ACC 211 - CH 7 PROBLEMS

#24.) In 2017, Company W elected under Section 179 to expense $19,300 of the cost of qualifying property. However, it could deduct only $15,000 of the expense because of the taxable income limitation. In 2018, Company W's taxable income before any Section 179 deduction was $1,812,000. Compute its 2018 Section 179 deduction if: a. The total cost of qualifying property purchases in 2018 was $13,600.

Company W's deduction is $17,900 ($13,600 + $4,300 carry-forward of 2017 expense) which is less than the limited dollar amount for 2018 of $1,000,000. Company W may deduct $17,900 in 2018.

#24.) In 2017, Company W elected under Section 179 to expense $19,300 of the cost of qualifying property. However, it could deduct only $15,000 of the expense because of the taxable income limitation. In 2018, Company W's taxable income before any Section 179 deduction was $1,812,000. Compute its 2018 Section 179 deduction if: b. The total cost of qualifying property purchases in 2018 was $998,000.

Company W's total cost is $1,002,300, which is more than the limited dollar amount for 2018 of $1,000,000. Company W may deduct $1,000,000 in 2018 and will have a $2,300 carry-forward to 2019.

#17.) Suber Inc., a calendar year taxpayer, purchased equipment for $800,000 and placed it in service on March 1. Suber's chief engineer determined that the equipment had an estimated useful life of 120 months and a $50,000 residual value. For financial statement purposes, Suber uses the straight-line method to compute depreciation. c. Compute Suber's book basis and tax basis in the equipment at the beginning of next year.

Cost of equipment Book - $800,000 Tax - $800,000 Accumulated depreciation Book - (62,500) Tax - (114,320) Adjusted basis at beginning of next year Book - $737,500 Tax - $685,680

#17.) Suber Inc., a calendar year taxpayer, purchased equipment for $800,000 and placed it in service on March 1. Suber's chief engineer determined that the equipment had an estimated useful life of 120 months and a $50,000 residual value. For financial statement purposes, Suber uses the straight-line method to compute depreciation. b. Assuming that the equipment has a seven-year recovery period and is subject to the half-year convention, compute MACRS depreciation for the year.

Initial basis of equipment $800,000 Year 1 recovery percentage for 7-year MACRS .1429 MACRS depreciation $114,320

#28.) Ajax Inc. was form on April 25 and elected a calendar year for tax purposes. Ajax paid $11,200 to the attorney who drew up the articles of incorporation and $5,100 to the CPA who advised the corporation concerning the accounting and tax implications of its organization. Ajax began business operations on July 15. To what extent can Ajax deduct its $16,300 organizational costs on its first tax return?

Ajax Inc. can deduct $5,000 of its $16,300 organizational costs and must capitalize the $11,300 remainder. It can elect to amortize the capitalized cost over 180 months at the rate of $62.78 per month. If it makes this election, Ajax can also deduct $377 amortization (6 months × $62.78). With the election, Ajax can deduct $5,377 organizational cost on its first tax return.

#3.) Determine the tax basis of the business asset acquired: b. TTP Inc. acquired inventory in exchange for 800 shares of TTP common stock listed on Nasdaq at $212 per share on the date of exchange.

$169,600 cost basis (FMV of stock exchanged for inventory)

#3.) Determine the tax basis of the business asset acquired: d. Company C purchased equipment by paying $2,000 cash at date of purchase and financing the $18,000 balance of the price under a three-year deferred payment plan.

$20,000 cost basis ($2,000 cash paid + $18,000 deferred payment)

#3.) Determine the tax basis of the business asset acquired: a. Firm L paid $5,950 cash plus $416 sales tax plus a $500 installation charge for a satellite dish.

$6,866 cost basis ($5,950 purchase price + $416 sales tax + $500 installation cost)

#3.) Determine the tax basis of the business asset acquired: c. Firm Q acquired machinery in exchange for architerctural drawings rendered by Firm's Q's junior partner. The partner spent 20 hours on the drawings, and his hourly billing rate is $350.

$7,000 cost basis (FMV of services exchange for machinery)

#17.) Suber Inc., a calendar year taxpayer, purchased equipment for $800,000 and placed it in service on March 1. Suber's chief engineer determined that the equipment had an estimated useful life of 120 months and a $50,000 residual value. For financial statement purposes, Suber uses the straight-line method to compute depreciation. a. Compute book depreciation for the year.

Book depreciation is calculated as follows. Cost of equipment $800,000 Residual value (50,000) Depreciable basis $750,000 ÷ 120 months = $6,250 monthly depreciation Ten months × $6,250 = $62,500 book depreciation

#34.) SEP, a calendar year corporation, reported $918,000 net income before tax on its financial statements prepared in accordance with GAAP. The corporation's records reveal the following information: SEP incurred $75,000 of research costs that resulted in a new 17-year patent for the corporation. SEP expensed these costs for book purposes. SEP's depreciation expense per books was $98,222, and its MACRS depreciation deduction was $120,000. SEP was organized two years ago. For its first taxable year, it capitalized $27, 480 start-up costs and elected to amortize them over 180 months. For book purposes, it expensed the costs in the year incurred. Compute SEP's taxable income.

SEP's net book income before tax $918,000 Research costs 0 Book depreciation expense $98,222 MACRS depreciation (120,000) Depreciation Deduction (21,778) Amortization of start-up costs ([$27,480 / 180 months] × 12 months) = (1,832) SEP's taxable income $894,390 SEP can deduct the $75,000 research costs, so it has no book/tax difference.