Chapter 10 Questions Acctg 332

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.

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

Trademarks Covenants not to compete Goodwill

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

True Reason: Personal property is simply tangible property, other than real property. It may be used in a trade or business or it may be used personally.

Which of the following choices describes how a business should account for organizational expenditures and start-up costs?

Up to $5,000 of each (total of $10,000) can be expensed immediately. Any costs that are NOT immediately expensed must be amortized over 180 months.

The cost recovery of the capital investment in natural resources is referred to as _____.

depletion

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

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

false

rue or false: Once the entire cost of a resource has been recovered, the business is NOT allowed to continue deducting depletion expense for the resource.

false

The _____ convention applies to the amortization of purchased intangibles.

full-month

Which convention applies to the amortization of purchased intangibles?

full-month

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

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

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

listed

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

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 expenditures

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; straight line

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

salvage or residual value for the asset

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

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 the _____-_____ method.

straight line

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

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?

$16,100 Reason: The car has a 5-year recovery period. The purchase price subjects the car to the luxury vehicle limits. The maximum deduction for year 2 is $16,100.

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 Reason: The basis is the lesser of the original cost or the FMV at the date of conversion.

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 Reason: .1249 x $4,500 x .5

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 Reason: The truck is depreciated under the half-year convention with a 5- year recovery period.

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

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 Reason: The computer is 5-year property and the oven is 7-year property.

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)?

$5,681 Reason: Use the Residential Real Property table and multiply the full year's depreciation by 7.5/12 to account for the portion of the year the property was owned.

In 2021, Bill purchased an automobile for $65,000 that will be used 80% 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 the first year. However, he will only be able to deduct ______ due to the luxury limitations.

$52,000; $14,480

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 ___ of depreciation in the year of sale.

$703 (($40,000 * .1406)/12) * 1.5

Under Code Section _____, businesses may elect to immediately expense up to $_____ of tangible personal property placed in service during 2021.

179; 1,050,000

What is the recovery period for Section 197 intangibles?

180 months, regardless of their actual life

In April of 2021, 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).

19,000; 18,100

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

Rachelle purchased a warehouse 19 years ago in the month of September. The purchase price was $400,000. In May of the current year (year 20), Rachelle sold the warehouse. She will be able to deduct $ for depreciation on the warehouse in the year of sale. (Round your answer to the nearest whole dollar.)

3846 (400,000 * .02564)(4.5/12)

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

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.)

4013 250,000 * .01605 (5th-month value) ; 2048 250,000 * .00963

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

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

50

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 $_____ for the building and $_____ for the land.

500,000; 250,000

Charlie purchased land containing a large amount of trees for $225,000. He estimates the value of the land without the trees is $25,000 and that the timber is worth $200,000. He also estimates that he can get 1 million board feet of lumber from cutting the trees. In the first year of his endeavor, he cuts 250,000 board feet. Assuming Charlie uses the cost depletion method, his depletion expense for the year is $

50000

A business may immediately expense up to $_____ (subject to phase-out rules) of both organizational expenditures and start-up costs with any remaining cost being amortized over _____ years.

5000; 15

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.

6000; 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

In 2021, 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; 18,100

Frank purchased land containing oil reserves for $425,000. He has calculated his cost depletion for the year to be $20 per barrel for a total of $120,000 in depletion expense. He now needs to calculate his percentage depletion in case it is larger. His gross income from the oil extraction is $600,000 and he has $520,000 in operating expenses before depletion expense. Assuming this is domestic production, the amount of percentage depletion expense is $_____. If he uses this method he can deduct $_____ for tax purposes. He should use the _____ depletion method to maximize his deduction.

90,000; 80,000; cost

Which of the following methods is NOT acceptable for the tax treatment of research and experimentation expenditures?

Capitalize the costs and depreciate them using MACRS with a 3-year recovery period.

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? Multiple choice question.

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

Which of the following choices reduces the basis of an asset?

