ACC 331 - Chapter 10 SmartBook

Rex's Wrecks purchased $1,251,000 in new equipment during 2022. 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-$1,080,000; adjusted basis subject to MACRS-$171,000

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

Barbara's Bakery purchased three new 7-year assets during the current 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 year?

$4,748

Which of the following assets qualifies as residential rental property?

-Single-family rental homes -Apartment building -Duplex rented to individuals and families

Randy rents commercial warehouses to various businesses. He purchased a warehouse in May of the current year. The cost of the warehouse was $250,000. The depreciation for the current year will be $____. If Randy continues to rent the warehouse for the next 40 years, the depreciation in the 40th year he owns the warehouse will be $____. (Round your answers to the nearest whole dollar.)

4,012 or 4,013; 2,407 or 2,408

Section 179 expensing, bonus depreciation, and MACRS depreciation rates are available for listed property if its business-use percentage exceeds ____%

50

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

The luxury automobile limitations do NOT apply to vehicles weighing more than ____ pounds. These vehicles are allowed to compute regular ____ depreciation expenses for these vehicles.

6,000; MACRS

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 or 717.09

In 2022, Bill purchased a new automobile for $78,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $____ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $____ due to the luxury limitations.

78,000; 18,200

Antoine owns a car. He uses the car for personal transportation. Which of the following classifications apply to the car?

Personal property; Personal-use property

A business's deductible Sec. 179 expense is limited to the taxpayer's ____ ____ before deducting the Sec. 179 expense. The business can ____ ____ any amount that cannot be deducted in the current year.

business; income; carry; forward or over

The method of deducting the cost of tangible personal and real property over its useful life is ____. The method of deducting the cost of intangible assets over a specific time is ____. The method of deducting the cost of natural resources over time is____.

depreciation; amortization; depletion

In years where many new assets are purchased, regular tax depreciation will be ____ (greater/less) than AMT depreciation, resulting in an ____ (addition/subtraction) of the difference to regular taxable income to arrive at the AMT tax base.

greater; addition

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

If a business wants to maximize the depreciation deduction, it should choose to take Section 179 expense on assets with the ____ lowest/highest) first year recovery percentage, ____ (including/excluding) bonus depreciation.

lowest; including

All real property is depreciated using the ____-____ convention.

mid-month

When depreciating real property under MACRS, which of the following conventions is used?

mid-month

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

mid; quarter; 40

Costs incurred prior to the starting of a business, or shortly thereafter that relate to creating the business entity, are referred to as:

organizational expenditures

Costs of legal services, state fees, and accounting services that relate to creating a business entity and are incurred prior to starting the business are referred to as

organizational or organization; expenditures or costs or expenses or expenditure or expense or cost

Business assets that are often used for both ____ and ____ purposes are referred to as listed property.

personal or nonbusiness; business

____-____ 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

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

real

True or false: The cost of marketing or selling stock qualifies as an organizational expenditure and is amortized over 180 months.

False

True or false: When §197 does not apply, patents or copyrights should be amortized over their legal lives.

False

Which of the following assets are generally referred to as listed property?

Automobiles; digital cameras

For research expenses incurred in tax years beginning after December 31, 2021, which of the following methods are acceptable for the tax treatment of research and experimentation expenditures?

Capitalize the costs and amortize them ratably over a 5 year period beginning with the midpoint of the year in which the costs were incurred.

Which one of the following assets is generally NOT referred to as listed property?

Filing cabinet

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?

Financial accounting only

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?

$16,072

Which of the following items are classified as Section 197 intangibles?

-Trademarks -goodwill -covenants not to compete

Which of the following items could be classified as Section 197 intangibles?

-patents -customer lists -goodwill -trademarks

During the 2022 tax year, businesses may elect to immediately expense up to $____ of tangible ____ property placed in service that year under Section 179. For any assets that are completely or partially expensed, the company must reduce the ____ of the asset before computing MACRS depreciation expense.

1,080,000; personal or qualified; basis

For the 2022 tax year, taxpayers can elect to immediately expense ____% of qualified property as bonus depreciation. The bonus depreciation is calculated (before/after) ____ the Section 179 expense and (before/after) ____ regular MACRS depreciation.

100; after; before

Profitable businesses will likely use ______ depreciation while companies with lower marginal rates that are expected to rise over time will likely use ______ depreciation.

