Deck 7: Property Acquisitions and Cost Recovery Deductions

Question 1

Depletion is the term used for the cost allocation of wasting assets.

Answer 1

True

Question 2

Section 179 expensing does not apply to used property.

Answer 2

False

Question 3

If more than 40 percent of all personalty purchased during the year is placed in service during the last quarter of the year, the mid-quarter convention must be used.

Answer 3

True

Question 4

13 Bonus depreciation and Section 179 expensing are never taken on the same asset.

Question 5

The basis in property acquired by inheritance is normally its fair market value at the date of the
decedent's death.

Question 6

What is the difference in the basis of an asset acquired by gift and one acquired by inheritance?

Question 7

The lease inclusion amount increases the deduction a person may take for business use of a leased automobile.

Question 8

The first year's depreciation for equipment acquired in October by a calendar-year business would be based on 1½ months if it was the only asset acquired that year.

Question 9

The cost of assets with useful lives expected to extend for 2 or more years are capitalized with costs allocated over their useful lives.

Question 10

Automobiles are subject to specific limitations on the amount of annual depreciation deductions.

Question 11

Section 179 expenses exceeding the annual cost limitation may be carried forward for five years only.

Question 12

In a basket purchase of a group of assets, the purchaser and the seller can agree to the value of the separate assets.

Question 13

A donee's basis in a gift is always equal to the donor's basis.

Question 14

The mid-year and mid-month are acceptable conventions for depreciating personalty.

Question 15

Explain how the basis of an asset is determined on acquisition.

Question 16

The MACRS life for all realty is 27½ years.

Question 17

The alternative depreciation system uses a straight-line allocation of an asset's cost to determine depreciation expense.

Question 18

Research expenditures must be capitalized and amortized over the period the research is expected to benefit the business.

Question 19

The after-tax cost of a depreciable asset is dependent on the purchaser's marginal tax rate.

Question 20

What is the adjusted basis of an asset?

Question 21

Wendell purchased a computer system for $6,000 on June 1, 2016. He kept records of his computer usage and found out he used the computer 45 percent of the time for his business, 20 percent for tracking his extensive investment portfolio and making trades, and the remaining time was for personal use in both years.
a. Determine Wendell's depreciation deductions in 2016 and 2017.
b. In 2018, Wendell's usage remained the same but he decided to dispose of the computer on November 1. Determine his 2018 depreciation deduction and his gain or loss on the disposition if he received $2,500 for the system.

Question 22

What limitations apply to the use of Section 179 expensing in 2018? What would have been different if this asset had been acquired in 2017?

Question 23

What is the difference between cost and percentage depletion?

Question 24

Soledad left her son Juan property valued at $700,000 when she died. Soledad paid $825,000 for the property but its adjusted basis was only $450,000 when she died. Juan did not want the building so he authorized the administrator to complete the sale of the building 6 months after Soledad's death for $650,000. Due to the decline in value of a number of Soledad's other assets after her death, the administrator elected the alternate valuation date for the assets. What is the realized and recognized gain or loss on the sale of the asset? Explain your answer.

Question 25

Explain the basic procedure for determining the net cost of a depreciable asset using net cash flow with a five-year MACRS life and no salvage value.

Question 26

What are listed properties?

Question 27

What is the difference in after-tax cost of a five-year machine costing $10,000 that is depreciated using MACRS depreciation versus the alternative depreciation system? The taxpayer is in the 35 percent tax marginal bracket and uses a 6 percent discount rate for evaluation. No Section 179 expensing or bonus depreciation is claimed for this property

Question 28

Calvin gave his son ABC stock valued at $100,000 that he purchased for $50,000; he gave his daughter EFG stock valued at $100,000 that he purchased for $150,000. Calvin paid $30,000 in gift taxes on each of these gifts. What are the son's and daughter's bases in the stock received?

Question 29

Wolfgang, a calendar-year taxpayer, purchased residential rental realty in April of year 1 for $150,000 ($50,000 of which was for the land).

A) What is Wolfgang's MACRS depreciation deduction in years 1 and 2?
B) What is his depreciation deduction in year 20 if he disposes of the asset in August of that year?
C) How would your answers change to (a) and (b) if the property is nonresidential realty?

Question 30

What are the permissible tax treatments for research and experimentation expenditures?

