Question 1

On January 15, 2018, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2018 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2018.

Accepted Answer

The answer of On January 15, 2018, Vern purchased the...

Question 2

A major objective of MACRS is to:

Accepted Answer

MACRS was designed to help companies achieve a faster write-off of their capital assets. This was done by creating a set of depreciation schedules that allow for accelerated cost recovery deductions. Additionally, MACRS is meant to simplify the tax code by providing clear guidelines for calculating depreciation, which can help to reduce the administrative burden on taxpayers.

Question 3

On March 3, 2018, Sally purchased and placed in service a building costing $12,000,000. The building has 10 floors.
The bottom three floors are rented out to businesses. The top seven floors are residential apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000. Determine Sally's cost recovery for the building in 2018.

Accepted Answer

The answer of On March 3, 2018, Sally purchased and...

Question 4

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

Accepted Answer

Full-month convention is not used under MACRS. MACRS only uses the mid-month or the half-year convention, depending on the asset's acquisition date. The mid-quarter convention is also available for assets acquired in the last quarter of the year, but it is not used very frequently.

Question 5

On June 1, 2018, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2018 for the patent.

Accepted Answer

The total amount that Red may amortize for 2018 for the patent is calculated as follows:

Amortization expense = (Cost of patent - Residual value) / Useful life 
Residual value = 0 (assuming the patent has no salvage value) 
Useful life = 20 years

Amortization expense = ($300,000 - $0) / 20 = $15,000 per year

However, since Red purchased the business on June 1, 2018, it can only amortize the patent for half of the year (i.e. 7 months). Therefore, the amount that Red may amortize for 2018 is:

$15,000 x (7/12) = $8,750

Therefore, the closest option is C) $11,667.

Question 6

Which of the following is not a characteristic of MACRS for property other than real estate?

Accepted Answer

MACRS actually decreases taxable income in the early years of the asset's life by allowing for accelerated depreciation deductions. This is a key benefit of using MACRS for tax purposes.

Question 7

Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?

Accepted Answer

Under MACRS, the salvage value is not considered when calculating depreciation for tax purposes. Depreciation is based on the cost of the asset, the property recovery class, and conventions like the half-year convention.

Question 8

On January 15, 2018, Dillon purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Dillon incurred expenses during 2018 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2018.

Accepted Answer

The cost depletion per unit is $7 ($3,500,000 / 500,000 units). For 25,000 units sold, the cost depletion is $175,000 (25,000 units x $7). The percentage depletion is $176,000 (22% of $800,000 revenue), but it cannot exceed the cost depletion. Therefore, the depletion deduction is $175,000.

Question 9

During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange Corporation may amortize.

Accepted Answer

Goodwill is not amortized for accounting purposes. It is tested annually for impairment.

Question 10

Rod paid $1,950,000 for a new warehouse on April 14, 2018. He sold the warehouse on September 29, 2023.
Determine the cost recovery deduction for 2018 and 2023.

Accepted Answer

The answer of Rod paid $1,950,000 for a new warehouse...

Question 11

Pat purchased a used five-year class asset on March 15, 2018, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2018 for earnings and profits purposes.

Accepted Answer

For earnings and profits purposes, the class life for a five-year class asset is six years, and the cost recovery method used is MACRS. 
Using the MACRS depreciation rates for a five-year class asset, the deduction for the first year (2018) is 20% of the cost, which is $12,000. However, since Pat did not elect § 179 expensing, the deduction must be reduced by the bonus depreciation percentage, which is 40% for property placed in service in 2018. 
So, the cost recovery deduction for 2018 for earnings and profits purposes is $12,000 x (1 - 40%) = $7,200. 
However, since Pat purchased the asset on March 15, 2018, the deduction is prorated based on the number of months the asset was in service. 
The asset was in service for 9.5 months in 2018 (March 15 to December 31), so the prorated deduction is $7,200 x 9.5/12 = $5,700. 
Therefore, the correct answer is C) $6,000.

Question 12

Tom purchased and placed in service used office furniture on January 3, 2018, for $40,000. Tom's accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The accountant also used the same depreciation amounts when filing Tom's income tax returns. On January 10, 2023, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

Accepted Answer

The answer of Tom purchased and placed in service used...

Question 13

Jenna acquires a new seven-year class asset on September 20, 2018, for $80,000. She placed the asset in service on October 5, 2018. She does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. She takes additional first-year depreciation. She sells the asset on August 25, 2019. This is the only asset she acquires in 2018. Determine Jenna's cost recovery in 2018 and 2019.

Accepted Answer

The answer of Jenna acquires a new seven-year class asset...

Question 14

Indigo Company acquires a new machine (5-year MACRS property) on February 2, 2018 at a cost of $100,000. On November 18, 2018, Indigo also acquires office equipment (7-year MACRS property) at a cost of $50,000. Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo's total MACRS deduction for 2018?

Accepted Answer

The MACRS deduction for the 5-year property (machine) is 20% of $100,000, which is $20,000. The deduction for the 7-year property (office equipment) is 14.29% of $50,000, which is $7,145. The total MACRS deduction for 2018 is $20,000 + $7,145 = $27,145.

Question 15

Maple Company purchases new equipment (7-year MACRS property) on January 10, 2018, at a cost of $430,000. Maple also purchases new machines (5-year MACRS property) on July 19, 2018 at a cost of $290,000. Maple wants to maximize its MACRS deductions? assume no taxable income limitations apply. What is Maple's total MACRS deduction for 2018?

Accepted Answer

The answer of Maple Company purchases new equipment (7-year MACRS...

Question 16

Orange Corporation begins business on April 2, 2018. The corporation reports startup expenditures of $64,000 all incurred last year. Determine the total amount that Orange can elect to deduct in 2018.

Accepted Answer

The answer of Orange Corporation begins business on April 2,...

Question 17

George purchases used seven-year class property at a cost of $200,000 on April 20, 2018. Determine George's cost recovery deduction for 2018 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation.

Accepted Answer

The answer of George purchases used seven-year class property at...

Question 18

On January 1, 2018, SymboNet Company completed its acquisition of NetOpen. As part of the acquisition, $2 million was allocated to goodwill. What is SymboNet's amortization deduction related to the goodwill for 2018?

Accepted Answer

Under the current U.S. tax code (as of 2021), goodwill acquired in a business acquisition can be amortized over 15 years for tax purposes. Therefore, the amortization deduction for SymboNet related to the goodwill for 2018 is $2,000,000 / 15 years = $133,333.

Question 19

Simpson Company, a calendar year taxpayer, acquires an apartment building on March 22, 2018 for $900,000. What is the maximum cost recovery deduction it may take for 2018?

Accepted Answer

The answer of Simpson Company, a calendar year taxpayer, acquires...

Question 20

On May 5 of the current tax year, Byrne purchased a patent that qualifies as a § 197 intangible. The cost of the patent was $207,000 and Byrne is a calendar-year taxpayer. In the current tax year, how much of the patent's cost may Byrne amortize?

Accepted Answer

Section 197 intangibles are amortized over 15 years (180 months). The annual amortization is $207,000 / 15 = $13,800. Since Byrne purchased the patent on May 5, he can amortize for 8 months in the current year: ($13,800 / 12) * 8 = $9,200.

Quiz 8: Depreciation, Cost Recovery, Amortization, and Depletion