200% declining balance; straight-line

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

Straight-line depreciation is mandatory and Section 179 expensing is NOT eligible for listed property when the business-use is ____ 50%.

Equal to or less than

True or false: A taxpayer will use the luxury automobile limitations for depreciation in the year the car is purchased, then the regular MACRS depreciation percentages will be applied for the remaining recovery periods.

False

True or false: Bonus depreciation is only available on new tangible personal property with a recovery period of 20 years or less. It can NOT be taken on used property.

False

Real property is classified in one of three ways: ____, which is NOT depreciable; ____ rental property, which is used as dwelling units by lessees; or ____ property.

Land; residential; nonresidential

Which of the following is NOT considered a start-up cost of a business?

Legal fees to draft original organizational documents

Which of the following assets has a 5-year recovery period for MACRS depreciation?

Light general-purpose trucks

Which depreciation method is most likely to be used by profitable businesses with high marginal tax rates?

MACRS 200% declining balance

Which of the following options is NOT a category for intangible assets?

Natural resources

Which of the following assets has a 7-year recovery period for MACRS depreciation?

Office furniture and fixtures

In order to compute MACRS depreciation, which of the following pieces of information is NOT required?

Salvage or residual value for the asset

Which of the following depreciation provisions are available to listed property that is used less than 50% for business purposes?

Straight-line depreciation on the business-use percentage of the cost

A calendar year-end 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 one-half of a full year's depreciation on the truck in the current year.

Janet owns land that she uses in her business. Which of the following statements is correct regarding the land?

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.

What is the recovery period for patents that have been purchased by a business (not as part of an acquisition of another entire business)?

The remaining legal life of the patent at the time of the purchase

Business assets that are often used for both business and personal purposes are referred to as ____ property.

listed or mixed-use

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

same; different

Costs, such as investigating the possibilities of and actually creating or acquiring a trade or business, are referred to as ____-____ costs.

start; up

When depreciating real property under MACRS, the recovery rates are based on which of the following methods?

straight-line

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

straight; line

Bill purchased a used automobile in the current year for $78,000 that will be used 100% for business. Assuming that the mid-quarter convention did NOT apply, what is the amount of depreciation he is allowed to take in the second year of the asset's life, assuming he elected NOT to take bonus depreciation in the first year?

$16,400

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?

$2,000

Jack and Diane decided to remodel their kitchen. They removed their old cabinets and replaced them with newer, nicer cabinets. They installed the old cabinets in a rental home that they own and lease to other people. The original cost of the old cabinets was $6,000. The fair market value on the date they were installed in the rental house was $2,500. The cost of the new cabinets was $11,000. What amount should Jack and Diane use as the basis for depreciation for the cabinets that have been installed in the rental property?

$2,500

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?

$3,000

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 second year of service if the taxpayer does NOT elect to use Section 179 and does NOT use bonus depreciation?

$480 computer; $294 oven

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?

$5,000

Which of the following items are needed to calculate MACRS depreciation for an asset?

-Applicable recovery period -Asset's depreciable basis -Applicable depreciation convention -Applicable depreciation method -Date placed in service

When comparing depreciation rules for regular tax purposes to those for alternative minimum tax (AMT) purposes, which of the following statements are correct?

-Depreciation of real property is the same for both regular tax purposes and AMT purposes. -For AMT purposes, the difference between regular tax depreciation and AMT depreciation is an adjustment used to calculate the AMT base. -For AMT purposes, businesses must use the 150 percent declining balance or the straight-line method to depreciate tangible personal property.

When comparing depreciation rules for regular tax purposes to those for alternative minimum tax (AMT) purposes, which of the following statements are incorrect?

-For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method. -Depreciation of real property uses longer recovery periods for AMT purposes than for regular tax purposes. -For AMT, the total AMT depreciation is always added to regular taxable income to calculate the AMT base.

Which of the following costs should be included in the asset's original cost basis?

-Installation charges -Purchase price -Sales tax -Shipping charges -Repairs prior to putting the asset in service

Which of the following choices are categories of intangible assets?

-Research and experimentation costs -Start-up expenditures and organizational costs -Patents and copyrights

Which of the following depreciation provisions are available to listed property that is used more than 50% for business purposes?

