Question 1

In 2013,Sanford Corporation purchases and places in service $2,050,000 of equipment for its manufacturing business.What portion of the $2,050,000 may Sanford elect to treat as a Section 179 expense?

Accepted Answer

The answer of In 2013,Sanford Corporation purchases and places in...

Question 2

Which of the following would be allowed a depreciation deduction?
I.Inventory.
II.Land acquired as an investment.
III.Residence used as rental property.
IV.Airplane used by company controller to attend accounting conference.

Accepted Answer

Only statement III is allowed a depreciation deduction because it is being used as rental property, which is considered a business use. Statement IV is also allowed a depreciation deduction because the airplane is being used for business travel. However, statement I is not allowed as it is not a fixed asset, and statement II is not allowed because land is not a depreciable asset.

Question 3

Periodic capital recovery deductions for tax purposes include
I.Depletion.
II.Amortization.
III.Depreciation.
IV.Proration.

Accepted Answer

Depletion, amortization, and depreciation are all methods of allocating the cost of an asset over its useful life for tax purposes, which allows for capital recovery. Proration is not a method of capital recovery.

Question 4

To compute cost depletion,you must know the basis subject to depletion,the recoverable quantity of the natural resource,and the quantity of the natural resource sold during the year.

Accepted Answer

To compute cost depletion, you need to know the basis subject to depletion (usually the acquisition cost of the natural resource), the recoverable quantity (how much of the resource is expected to be extracted), and the quantity of the resource sold during the year. These factors are used to determine the depletion rate and the annual depletion expense.

Question 5

Davis,Inc.,a motorcycle wheel manufacturer,purchased a new spoke machine in 2013 for $200,000.What are the tax effects of this purchase?
I.If taxable income is $100,000,then $100,000 can be expensed in 2013.
II.No Section 179 election is allowed if Davis decides to use a $200,000 depreciable basis.
III.If Davis had purchased a total of $2,400,000 of equipment in 2013,the corporation can deduct only $100,000 of the purchases in 2013 through use of the Section 179 election.

Accepted Answer

The answer of Davis,Inc.,a motorcycle wheel manufacturer,purchased a new spoke...

Question 6

Qualified Section 179 property for a retail store includes
I.Store shelving.
II.Company auto used by salesmen.
III.Sidewalks in front of the store.
IV.Delivery van owned by the store.

Accepted Answer

Qualified Section 179 property includes tangible personal property such as store shelving and vehicles like delivery vans used for business purposes, as well as company autos used by salesmen if they are used more than 50% for business. Sidewalks are considered land improvements and do not qualify.

Question 7

To be considered predominately used in a trade or business under the listed property rules,more than 75% of an asset's total use for each taxable year must be related to the taxpayer's trade or business.

Accepted Answer

To be considered predominately used in a trade or business under the listed property rules, more than 50% of an asset's total use for each taxable year must be related to the taxpayer's trade or business.

Question 8

Which of the following assets would be allowed a depreciation deduction?
I.A truck used to provide transportation to a job site.
II.A car used for personal purposes.
III.An apartment building rented out for the production of rental income.
IV.A personal-use computer of the taxpayer.

Accepted Answer

Assets that are used for business or income-producing purposes are allowed a depreciation deduction. Therefore, statement I (truck used for job site) and statement III (apartment building rented out for rental income) are correct. Statement II (car used for personal purposes) and statement IV (personal-use computer) are not eligible for a depreciation deduction.

Question 9

Felix purchases the franchise rights to a new sports team and will be able to amortize the cost over the 15-year amortization period for intangibles.

Accepted Answer

The answer of Felix purchases the franchise rights to a...

Question 10

Watson Company purchases used equipment (5-year MACRS property)for $2,350,000 on July 8,2013.What is Watson' maximum allowable cost recovery deduction for 2013 on the equipment if this is the only purchase of equipment for 2013?
(Watson elects out of bonus depreciation.)

Accepted Answer

The answer of Watson Company purchases used equipment (5-year MACRS...

Question 11

Which of the following statements related to the Section 179 election to expense is (are)true?
I.A Section 179 deduction can be claimed on tangible personal property
II.A Section 179 deduction can be claimed on property held for the production of income.
III.A Section 179 deduction can be claimed on real property.
IV.A Section 179 deduction is allowed only for assets used in trade or business.

Accepted Answer

Statement I is true as Section 179 allows deduction on tangible personal property. However, statement II is false as Section 179 deduction cannot be claimed on property held for the production of income. Statement III is also false as Section 179 deduction cannot be claimed on real property. Statement IV is true as a Section 179 deduction is allowed only for assets used in trade or business.

Question 12

Sorensen Corporation purchases eqipment in 2013 for $2,200,000.Sorensen has substantial taxable income and desires to minimize this amount to the fullest extent possible.How much can Sorensen deduct under Section 179?

Accepted Answer

The answer of Sorensen Corporation purchases eqipment in 2013 for...

Question 13

In most cases,the taxpayer may continue to use percentage (statutory)depletion after the initial basis has been fully recovered.In other words,the taxpayer's depletion deduction can exceed the cost of the depletable asset.

Accepted Answer

According to the IRS, "If the depletion allowances exceed the adjusted basis of the property or its fair market value on the date it is mined, whichever is less, taxpayers may continue to use percentage depletion. However, they must include in income, as recapture, some or all of the excess allowances deducted in earlier years."

Question 14

During 2013,Witt Processing Corporation places $2,435,000 of Section 179 property in service for use in its business.What is the amount of Witt Processing's maximum Section 179 deduction for 2013?

Accepted Answer

The answer of During 2013,Witt Processing Corporation places $2,435,000 of...

