Deck 10: Property Acquisition and Cost Recovery

Question 1

Taxpayers use the half-year convention for all assets.

Answer 1

False

Question 2

The mid-month convention applies to real property in the year of acquisition and disposition.

Answer 2

True

Question 3

The MACRS depreciation tables automatically switch to the straight-line method when the straight-line method yields a higher annual depreciation amount than the declining balance method.

Answer 3

True

Question 4

If tangible personal property is depreciated using the half-year convention and is disposed of during the first quarter of a subsequent year,the taxpayer must use the mid-quarter convention for the year of disposition.

Question 5

In general,a taxpayer should select longer-lived property for the §179 immediate expensing election.

Question 6

The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year.

Question 7

If a taxpayer places only one asset (a building)in service during the fourth quarter of the year,the mid-quarter convention must be used.

Question 8

The §179 immediate expensing election phases out based upon a taxpayer's taxable income.

Question 9

An asset's capitalized cost basis includes only the actual purchase price; whereas expenses to purchase,prepare the asset for use,and begin using the asset are immediately expensed.

Question 10

The 200 percent or double declining balance method is allowable for five and seven-year property.

Question 11

Real property is always depreciated using the straight-line method.

Question 12

If a machine (seven-year property)being depreciated using the half-year convention is disposed of during the seventh year,a taxpayer must multiply the appropriate depreciation percentage from the MACRS table percentage by 50 percent to calculate the depreciation expense properly.

Question 13

Like financial accounting,most acquired business property must be capitalized for tax purposes.

Question 14

Taxpayers may use historical data to determine the recovery period for tax depreciation.

Question 15

All taxpayers may use the §179 immediate expensing election on certain property.

Question 16

If a business mistakenly claims too little depreciation,the business must only reduce the asset's basis by the depreciation actually taken rather than the amount of the allowable depreciation.

Question 17

Tax cost recovery methods include depreciation,amortization,and depletion.

Question 18

The basis for a personal use asset converted to business use is the lesser of the asset's cost basis or fair market value on the date of the transfer or conversion.

Question 19

Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS).

Question 20

Property expensed under the §179 immediate expensing election is not included in the 40 percent test to determine whether the mid-quarter convention must be used.

Question 21

If the business use percentage for listed property falls below 50 percent,the only adjustment is all future depreciation must be calculated under the straight-line method.

Question 22

Goodwill and customer lists are examples of §197 amortizable assets.

Question 23

Significant limits are placed on the depreciation of luxury automobiles.

Question 24

Depletion is the method taxpayers use to recover their capital investment in natural resources.

Question 25

The method for tax amortization is always the straight-line method.

Question 26

Taxpayers may always expense a portion of start-up costs and organizational expenditures.

Question 27

An example of an asset that is both personal-use and personal property is:

A) A computer used solely to email company employees regarding company activities.
B) A storage building used by the CEO to store personal records.
C) A computer used solely to monitor the CEO's investments and to complete her Form 1040.
D) A company airplane used by the CEO for business travel.
E) All of the assets are personal-use and personal property.

Question 28

All assets subject to amortization have the same recovery period.

Question 29

In general,major integrated oil and gas producers may take the greater of cost or percentage depletion.

Question 30

The alternative depreciation system requires both a slower method of recovery and longer recovery periods.

Question 31

Occasionally bonus depreciation is used as a stimulus tool by tax policy makers.

Question 32

Businesses deduct percentage depletion when they sell the natural resource and they deduct cost depletion in the year they produce or extract the natural resource.

Question 33

Cost depletion is available to all natural resource producers.

Question 34

Businesses may immediately expense research and experimentation expenditures or they may elect to capitalize these costs and amortize them using the straight-line method over a period of not less than 60 months.

Question 35

Which of the following business assets is not depreciated?

A) Automobile
B) Building
C) Patent
D) Machinery
E) All of the assets are depreciated.

Question 36

Tax cost recovery methods do not include:

A) Amortization.
B) Capitalization.
C) Depletion.
D) Depreciation.
E) All of the choices are tax cost recovery methods.

Question 37

Business assets that tend to be used for both business and personal purposes are referred to as listed property.

Question 38

An office desk is an example of:

A) Personal property.
B) Personal-use property.
C) Real property.
D) Business property.
E) Personal property and business property.

Question 39

Which of the following is not usually included in an asset's tax basis?

A) Purchase price
B) Sales tax
C) Shipping
D) Installation costs
E) All of the choices are included in an asset's tax basis.

Question 40

The manner in which a business amortizes a patent or copyright is the same whether the business directly purchases the patent or copyright or whether it self-creates the intangible.

