Chapter 7

Lensa Incorporated purchased machinery several years ago for $400,000. This asset is 7 year property. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 21%. Which of the following statements is true? The book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities. The $4,280 difference between book and tax depreciation is unfavorable. Both the book/tax difference in depreciation results in a $899 decrease in Lensa's deferred tax liabilities and the $4,280 difference between book and tax depreciation is unfavorable are true. The book/tax difference in depreciation results in a $899 deferred tax asset.

C

Lisle Incorporated manufactures small appliances in three plants in the Southeast. Which of the following statements is true? If Lisle uses FIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes. Lisle is not allowed to use LIFO to compute the cost of goods sold for tax purposes. If Lisle uses LIFO to compute the cost of goods sold for tax purposes, it must use LIFO for financial statement purposes. None of these statements are true.

C

Durna Incorporated, a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $874,000, and the second purchase was equipment costing $660,000. Both assets are 7-year recovery property. Durna placed the machine in service on March 27 and the equipment in service on December 14. How many months of MACRS depreciation is Durna allowed for each asset this year?

Durna is allowed 10.5 months depreciation for the machine and 1.5 months of depreciation for the equipment.

In its first year of operations, Lima Company manufactured 1,000 widgets, incurring direct materials and labor costs of $227,000. For book purposes, Lima capitalized $260,000 of indirect manufacturing costs. For tax purposes, it had to capitalize $315,000 of indirect costs under the UNICAP rules. At the end of the year, Lima had 170 widgets remaining in inventory. Required: a. For book purposes, compute Lima's ending inventory cost and cost of goods sold for the year. b. For tax purposes, compute Lima's ending inventory cost and cost of goods sold for the year. c. Compute Lima's inventory book/tax difference and indicate if such difference is favorable or unfavorable.

A: E.I. = 82,790 COGS= 404.210 B: E.I. = 92,140 Cogs= 449,860 C: tax EB = 92,140 Book EB= 82,790... 9,350 unfavorable

Loni Company paid $1,167,000 for tangible personalty in 2023 and elected to expense $1,160,000 of the cost (the limited dollar amount for 2023). Loni's taxable income before a Section 179 deduction was $894,100. Loni paid $23,700 for tangible personalty in 2024 and elected to expense the entire cost. Loni's taxable income before a Section 179 deduction was $228,000. Use Table 7-2. Required: A: Compute Loni's Section 179 deduction and taxable income for 2023. B: Compute Loni's Section 179 deduction and taxable income for 2024.

A: deduction: 894,100 taxable income: 0 B: deduciton: 228,000 taxable income= 0

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:

mid quarter convention

Which of the following statements about tax basis is false? Every asset owned by the taxpayer has a tax basis. Tax basis reflects the asset's fair market value. Tax basis represents the taxpayer's unrecovered dollars invested in the asset. The tax basis in an asset can never be negative.

B

Noble Incorporated paid $310,000 for equipment three years ago. This year, it sold the equipment for $200,000. Through date of sale, accumulated book depreciation was $93,840 and accumulated tax depreciation was $147,327. Assuming a 21% tax rate, what is the effect of the sale on Noble's deferred tax accounts?

$11,232 decrease in deferred tax liabilities

Jerod Company purchased a depreciable business asset for $63,000. Assuming the firm uses the half-year convention, compute its first-year MACRS depreciation if the asset is: Use Table 7-1 and Table 7-2. Required: A land irrigation system. B Duplicating equipment. C An oceangoing barge. D Small manufacturing tools.

$3,150; $12,600; $6,300; $20,998

B&P Incorporated, a calendar year corporation, purchased only one operating asset during 2024: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2024.

0

Quanti Company, a calendar-year taxpayer, purchased small tools for $5,000 on December 21, Year 1, representing the company's only purchase of tangible personal property that took place during Year 1. Assume Quanti Company does not want to take §179 or bonus depreciation on the tools. On its Year 1 tax return, how many months of MACRS depreciation may Quanti Company claim on the tools?

1 and a half months

Pane in the Glass Window Co. purchased a total of $3,270,000 of depreciable personal property in 2024. How much of this cost can Pane elect to expense under §179?

1,000,000

W&F Company, a calendar year taxpayer, purchased a total of $2,794,700 tangible personalty in 2024. How much of this cost can W&F elect to expense under Section 179?

1,220,000

Greta, a calendar-year taxpayer, acquires 5-year tangible personal property in 2024 and places the property in service on the following schedule: Date placed in serviceAcquisition Cost January 15 $7,000 May 25 $10,000 November 8 $1,228,000 Greta elects to expense the maximum under Sec. 179, and selects the property placed into service on November 8. She elects out of bonus depreciation. Her business's taxable income before Sec. 179 is $1,790,000. What is the total cost recovery deduction (depreciation and Sec. 179) for 2024?