-Section 179 expensing on the business-use percentage of the cost -Bonus depreciation on the business-use percentage of the cost -MACRS depreciation on the business-use percentage of the cost

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

40; personal

In April of 2022, Bill purchased a new automobile for $90,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct $____ n regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $____ due to the luxury limitations (considering allowable bonus depreciation).

90,000; 18,200

In April of 2022, Bill purchased a new automobile for $90,000 that will be used 100% for business. If Bill did NOT have to consider the limitations for depreciation on automobiles, he would be able to deduct ____ in regular MACRS depreciation and bonus depreciation the first year. However, he will only be able to deduct $____ due to the luxury limitations (considering allowable bonus depreciation).

90,000; 18,200

Sally's Seashells, a calendar year company, purchased three assets during April of the current year: Asset A costing $20,000 with a 5-year recovery period; Asset B costing $20,000 with a 7-year recovery period; Asset C costing $120,000 with a 27.5 year recovery period. Sally wants to maximize her depreciation deduction for the year. If she takes Section 179 expense on only one asset, she should chose Blank______.

Asset B

For tax years beginning after December 31, 2021, which of the following methods is acceptable for the tax treatment of research and experimentation expenditures?

Capitalize the costs and amortize them ratably over a 5 year period beginning with the midpoint of the year in which the costs were incurred.

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

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

Depreciation --> Tangible personal and real property (except land) Amortization --> Intangible assets Depletion --> Natural resources

Which of the following statements is correct regarding the depreciable lives of business assets? Multiple choice question. For tax purposes, management can choose the estimated life. For financial accounting, GAAP 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 tax purposes, GAAP has predetermined estimated lives. For financial accounting, Congress has set recovery periods for various types of assets. For financial accounting, management can choose the estimated life. For tax purposes, Congress has set recovery periods for various types of assets.

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

Rex's Wrecks purchased $150,000 in new equipment during 2022. Rex's gross business income for the year is $1,200,000 and his business expenses (including regular and bonus depreciation) before Section 179 deduction total $1,150,000. Assuming Rex wants to take the maximum Section 179 deduction allowable, which of the following statements is correct?

He can expense the maximum $50,000 in the current year and carry forward $100,000 until next year.

Match the type of real property with the MACRS recovery period for that type of property. Nondepreciable 39 yrs. 27.5 yrs. 31.5 yrs.

Nondepreciable --> Land 39 yrs. --> Nonresidential property placed in service after May 13, 1993 27.5 yrs. --> Residential rental property 31.5 yrs. --> Nonresidential property placed in service after Dec. 31, 1986 and before May 13, 1993

Match the type of asset with its description. Personal property Real property Intangible assets Natural resources

Personal property --> Tangible assets such as equipment and machinery Real property --> Buildings and land Intangible assets --> Nonphysical assets Natural resources --> Commodities such as oil, timber, and gold

Rambo Manufacturing Co. purchased $2,885,000 in new production equipment during 2022. All of the equipment was purchased in June. What is the maximum depreciation deduction Rambo can take this year (assuming Rambo elected out of taking bonus depreciation)?

Section 179 - $895,000; MACRS - $284,371

During the prior three years, listed property was being used 75% for business and 25% for personal use. For the current and future years, business use has dropped to 40%. Which of the following statements is correct?

Since the business use has dropped to 50% or below, the excess of accelerated depreciation over straight-line for all prior years must be recaptured.

Andrew's Art Studio, a calender 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 use the half-year convention for the computer and the office furniture if the delivery truck is expensed under Section 179.

If a business purchases $3,220,000 in equipment during 2022, what is the impact on the Section 179 election?

The ceiling amount will be reduced by $520,000 to a maximum eligible deduction of $560,000 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 $2,850 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 cost of the assets will be classified as nonresidential property and recovered over 39 years.

Which of the following statements is correct regarding the depreciation of automobiles weighing over 6,000 pounds?

These vehicles can be depreciated using regular MACRS percentages.

True or false: Personal property can be business property or personal-use property.

True

Which of the following assets purchased in the current year are eligible to be expensed under Section 179 assuming the cost does NOT exceed the limitations? (Check all that apply.)

Used equipment; new delivery truck; new office furniture

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

after; before

If an asset's business use drops to 50%, or below, the business must ____ any excess accelerated depreciation over the ____ ____ depreciation for all prior years.

recapture or recompute or recomputed; straight; line