Question 31

Josephine Company, a sole proprietorship whose owner is in the 35 percent marginal tax bracket, purchases five-year MACRS property in mid-year for $12,000. What is its after-tax cost of this asset if it uses a 6 percent discount rate for project evaluation? No Section 179 expensing or bonus depreciation is claimed for this property.

Question 32

Which averaging conventions are used for MACRS depreciation?

Question 33

William has decided to purchase a large apartment complex. He pays $100,000 cash, obtains a loan on the property for $500,000, and assumes the first mortgage balance of $250,000. He also gives the sellers $100,000 of marketable securities that he purchased three years ago for $125,000. He paid a finder's fee of $5,000, legal fees of $6,000, and transfer taxes of $12,000. What is William's acquisition basis for the building? Does he have any other tax consequences as a result of this purchase?

Question 34

What is the purpose of the lease inclusion amount for automobiles?

Question 35

What is the difference between depreciation, depletion, and amortization?

Question 36

Jeremy purchased an asset for $12,000 at the beginning of the year. No Section 179 expensing or bonus depreciation is claimed for this property. Assuming the asset is depreciated over three years on a straight-line basis, no averaging conventions apply, Jeremy's tax rate is 35 percent, and he uses a 6 percent discount rate, what is the after-tax cost of the asset?

Question 37

What is a mixed-use asset? What adjustment must be made for depreciating a mixed-use asset?

Question 38

Morgan Corporation, a calendar-year corporation, purchased a $2,800,000 factory building in February, $950,000 of new machinery in April, $80,000 of new office furniture in August, $900,000 of used machinery in October, and $150,000 of additional new office furniture in December 2018.
What is the corporation's first year maximum cost recovery deduction assuming the corporation expects at least $2,500,000 of income before depreciation deductions in 2018?

Question 39

When would it be advisable to use the alternative depreciation system? Which properties must be depreciated by the alternative depreciation system?

Question 40

If a business acquired a new machine in 2018, explain how it could have recovered its cost most efficiently. How does this differ from the maximum cost recovery deduction if the machine was instead acquired in 2017?

Question 41

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Peter received his uncle's coin collection as a gift when it was valued at $150,000. Over the years, the uncle had purchased the coins for a total of $75,000. The uncle paid a $15,000 gift tax on the gift. What is Peter's basis in the coin collection?

A) $75,000
B) $82,500
C) $90,000
D) $150,000

Question 42

GFC Corporation purchased a new $50,000 automobile for business use by its president in June, 2018.

A) Determine the corporation's maximum depreciation deduction in years 1 and 2. In what year will the corporation take its final depreciation deduction if the car is held until fully depreciated?
B) How would your answers change if the automobile was purchased and placed in service in March of 2017?
C) How would your answer change if the automobile was used, purchased, and placed in service in March of 2017?

Question 43

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Alternative depreciation system

Question 44

Biggie Corporation can buy an auto for $29,500 (including taxes, license, and title fees) or it can lease the same car for $390 per month with $2,500 up front for tax, license, and fees. The corporation only keeps its cars for two years and it expects to be able to sell the car for $19,000 at the end of two years if it purchases the car. The corporation is in the 21 percent tax bracket, uses a 6 percent discount rate for evaluation, and assume that the lease inclusion amounts for years 1 and 2 are 70 and 150, respectively. Should Biggie Corporation buy or lease the auto in 2018 (assume lease payments are all made at the end of the year).

Question 45

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Mid-quarter convention

Question 46

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Half-year convention

Question 47

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Listed property limitations

Question 48

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
The cost of an asset with a useful life exceeding one year can be

A) Expensed immediately
B) Capitalized until disposal
C) Capitalized with part of the costs deducted annually
D) All of the above are possible depending on the asset

Question 49

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Mid-month convention

Question 50

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
The after-tax cost of an asset increases if

A) The cost recovery period is increased
B) The marginal tax rate increases
C) The discount percentage decreases
D) The asset's salvage value increases

Question 51

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Reduction for personal use

Question 52

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Mixed-use depreciation limitations

Question 53

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Section 179 expensing

Question 54

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Gribble Corporation acquires the Dibble Corporation for $7,200,000. On appraisal, the assets of Dibble Corporation have a fair market value of $6,800,000. The excess of the purchase price over the fair market value of the assets:

A) Can be apportioned to the assets based on their relative fair market value.
B) Is goodwill that is amortized over 15 years.
C) Is goodwill that is amortized over 40 years.
D) Must be capitalized until Dibble is sold.