1,225,000

Pane in the Glass Window Co. purchased a total of $1,410,000 of depreciable personal property in August of 2024. Assume the asset was a ten-year property and was Pane's only qualifying asset acquisition for the year. If Pane elects both 179 and bonus depreciation compute the maximum cost recovery deduction for 2024.

1,341,600

Norwell Company purchased $1,413,200 of new business equipment on July 10, 2024. This was Norwell's only asset purchase for its 2024 taxable year. Compute Norwell's maximum total cost recovery deduction for this 7-year recovery property (assuming Norwell has sufficent income for the Section 179 deduction).

1,346,963

Margo, a calendar year taxpayer, paid $1,580,000 for new machinery (seven-year recovery property) placed in service on August 1, 2024. Required: a. Assuming that the machinery was the only tangible property placed in service during the year, compute Margo's maximum cost recovery deduction.

1,580,000 (1,220,000) Max 179 deduction =360,000 tax basis (216,000) 60% bonus depreciation =144,000 tax basis after bonus depreciation X14.29% MACRS = 20,578 MACRS 1,220,000 + 216,000 + 20,578=1,456,578 total deduction

Terrance Incorporated, a calendar year taxpayer, purchased used equipment for $2,765,000 and placed it in service on March 4, Year 1. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during Year 1 (assume no election for Section 179 expense and no Bonus Depreciation taken). Compute Terrance's adjusted basis in the equipment on December 31, Year 2.

1,692,732. half year convention

W&F Company, a calendar year taxpayer, purchased a total of $4,268,000 tangible personalty in 2024. How much of this cost can W&F elect to expense under Section 179?

2,000

Elakin Incorporated, a calendar year taxpayer, paid $4,350,000 for new machinery (seven-year recovery property) placed in service on August 29, 2024. The machinery was Elakin's only asset purchase during 2024, and Elakin's taxable income before any Section 179 deduction was $14 million. Compute Elakin's maximum cost recovery deduction with respect to the machinery.

2,858,646. 179 cannot apply. 4,350,000 x 60% (2,610,000) = 1,740,000 x MACRS 14.29% = 248,646 2,610,000 + 248,646

ABC Company purchased business property several years ago, paying $25,000 cash and borrowing $80,000 to fund the acquisition. ABC also incurred $2,000 of freight costs for shipping the property to its business location. Over time, ABC has incurred $12,000 of repair costs for the property and made $7,000 of capital improvements. ABC has also deducted $56,000 of MACRS depreciation on the property to date. Required: Calculate ABC's adjusted tax basis in this asset.

25,000 +80,000 +2,000 = 107,000 initial basis 107,000 + 7,000 - 56,000 = 58,000 adjusted basis

Atiqa sold a residential rental property on October 31 of this year. She had originally acquired the property in July ten years ago. The building (excluding the value of the land) cost $1,000,000. How much is her current year depreciation deduction?

28,785

Darth Vapor smoke shop purchased a new computer system for $10,000 and placed it in service on February 28, Year 1. The computer system is five-year recovery property. Assuming no bonus depreciation or §179 deduction, compute MACRS depreciation for Year 2.

3,200

TGW, a calendar year corporation, reported $4,028,000 net income before tax on its financial statements prepared in accordance with GAAP. The corporation's records reveal the following information: TGW's depreciation expense per books was $458,000, and its MACRS depreciation deduction was $382,900. TGW capitalized $688,000 indirect expenses to manufactured inventory for book purposes and $822,000 indirect expenses to manufactured inventory for tax purposes. TGW's cost of manufactured goods sold was $2,567,000 for book purposes and $2,658,000 for tax purposes. Four years ago, TGW capitalized $2,310,000 goodwill when it purchased a competitor's business. This year, TGW's auditors required the corporation to write the goodwill down to $1,550,000 and record a $760,000 goodwill impairment expense. Required: Compute TGW's taxable income.

4,028,000 +75,100 depreciation +134,000 indirect inventory costs (91,000) COGS +760,000 bank goodwill impairment expense (154,000) tax amortization of goodwill = 4,752,100

NRW Company, a calendar year taxpayer, purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building. NRW placed the realty in service on August 2, 2022. Compute NRW's adjusted basis in the building on December 31, 2023.

4,560,000. residential rental real property table

In Year 1 Fir Corporation purchases and places into service $2.48 million of five-year MACRS property: Date Placed in Service Acquisition Cost March 3 $630,000 April 2 $700,000 December 21 $1,150,000 Compute Year 1 MACRS depreciation (disregard the Section 179 deduction and bonus depreciation in making your calculation).