Question 15

The Section 179 election promotes which of the following tax concept(s)or doctrine(s)?
I.Claim of Right Doctrine.
II.Administrative Convenience Concept.
III.Tax benefit rule.
IV.Substance-Over-Form Doctrine.

Accepted Answer

The Section 179 election allows businesses to deduct the full purchase price of qualifying equipment and/or software within the tax year it is purchased, rather than depreciating it over time. This primarily promotes the Administrative Convenience Concept by simplifying tax reporting and reducing administrative burdens on both businesses and the IRS.

Question 16

Which of the following assets would not be allowed a depreciation deduction?
I.A business computer used to process payroll and maintain a company's general ledger.
II.A personal residence of a taxpayer.
III.A building rented out for the production of rental income.
IV.A yacht rented to a fishing party.

Accepted Answer

A personal residence of a taxpayer is not allowed a depreciation deduction because depreciation is only applicable to assets used in a business or income-producing activity. Personal use property, like a personal residence, does not qualify for depreciation.

Question 17

In May 2013,Preston purchases 5-year MACRS property costing $150,000 and 7-year MACRS property costing $140,000.Preston's income is $100,000.If Preston wishes to maximize his total 2013 cost recovery deduction,what will his total cost recovery deduction be on the properties purchased in 2013?
(Preston elects out of bonus depreciation.)

Accepted Answer

To calculate the cost recovery deduction, we need to calculate the depreciation for both properties using MACRS for 2013.

For the 5-year MACRS property, the deduction for the first year is 20% of the cost, as it falls under the 5-year recovery period. Therefore, the depreciation for the 5-year MACRS property is:

20% x $150,000 = $30,000

For the 7-year MACRS property, the deduction for the first year is 14.29% of the cost, as it falls under the 7-year recovery period. Therefore, the depreciation for the 7-year MACRS property is:

14.29% x $140,000 = $20,006

The total cost recovery deduction for the year would be the sum of the depreciation for both properties:

$30,000 + $20,006 = $50,006

Therefore, the best choice is C.

Question 18

Under current law,taxpayers must use regular MACRS.

Accepted Answer

Taxpayers have the option to use different depreciation methods, including MACRS (Modified Accelerated Cost Recovery System), but they are not strictly required to use regular MACRS for all assets. Other methods, such as straight-line depreciation, may be used depending on the asset and circumstances.

Question 19

Under the computation of the alternative minimum tax,the Alternative Depreciation System may be used but is not required.

Accepted Answer

Under the computation of the alternative minimum tax (AMT), taxpayers are required to use the Alternative Depreciation System (ADS) for certain types of property, making it not merely an option but a requirement for AMT purposes.

Question 20

Which of the following would not be allowed a depreciation deduction?
I.Inventory.
II.Business equipment.
III.Land acquired as an investment.
IV.Cattle used in a dairy herd.

Accepted Answer

Inventory cannot be depreciated, as it is not a long-term asset. Land acquired as an investment may not be depreciated either, as it is not used in business operations. Business equipment and cattle used in a dairy herd can both be depreciated.

Quiz 10: Cost Recovery on Property: Depreciation,depletion,and Amortization

In 2013,Sanford Corporation purchases and places in service $2,050,000 of equipment for its manufacturing business.What portion of the $2,050,000 may Sanford elect to treat as a Section 179 expense?

Which of the following would be allowed a depreciation deduction? I.Inventory. II.Land acquired as an investment. III.Residence used as rental property. IV.Airplane used by company controller to attend accounting conference.

Periodic capital recovery deductions for tax purposes include I.Depletion. II.Amortization. III.Depreciation. IV.Proration.

To compute cost depletion,you must know the basis subject to depletion,the recoverable quantity of the natural resource,and the quantity of the natural resource sold during the year.

Qualified Section 179 property for a retail store includes I.Store shelving. II.Company auto used by salesmen. III.Sidewalks in front of the store. IV.Delivery van owned by the store.

To be considered predominately used in a trade or business under the listed property rules,more than 75% of an asset's total use for each taxable year must be related to the taxpayer's trade or business.

Which of the following assets would be allowed a depreciation deduction? I.A truck used to provide transportation to a job site. II.A car used for personal purposes. III.An apartment building rented out for the production of rental income. IV.A personal-use computer of the taxpayer.

Felix purchases the franchise rights to a new sports team and will be able to amortize the cost over the 15-year amortization period for intangibles.

Watson Company purchases used equipment (5-year MACRS property) for $2,350,000 on July 8,2013.What is Watson' maximum allowable cost recovery deduction for 2013 on the equipment if this is the only purchase of equipment for 2013? (Watson elects out of bonus depreciation.)

Sorensen Corporation purchases eqipment in 2013 for $2,200,000.Sorensen has substantial taxable income and desires to minimize this amount to the fullest extent possible.How much can Sorensen deduct under Section 179?

In most cases,the taxpayer may continue to use percentage (statutory)depletion after the initial basis has been fully recovered.In other words,the taxpayer's depletion deduction can exceed the cost of the depletable asset.

During 2013,Witt Processing Corporation places $2,435,000 of Section 179 property in service for use in its business.What is the amount of Witt Processing's maximum Section 179 deduction for 2013?

The Section 179 election promotes which of the following tax concept(s) or doctrine(s) ? I.Claim of Right Doctrine. II.Administrative Convenience Concept. III.Tax benefit rule. IV.Substance-Over-Form Doctrine.

Under current law,taxpayers must use regular MACRS.

Under the computation of the alternative minimum tax,the Alternative Depreciation System may be used but is not required.

Which of the following would not be allowed a depreciation deduction? I.Inventory. II.Business equipment. III.Land acquired as an investment. IV.Cattle used in a dairy herd.