Question 1

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 these

Accepted Answer

The amortization when capitalization is elected is $7,000 ($60,000/60) × 7 months. The amortization period on capitalized research and development is not less than 60 months-and 60 months is the most often elected.

Question 2

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):
A) $0
B) $48
C) $192
D) $336
E) None of these

Accepted Answer

Because the listed property's business use drops below 50%, the straight-line method must be used and all prior years' excess depreciation must be recaptured. The asset's recovery period is 5 years and the half-year convention applies. The calculation for the current year's depreciation before adjusting for the prior year is $2,400 × .2 × 40% = $192. But he must recapture prior depreciation of $144 ($2,400 × .2 × 60% = $288 taken less $144 (straight-line, ½ year)) that would have been taken. Therefore, the current year depreciation expense is $192 - $144 = $48.

Question 3

Assume that Brittany acquires a competitor's assets on September 30^th 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 30^th of year 2, what is Brittany's amortization expense for the second year, rounded to the nearest whole number? A) $0 B) $1,667 C) $2,917 D) $3,333 E) None of these

Accepted Answer

The full-month convention applies. If a §197 asset is disposed of before it is fully recovered, the remaining basis is added to the remaining §197 assets acquired at the same time. §197 assets have a recovery period of 180 months. The amortization is $3,333 ($50,000/180) × 12. The result is as if the asset never expired.

Question 4

Assume that Bethany acquires a competitor's assets on March 31^st. 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, rounded to the nearest whole number? A) $0 B) $1,250 C) $1,319 D) $1,389 E) None of these

Accepted Answer

The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $1,389 ($25,000/180) × 10.

Question 5

Lenter LLC placed in service on April 29, 2016 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). Assume that the 2015 §179 limits are identical to 2016:
A) $85,740
B) $120,000
C) $514,290
D) $585,740
E) None of these

Accepted Answer

The $500,000 §179 expense is not limited. The half year convention applies. The expense is $514,290 which is depreciation of $100,000 × .1429 = $14,290 + $500,000 of §179 expense.

Question 6

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), rounded to a whole number. (Assume that the 2015 §179 limits are identical to 2016.)
A) $350,105
B) $392,960
C) $778,070
D) $864,395
E) None of these

Accepted Answer

The $500,000 §179 expense is reduced to $50,000 because of the property placed in service limitation ($2,450,000 - $2,000,000 threshold). The half-year convention applies. The expense is $392,960 which is depreciation of $2,400,000 × .1429 = $342,960 + $50,000 of §179 expense.

Question 7

Potomac LLC purchased an automobile for $30,000 on August 5, 2016. What is Potomac's depreciation expense for 2016? (ignore any possible bonus depreciation)
A) $3,160
B) $4,287
C) $6,000
D) $30,000
E) None of these

Accepted Answer

A luxury auto's maximum depreciation in the first year is $3,160 for 2016.

Question 8

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 these

Accepted Answer

The depletion expense is $90,000 ($300,000/5,000) × 1,500.

Question 9

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 these

Accepted Answer

$5,000 of start-up expenses can be immediately expensed. The $5,000 maximum phases out dollar for dollar if more than $50,000 of start-up costs are incurred.

Question 10

Crouch LLC placed in service on May 19, 2016 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). (Assume that the 2015 §179 limits are identical to 2016.)
A) $314,380.
B) $440,000.
C) $571,510.
D) $742,930.
E) None of these.

Accepted Answer

The $500,000 §179 expense is reduced to $300,000 because of the property placed in service limitation ($2,200,000 - $2,000,000 threshold). The half year convention applies. The expense is $571,510 which is depreciation of $1,900,000 × .1429 = $271,510 + $300,000 of §179 expense.

Question 11

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: $$\begin{array} { | c | c | c | } 
\hline { \text { Ounces extracted per year } } \
\hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
50,000 & 150,000 & 100,000 \
\hline
\end{array}$$ 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 these

Accepted Answer

The answer of Lucky Strike Mine (LLC) purchased a silver...

Question 12

Arlington LLC purchased an automobile for $40,000 on July 5, 2016. What is Arlington's depreciation expense for 2016 if its business use percentage is 75 percent? (ignore any possible bonus depreciation)
A) $2,370
B) $3,160
C) $6,000
D) $8,000
E) None of these

Accepted Answer

A luxury auto's maximum depreciation in the first year is $3,160 × 75% = $2,370.

Question 13

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 these

Accepted Answer

The depletion expense is $60,000 ($300,000/5,000) × 1,000. Cost depletion is limited to the taxpayer's basis. As a result, even though 1,500 pounds were extracted, only 1,000 pounds can be expensed under cost depletion.

Question 14

Racine started a new business in the current year. She incurred $52,000 of start-up costs. If her business started on November 23^rd 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 these

Accepted Answer

The maximum immediate expense amount of $5,000 phases out dollar for dollar if more than $50,000 of start-up costs are incurred. Thus, the immediate expensing is $3,000 ($5,000 - ($52,000 - $50,000)). The remaining amount is amortized over 180 months and results in an additional deduction of $544 [($49,000/180) × 2 months] for the year.

Question 15

Janey purchased machinery on April 8^th 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?

Accepted Answer

The answer of Janey purchased machinery on April 8^th of...

Question 16

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 15^th 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 these

Accepted Answer

The amortization is $4,350 ($58,000/120) × 9 months. The amortization period is the shorter of the patent's legal (20 years for utility patents) or useful life (10 years).

Question 17

Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15^th 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 these

Accepted Answer

The amortization is $6,000 ($75,000/75) × 6. The amortization period on a purchased patent is the asset's remaining useful life.

Question 18

Littman LLC placed in service on July 29, 2016 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 2016? (Assume that the 2015 §179 limits are identical to 2016.)
A) Littman should take §179 expense equal to the maximum $500,000.
B) Littman should take no §179 expense.
C) Littman's §179 expense will be greater than $100,000.
D) Littman's §179 expense will be less than $100,000.
E) None of these.

Accepted Answer

The $500,000 §179 expense is limited to income after regular MACRS depreciation but before §179 expense. The $100,000 income amount is before any cost recovery. Thus to maximize its cost recovery, Littman should first elect $16,637 of §179 expense. Littman's regular MACRS amount will be $83,363 for a total of $100,000 of cost recovery.

Question 19

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 these

Accepted Answer

Only new personal property is eligible for bonus depreciation. Real property and used property are not eligible.

Question 20

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):
A) $240
B) $288
C) $480
D) $2,400
E) None of these

Accepted Answer

The asset's recovery period is 5 years and the half-year convention applies. The calculation is $2,400 × .2 × 60% = $288.

Quiz 10: Property Acquisition and Cost Recovery

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?

Potomac LLC purchased an automobile for $30,000 on August 5, 2016. What is Potomac's depreciation expense for 2016? (ignore any possible bonus depreciation)

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?

Arlington LLC purchased an automobile for $40,000 on July 5, 2016. What is Arlington's depreciation expense for 2016 if its business use percentage is 75 percent? (ignore any possible bonus depreciation)

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?

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?

Which of the following assets is eligible for bonus depreciation?

Racine started a new business in the current year. She incurred $52,000 of start-up costs. If her business started on November 23^rd 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?

Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15^th 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?