Question 41

Tom Tom LLC purchased a rental house and land during the current year for $150,000.The purchase price was allocated as follows: $100,000 to the building and $50,000 to the land.The property was placed in service on May 22.Calculate Tom Tom's maximum depreciation for this first year.(Use MACRS Table 3 in the text)

A) $1,605.
B) $2,273.
C) $2,408.
D) $3,410.
E) None of the choices are correct.

Question 42

How is the recovery period of an asset determined?

A) Estimated useful life
B) Treasury regulation
C) Revenue Procedure 87-56
D) Revenue Ruling 87-56
E) None of the choices are correct.

Question 43

Simmons LLC purchased an office building and land several years ago for $250,000.The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land.The property was placed in service on October 2.If the property is disposed of on February 27 during the 10ᵗʰ year,calculate Simmons' maximum depreciation in the 10ᵗʰ year.(Use MACRS Table 5 in the text)  EXHIBIT 10-6 in the text

A) $641.
B) $909.
C) $5,128.
D) $7,346.
E) None of the choices are correct.

Question 44

Anne LLC purchased computer equipment (5-year property)on August 29 for $30,000 and used the half-year convention.Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment.During the current year,which is the fourth year Anne LLC owned the property,the property was disposed of on January 15.Calculate the maximum depreciation expense.(Use MACRS Table 1 in the text)

A) $432.
B) $1,728.
C) $1,874.
D) $3,456.
E) None of the choices are correct.

Question 45

Suvi,Inc.purchased two assets during the current year (a full 12-month tax year).Suvi placed in service computer equipment (5-year property)on August 10 with a basis of $20,000 and machinery (7-year property)on November 18 with a basis of $10,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 1 in the text)(Round final answer to the nearest whole number)

A) $857.
B) $3,357.
C) $5,429.
D) $6,000.
E) None of the choices are correct.

Question 46

Tasha LLC purchased furniture (7-year property)on April 20 for $20,000 and used the mid-quarter convention.Tasha did not take §179 or bonus depreciation in the year it acquired the furniture.During the current year,which is the fourth year Tasha LLC owned the property,the property was disposed of on December 15.Calculate the maximum depreciation expense.(Use MACRS Table 2 in the text)EXHIBIT 10-6 in the text (Round final answer to the nearest whole number)

A) $898.
B) $2,095.
C) $2,461.
D) $2,394.
E) None of the choices are correct.

Question 47

Poplock LLC purchased a warehouse and land during the current year for $350,000.The purchase price was allocated as follows: $275,000 to the building and $75,000 to the land.The property was placed in service on August 12.Calculate Poplock's maximum depreciation for this first year.(Use MACRS Table 5 in the text)(Round final answer to the nearest whole number)

A) $2,648.
B) $3,371.
C) $3,751.
D) $4,774.
E) None of the choices are correct.

Question 48

The MACRS recovery period for automobiles and computers is:

A) 3 years.
B) 5 years.
C) 7 years.
D) 10 years.
E) None of the choices are correct.

Question 49

Which depreciation convention is the general rule for tangible personal property?

A) Full-month
B) Half-year
C) Mid-month
D) Mid-quarter
E) None of the choices are conventions for tangible personal property.

Question 50

Beth's business purchased only one asset during the current year (a full 12-month tax year).Beth placed in service machinery (7-year property)on December 1 with a basis of $50,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 2 in the text)

A) $1,785.
B) $2,500.
C) $7,145.
D) $10,000.
E) None of the choices are correct.

Question 51

Which is not an allowable method under MACRS?

A) 150 percent declining balance
B) 200 percent declining balance
C) Straight line
D) Sum of the years digits
E) All of the choices are allowable methods under MACRS.

Question 52

Which of the following assets are eligible for §179 expensing?

A) Used office machinery
B) Qualified leasehold improvements
C) A new delivery truck
D) Used office furniture
E) All of the choices are correct.

Question 53

Which of the allowable methods allows the most accelerated depreciation?

A) 150 percent declining balance
B) 200 percent declining balance
C) Straight line
D) Sum of the years digits
E) None of the methods would allow accelerated depreciation.

Question 54

Tax depreciation is currently calculated under what system?

A) Sum of the years digits
B) Accelerated cost recovery system
C) Modified accelerated cost recovery system
D) Straight line system
E) None of the choices are correct.

Question 55

Wheeler LLC purchased two assets during the current year (a full 12-month tax year).Wheeler placed in service computer equipment (5-year property)on November 16 with a basis of $15,000 and furniture (7-year property)on April 20 with a basis of $11,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 2 in the text)(Round final answer to the nearest whole number)

A) $1,285.
B) $2,714.
C) $4,572.
D) $5,200.
E) None of the choices are correct.

