements - depreciation allowed or allowable Original basis + depreciation taken - significant improvements

Original basis + significant improvements - depreciation allowed or allowable

During the second quarter of Year 1, Barbara's Bakery purchased furnishings (7 year property) at an original cost of $15,000. She did NOT take bonus depreciation or Section 179 expense in the year of purchase. Due to other asset purchases in Year 1, the mid-quarter convention is being used for calculating the depreciation on the furnishings. If Barbara sells the furnishings in October of Year 4 how much can she deduct for depreciation in the year of sale?

Reason: ($15,000 x.1197) x.875 = $1,571

A business purchased a new delivery truck at the end of March during the current year. The truck was the only asset purchased during the year. Which of the following statements is correct regarding the depreciation that can be taken on the truck? The business will deduct 3.5 quarters (10.5 months) of depreciation on the truck in the current year. The business will deduct three-fourths (9 months) of a full year's depreciation on the truck in the current year. The business will deduct one-fourth (3 months) of a full year's depreciation on the truck in the current year. The business will deduct one-half of a full year's depreciation on the truck in the current year.

The business will deduct one-half of a full year's depreciation on the truck in the current year.

If a business purchases $3,180,000 in equipment during a given year, what is the impact on the Section 179 election? The ceiling amount will be reduced by $390,000 to a maximum eligible deduction of $2,790,000. The Section 179 deduction is eliminated when purchases exceed $2,550,000 in 2019. The ceiling amount will be reduced by $630,000 to a maximum eligible deduction of $390,000 for the current year. The business will only be able to take the Section 179 deduction on $1,020,000 of the assets purchased.

The ceiling amount will be reduced by $630,000 to a maximum eligible deduction of $390,000 for the current year.

Mark's Markers purchased a new machine to use in the manufacturing process for $2,500. The sales tax was an additional $150 and the shipping charges were $200. One month after using the machine, a small part broke and needed repair. The cost of the repair was $900. How will Mark's Markers treat the costs for tax purposes? The cost of $2,700 will be capitalized and depreciated over the asset's life. The repairs and tax of $1,050 will be expensed immediately. The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately. The cost of $2,500 will be capitalized and depreciated over the asset's life. The other costs of $1,250 will be expensed immediately. The cost of $2,650 will be capitalized and depreciated over the asset's life. The shipping and repairs of $1,100 will be expensed immediately.

The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.

Andrews Art Studio purchased its shop fifteen years ago. During the current year, the business installed a new roof and central air-conditioning system. Which of the following choices is correct regarding the substantial improvements made during the current year? The assets will be classified as personal property and the cost will be recovered over 7 years. The cost of the assets will be classified as nonresidential property and recovered over 39 years. The cost of the assets will be added to the adjusted basis of the building and depreciated over the remaining recovery period for the building.

The cost of the assets will be classified as nonresidential property and recovered over 39 years.

Mark's Markers purchased a building and land for $750,000. How should Mark's Markers account for the purchase? The total purchase price will be allocated to the land because it results in the most conservative tax treatment. The land and building must be treated as separate assets with a portion of the total cost allocated to each of the assets. The land and building must be treated as one asset because they were purchased together. The total cost will be allocated to the building in order to allow the business to deduct the maximum amount of depreciation.

The land and building must be treated as separate assets with a portion of the total cost allocated to each of the assets.

Janet owns land that she uses in her business. Which of the following statements is correct regarding the land? The land is classified as personal-use property, and it can NOT be depreciated because it is not a business asset. The land is classified as real property, but it can NOT be depreciated, even though it is a business asset. The land is classified as personal property, but it can NOT be depreciated, even though it is a business asset. The land is classified as personal property, and it can be depreciated because it is a business asset. The land is classified as real property, and it can be depreciated because it is a business asset.

The land is classified as real property, but it can NOT be depreciated, even though it is a business asset.

Lucky started a new business last year. Since it was the first year of operation, the business purchased $10,000 in machinery and used the straight-line method for depreciation. Business is booming, so Lucky purchased $15,000 in equipment during the current year to help meet production demands. Which of the following statements is true regarding the depreciation choices available to Lucky? The new machinery can be depreciated using the same method or a different method than the previously purchased machinery. The new machinery must be depreciated using the same method as the previously purchased machinery. If Lucky wants to use a different depreciation method, he must recapture depreciation and change the method used on the prior purchase of machinery.

The new machinery can be depreciated using the same method or a different method than the previously purchased machinery.

How does depreciation affect the tax basis of an asset? The tax basis is reduced by the depreciation allowed or allowable on the asset each year. The tax basis is reduced by the depreciation expense deducted on the tax return each year. The tax basis is increased by the depreciation expense deducted on the tax return each year. The tax basis is increased by the depreciation allowed or allowable on the asset each year.

The tax basis is reduced by the depreciation allowed or allowable on the asset each year.

When does a business have to use the mid-quarter convention? When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year When a tangible personal property asset is placed in service during the fourth quarter of the year When more that half of a business's assets including real property purchased are placed in service during the fourth quarter of the year When more than 60% of the tangible personal property purchased is placed in service during the fourth quarter of the year

When more than 40% of the tangible personal property purchased is placed in service during the fourth quarter of the year

The mid-quarter test is applied (before/after) the Section 179 expense is deducted from an asset's basis, and (before/after) bonus depreciation is taken.

after before

Which of the following choices reduces the basis of an asset? (Check all that apply.) Maintenance costs related to the asset Depreciation allowed, but not deducted, on the asset Ordinary repairs related to the asset Depreciation actually deducted on the asset

both depreciation choices

In which accounting area(s) is an asset's estimated useful life determined by the taxpayer's assessment, rather than being predetermined based on asset type? Both financial and tax accounting Tax accounting only Financial accounting only

financial accounting only

The - convention allows 50% of a full year's depreciation in the year the asset is placed in service, regardless of when it was actually placed in service.

half year

classify the type of property this is: nonphysical assets

intangible assets

All real property is depreciated using the __convention.

mid-month

classify the type of property this is: commodities such as oil, timber and gold

natural resources

Which of the following assets has a 7-year recovery period for MACRS depreciation? Computers and peripheral equipment Light general-purpose trucks Office furniture and fixtures Buildings

office furniture and fixtures

classify the type of property this is: tangible assets such as equipment and machinery

personal property

Land and buildings are classified as_property, while items such as machinery, equipment, and furnishings are classified as tangible, personal property.

real

classify the type of property this is: buildings and land

real property

Which of the following costs should be included in the asset's original cost basis? (Check all that apply.) Repairs prior to putting the asset in service Repairs after putting the asset in service Shipping charges Installation charges Depreciation Sales tax Purchase price

repairs prior shipping installation sales tax purchase price

In order to compute MACRS depreciation, which of the following pieces of information is NOT required? salvage or residual value for the asset cost or original basis of the asset depreciation method chosen by the business depreciation convention used in the year of purchase recovery period for the asset date placed in service

salvage or residual value

Similar assets purchased in the same year must be depreciated using the (same/different) depreciation method, but similar assets purchased in different years can be depreciated using (same/different) depreciation methods.

same different

When depreciating real property under MACRS, the recovery rates are based on the____ -____ method

straight line