Depreciation allowed, but not deducted, on the asset Depreciation actually deducted on the asset

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

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. For AMT purposes, businesses must depreciate tangible personal property using the 200 percent declining balance method.

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

Digital cameras Automobiles

Rex's Wrecks purchased $150,000 in new equipment during 2021. 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. REASON: Rex can take a Section 179 deduction up to his business income before the deduction. He is also limited by the total purchase ($150,000).

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

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

_____ - _____ 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

Which of the following choices are categories of intangible assets?

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

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

Choose the items included in the calculation of an asset's adjusted 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.

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.

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.

If a business purchases $3,220,000 in equipment during 2021, what is the impact on the Section 179 election?

The ceiling amount will be reduced by $600,000 to a maximum eligible deduction of $450,000 for the current year.

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.

Mark's Markers purchased a building and land for $750,000. How should Mark's Markers account for the purchase?

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

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

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.

Rex's Wrecks purchased $1,650,000 in new equipment (7 year property) during 2021. Rex wants to use Section 179 to expense the maximum amount of the purchase. Assuming no limitations due to net income restrictions, Rex can expense $____ under Sec. 179, $____ in bonus depreciation, and $____ in regular MACRS depreciation (rounded to the nearest dollar).

1,050,000; 600,000; 0

During the 2021 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.

1,050,000; personal; basis

For 2021, the maximum depreciation on luxury automobiles for the first year including MACRS depreciation and Sec. 179, but excluding bonus depreciation is $_____. The maximum Section 179 deduction for SUVs and trucks weighing over 6,000 pounds is $_____.

10,100; 26,200

Frank purchased land containing oil reserves for $425,000. He estimates the value of the land without the oil is $25,000. He also estimates that he can extract 20,000 barrels of oil from the property. In the first year of his endeavor, the property produced 6,000 barrels of oil. Assuming Charlie uses the cost depletion method, his depletion expense for the year is $_____.

120,000

The recovery period for Section 197 intangibles is _____ years.

15

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?

1571 15,000 * (21/24 half months) * .1197

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 __.

Asset B Reason:It's best to choose the asset with the longest recovery period because the depreciation deduction under MACRS is less than those with shorter recovery periods.If Asset C is 27.5-year property, this means it must be a residential real property. Section 179 can NOT be used on residential real property.

Your friend, Andy, is considering purchasing a vehicle for use in his business in 2021. He is asking about the depreciation rules and Section 179 expensing. What advice below is accurate and correct?

Bonus depreciation of up to $8,000 is allowed in addition to Sec. 179 and MACRS regular deduction. The Section 179 expense for SUVs and trucks weighing over 6,000 pounds is $26,200. The Section 179 deduction plus the regular MACRS depreciation is limited to $10,100 in the first year.

Which of the following methods are acceptable for the tax treatment of research and experimentation expenditures?

Capitalize the costs and amortize them over not less than 60 months beginning in the month benefits are first derived from the research. Expense the costs immediately. Capitalize the costs and amortize them over the determinable useful life.

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: 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 Reason: If the automobile depreciation limits apply in the first year, the taxpayer must use the IRS maximum limits for all subsequent years.

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 Reason: The requirement for business depreciation is only that the property is "new" to the taxpayer, so that the taxpayer cannot have previously used the specific piece of property. Thus, the property can be used property purchased from another person or business.

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.

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.

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

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

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. Depreciation of real property is the same for both regular tax purposes and AMT purposes.

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, Congress has set recovery periods for various types of assets.

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?

New office furniture New delivery truck Used equipment

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

Patents Goodwill Customer lists Trademarks

The amount of the cost that can be recovered on an annual basis for the investment in natural resources is the larger of which of the following two methods?

Percentage depletion method Cost depletion method

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

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

Rambo Manufacturing Co. purchased $2,885,000 in new production equipment during 2021. 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-$785,000; MACRS-$300,090 Reason: The ceiling is reduced by $265,000 (2,885,000-2,620,000) for a total of $785,000. Then apply MACRS at .1429 to the residual $2,100,000.

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.

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

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

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