Question 56

Deirdre's business purchased two assets during the current year (a full 12-month tax year).Deirdre placed in service computer equipment (5-year property)on January 20 with a basis of $15,000 and machinery (7-year property)on October 1 with a basis of $15,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 2 in the text)(Round final answer to the nearest whole number)

A) $1,286.
B) $5,144.
C) $5,786.
D) $6,000.
E) None of the choices are correct.

Question 57

Which of the following depreciation conventions are not used under MACRS?

A) Full-month
B) Half-year
C) Mid-month
D) Mid-quarter
E) All of the choices are used under MACRS.

Question 58

Sairra,LLC purchased only one asset during the current year (a full 12-month tax year).Sairra placed in service furniture (7-year property)on April 16 with a basis of $25,000.Calculate the maximum depreciation expense for the current year? (ignoring §179 and bonus depreciation).(Use MACRS Table 1 in the text)(Round final answer to the nearest whole number)

A) $1,786.
B) $3,573.
C) $4,463.
D) $5,000.
E) None of the choices are correct.

Question 59

Which of the following would be considered an improvement rather than a routine maintenance?

A) Oil change
B) Engine overhaul
C) Wiper blade replacement
D) Air filter change

Question 60

Lax,LLC purchased only one asset during the current year (a full 12-month tax year).Lax placed in service computer equipment (5-year property)on August 26 with a basis of $20,000.Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation).(Use MACRS Table 1 in the text)

A) $2,000.
B) $2,858.
C) $3,000.
D) $4,000.
E) None of the choices are correct.

Question 61

Jorge purchased a copyright for use in his business in the current year.The purchase occurred on July 15ᵗʰ and the purchase price was $75,000.If the patent has a remaining life of 75 months,what is the total amortization expense Jorge may deduct during the current year?

A) $0
B) $5,500
C) $6,000
D) $12,000
E) None of the choices are correct.

Question 62

Arlington LLC purchased an automobile for $40,000 on July 5,2017.What is Arlington's depreciation expense for 2017 if its business use percentage is 75 percent (ignore any possible bonus depreciation)?  Exhibit 10-8 in the text

A) $2,370
B) $3,160
C) $6,000
D) $8,000
E) None of the choices are correct.

Question 63

Which of the following assets is eligible for bonus depreciation?

A) Used office machinery
B) Qualified leasehold improvements
C) A new delivery truck
D) Used office furniture
E) All of the choices are correct.

Question 64

Assume that Bethany acquires a competitor's assets on March 31ˢᵗ.The purchase price was $150,000.Of that amount,$125,000 is allocated to tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset).What is Bethany's amortization expense for the current year? (Round final answer to the nearest whole number)

A) $0
B) $1,250
C) $1,319
D) $1,389
E) None of the choices are correct.

Question 65

Daschle LLC completed some research and development during June of the current year.The related costs were $60,000.If Daschle wants to capitalize and amortize the costs as quickly as possible,what is the total amortization expense Daschle may deduct during the current year?

A) $0
B) $6,500
C) $7,000
D) $12,000
E) None of the choices are correct.

Question 66

Geithner LLC patented a process it developed in the current year.The patent is expected to create benefits for Geithner over a 10-year period.The patent was issued on April 15ᵗʰ and the legal costs associated with the patent were $43,000.In addition,Geithner had unamortized research expenditures of $15,000 related to the process.What is the total amortization expense Geithner may deduct during the current year?

A) $2,417
B) $2,174
C) $4,108
D) $4,350
E) None of the choices are correct.

Question 67

Lenter LLC placed in service on April 29,2017 machinery and equipment (7-year property)with a basis of $600,000.Assume that Lenter has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing).(Use MACRS Table 1 in the text)

A) $85,740.
B) $120,000.
C) $522,861.
D) $585,740.
E) None of the choices are correct.

Question 68

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period.Santa Fe paid $300,000 for extraction rights.A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise.During the current year,Santa Fe extracted 1,500 pounds of turquoise,which it sold for $200,000.What is Santa Fe's cost depletion expense for the current year?

A) $60,000
B) $90,000
C) $110,000
D) $300,000
E) None of the choices are correct.

Question 69

Crouch LLC placed in service on May 19,2017 machinery and equipment (7-year property)with a basis of $2,200,000.Assume that Crouch has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing).(Use MACRS Table 1 in the text)

A) $314,380.
B) $340,000.
C) $605,794.
D) $742,930.
E) None of the choices are correct.