453,000. mid quarter convention because more than 40% was placed in service in Q4

On May 1, Sessi Incorporated, a calendar year corporation, purchased a business for a $2 million lump-sum price. The business' balance sheet assets had the following appraised FMV. Accounts receivable $ 38,900 Inventory 450,000 Tangible personality 225,000 Realty: Building 500,000 Land 50,000 =$ 1,263,900 Use a 21 percent tax rate to compute Sessi's deferred tax liability resulting from the goodwill amortization deduction for the year of purchase.

6,870. 736,100 / 15= 49073 49073 x (8/12) = 32716 32176 x 0.21 = 6870

Volunteer, Inc. purchased a commercial office building for $1,200,000. $400,000 of the cost was allocated to the land and $800,000 was allocated to the building. The building was placed in service on August, 2. Compute Volunteer's MACRS depreciation expense for Year 1.

7,704

SEP, a calendar year corporation, reported $918,000 net income before tax on its current year financial statements prepared in accordance with GAAP. The corporation's records reveal the following information: SEP incurred $75,000 of domestic 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. Required: Compute SEP's taxable income.

918,000 75,000 book expense (7,500) tax amortization (75,000 x 50% / 5) 98,222 book depreciation expense (120,000) MACRS depreciation (1,832) amortization of start up costs ((27,480 / 180 months) x 12 months) = 961,890 taxable income

Tesla, Inc. capitalized $15,000 of indirect costs to inventory under the UNICAP rules. For book purposes Tesla capitalized only $9,000 of indirect costs to inventory. Tesla reported cost of goods sold of $520,000 on its tax return. Cost of goods sold for book purposes was $495,000. If Tesla has no other book-tax differences, and its book net income is $1,000,000, compute Tesla's taxable income.

981,000

Which of the following statements concerning deductible repair expenses is false? The distinction between a repair expense and a capital improvement is clearly defined by the tax law. Repair expenses do not substantially increase the useful life of the repaired asset. Repair expenses do not substantially increase the value of the repaired asset. Businesses typically incur repair expenses on a regular and recurring basis.

A

On November 13, Underhill, Incorporated, a calendar year taxpayer, purchased a business for a $750,000 lump-sum price. The business's balance sheet assets had the following appraised FMV: Accounts receivable $ 38,000 Inventory 177,000 Tangible personalty 400,000 $ 615,000 Required: a. What is the cost basis of the goodwill acquired by Underhill on the purchase of this business? b. Compute Underhill's goodwill amortization deduction for the year of purchase. c. Assuming a 21 percent tax rate, compute the deferred tax asset or deferred tax liability (identify which) resulting from Underhill's amortization deduction.

A: 135,000 B: 1,500 deduction C: 315 DTL

Knute Company purchased only one asset during its calendar taxable year. The asset cost $650,000 and has a three-year recovery period. Required: a. Compute MACRS depreciation with respect to this asset over the recovery period assuming that the asset was placed in service on August 18. b. Compute MACRS depreciation with respect to this asset over the recovery period assuming that the asset was placed in service on November 9.

A: 216,645; year2: 288,925; year 3: 96,265 B: 54,145; year 2: 397,215; year 3: 132,405

Ryland Company, a calendar year taxpayer, purchased commercial realty for $2 million and allocated $200,000 cost to the land and $1.8 million cost to the building. Ryland placed the real estate in service on May 21. Required: a. Compute Ryland's MACRS depreciation with respect to the realty for the year of purchase. b. Compute the MACRS depreciation, if Ryland placed the realty in service on September 2 instead of May 21. c. Compute the MACRS depreciation, if the building was a residential apartment complex instead of a commercial office, which was placed in service on May 21.

A: 28,890 B: 13,482 C: 40,914

Herelt, Incorporated, a calendar year taxpayer, purchased equipment for $383,600 and placed it in service on April 1, Year 1. The equipment was seven-year recovery property, and Herelt used the half- year convention to compute MACRS depreciation. Required: a. Compute Herelt's MACRS depreciation with respect to the equipment for Year 1 and Year 2. b. Compute Herelt's adjusted basis in the equipment on December 31, Year 2. c. Compute Herelt's MACRS depreciation for Year 3 if it disposes of the equipment on February 9, Year 3.

A: 54,816; 93,944 B: 234,840 C: 33,546

Suber, Incorporated, a calendar year taxpayer, purchased equipment for $750,000 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 $45,000 residual value. For financial statement purposes, Suber uses the straight-line method to compute depreciation. Required: A: Compute book depreciation for the year. 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. C: Compute Suber's book basis and tax basis in the equipment at the beginning of next year.

A: 58.750 B: 107,175 C: Book basis: 691,250 Tax basis: 642,825