Question 70

Racine started a new business in the current year.She incurred $52,000 of start-up costs.If her business started on November 23ʳᵈ of the current year,what is the total expense she may deduct with respect to the start-up costs for her initial year,rounded to the nearest whole number?

A) $2,555
B) $3,544
C) $5,522
D) $52,000
E) None of the choices are correct.

Question 71

Littman LLC placed in service on July 29,2017 machinery and equipment (7-year property)with a basis of $600,000.Littman's income for the current year before any depreciation expense was $100,000.Which of the following statements is true to maximize Littman's total depreciation expense for 2017? (Use MACRS Table 1 in the text)

A) Littman should take §179 expense equal to the maximum $510,000.
B) Littman should take no §179 expense.
C) Littman's §179 expense will be greater than $100,000.
D) Littmen's §179 expense will be less than $100,000.
E) None of the choices are correct.

Question 72

Lucky Strike Mine (LLC)purchased a silver deposit for $1,500,000.It estimated it would extract 500,000 ounces of silver from the deposit.Lucky Strike mined the silver and sold it reporting gross receipts of $1.8 million,$2.5 million,and $2 million for years 1 through 3,respectively.During years 1 - 3,Lucky Strike reported net income (loss)from the silver deposit activity in the amount of ($100,000),$400,000,and $100,000,respectively.In years 1 - 3,Lucky Strike actually extracted 300,000 ounces of silver as follows: $$\begin{array} { c c c } { \text { Ources extracted per year } } \\\text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\50,000 & 150,000 & 100,000\end{array}$$ What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?

A) $200,000
B) $375,000
C) $400,000
D) $450,000
E) None of the choices are correct.

Question 73

Potomac LLC purchased an automobile for $30,000 on August 5,2017.What is Potomac's depreciation expense for 2017 (ignore any possible bonus depreciation)?  Exhibit 10-8 in the text

A) $3,160
B) $4,287
C) $6,000
D) $30,000
E) None of the choices are correct.

Question 74

Bonnie Jo purchased a used computer (5-year property)for use in her sole proprietorship.The basis of the computer was $2,400.Bonnie Jo used the computer in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year.Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter).(Use MACRS Table 1 in the text)

A) $240.
B) $288.
C) $480.
D) $2,400.
E) None of the choices are correct.

Question 75

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period.Santa Fe paid $300,000 for extraction rights.A geologist estimated that Santa Fe will recover 5,000 pounds of turquoise.During the past several years,4,000 pounds were extracted.During the current year,Santa Fe extracted 1,500 pounds of turquoise,which it sold for $250,000.What is Santa Fe's cost depletion expense for the current year?

A) $60,000
B) $90,000
C) $190,000
D) $160,000
E) None of the choices are correct.

Question 76

Clay LLC placed in service machinery and equipment (7-year property)with a basis of $2,450,000 on June 6,2016.Assume that Clay has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus expensing)(Use MACRS Table 1 in the text)(Round final answer to the nearest whole number)

A) $350,105
B) $427,244
C) $778,070
D) $860,105
E) None of the choices are correct.

Question 77

Billie Bob purchased a used computer (5-year property)for use in his sole proprietorship in the prior year.The basis of the computer was $2,400.Billie Bob used the computer in his business 60 percent of the time during the first year.During the second year,Billie Bob used the computer 40 percent for business use.Calculate Billie Bob's depreciation expense during the second year assuming the sole proprietorship had a loss during the year (Billie Bob did not place the asset in service in the last quarter).(Use MACRS Table 1 in the text)

A) $0.
B) $48.
C) $192.
D) $336.
E) None of the choices are correct.

Question 78

Janey purchased machinery on April 8ᵗʰ of the current year.The relevant costs for the year are as follows: machinery for $10,000,$800 shipping,$50 for delivery insurance,$500 for installation,$750 for sales tax,$150 for the annual tune up,and $200 of property taxes (an annual tax on business property).What is Janey's tax basis for the machinery?

Question 79

Assume that Brittany acquires a competitor's assets on September 30ᵗʰ of year 1 for $350,000.Of that amount,$300,000 is allocated to tangible assets and $50,000 is allocated equally to two §197 intangible assets (goodwill and a 1-year non-compete agreement).Given,that the non-compete agreement expires on September 30ᵗʰ of year 2,what is Brittany's amortization expense for the second year? (Round final answer to the nearest whole number)

A) $0
B) $1,667
C) $2,917
D) $3,333
E) None of the choices are correct.

Question 80

Jasmine started a new business in the current year.She incurred $10,000 of start-up costs.How much of the start-up costs can be immediately expensed (excluding amounts amortized over 180 months)for the year?

A) $0
B) $2,500
C) $5,000
D) $10,000
E) None of the choices are correct.