Question 55

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Barber Corporation purchased all the assets of TECO Corporation for $1,820,000. An appraisal yielded the following: the building had a fair market value of $1,200,000; equipment a value of $1,000,000; and office equipment a value of $400,000. What is the depreciable basis for the office equipment?

A) $400,000
B) $300,000
C) $280,000
D) $250,000

Question 56

Warren leases an auto valued at $18,750 for his business and personal use on May 1, 2017. His extensive records indicate he used the automobile 85 percent for business and 15 percent for personal use. He starts making monthly lease payments of $235 on June 1, 2017. What are the tax consequences for Warren in year 1 and 2 as a result of this lease contract?

Question 57

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
The after-tax cost of an asset

A) Is higher for taxpayers with higher tax rates
B) Is lower for taxpayers with lower discount rates
C) Is higher for taxpayers with lower discount rates
D) Is not affected by the taxpayer's tax rate

Question 58

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Joan gives an asset valued at $12,000 with a basis of $10,000 to Mary; Joan dies six-months later leaving an asset valued at $10,000 with a basis of $12,000 to Larry. What are Mary's and Larry's bases in these assets if they are then sold for their fair market value?

A) Mary = $12,000; Larry = $12,000
B) Mary = $12,000; Larry = $10,000
C) Mary = $10,000; Larry = $12,000
D) Mary = $10,000; Larry = $10,000

Question 59

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
MACRS depreciation

Question 60

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Lease inclusion amounts

Question 61

The first and last years of MACRS depreciation deductions for a 7-year asset costing $20,000 using the half-year convention are:

A) $4,000 and $1,152
B) $2,858 and $892
C) $2,000 and $576
D) $1,428 and $1,428

Question 62

On October 12, 2018, Wilson Corporation (a calendar-year taxpayer) acquires 5-year property for $9,000. This is the only property acquired this year and neither Section 179 expensing nor bonus depreciation were claimed. What is Wilson's total depreciation deduction for 2018?

A) $1,800
B) $1,350
C) $900
D) $450

Question 63

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Jack did not depreciate one of his machines that cost $40,000 because he had net operating losses for the last two years. Which of the following statements is true?

A) Jack's basis in the asset is $40,000 this year.
B) Jack can deduct three year's depreciation in the current year.
C) Jack must file amended returns to claim the depreciation for prior years.
D) If Jack sells the machine for $20,000 this year, he has a $20,000 loss.

Question 64

Useful lives for realty include all of the following except:

A) 25 years
B) 27.5 years
C) 39 years
D) 40 years

Question 65

When fully depreciating 7-year property, the final year of depreciation will be year:

A) 5
B) 6
C) 7
D) 8

Question 66

On November 7, 2018, Wilson Corporation acquires 7-year property for $25,000. This is the only property acquired this year and neither Section 179 expensing nor bonus depreciation were claimed. What is Wilson's total depreciation deduction for 2018?

A) $893
B) $1,785
C) $2,678
D) $3,573

Question 67

The only acceptable convention for MACRS realty is

A) Mid-week
B) Mid-month
C) Mid-quarter
D) Half-year

Question 68

Gonzalez Corporation is a calendar-year taxpayer. What is the MACRS depreciation percentage deduction for the first year for a 7-year asset acquired February 15 under the mid-quarter convention.

A) 25%
B) 17.85%
C) 10.71%
D) 3.57%

Question 69

When fully depreciating 5-year property, the final year of depreciation will be year:

A) 6
B) 5
C) 4
D) 3

Question 70

MACRS means

A) Modified asset cost recovery system
B) Mid-year accelerated cost recovery system
C) Modified accelerated cost recovery system
D) Modified accelerated conventional recovery system

Question 71

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
The adjusted basis of an asset is:

A) Its acquisition price only
B) Acquisition cost less cost recovery
C) Acquisition cost less selling price
D) Only the cash used to purchase the asset

Question 72

MACRS depreciation for 5-year assets is based on:

A) Straight-line depreciation
B) 150 percent declining balance only
C) 200 percent declining balance with a switch to straight-line
D) 200 percent declining balance only

Question 73

Other Objective Questions
Indicated by a P for personalty, R for realty, or B for both personalty and realty which are subject to the following provisions:
Joe started a new business this year. He had purchased a computer two years ago for $4,000 and decided to use it in his business until he could afford a new system. He could purchase a new computer with the same specifications for $1,800, but his used computer is worth only $1,100. What is his computer's basis for depreciation?

A) $1,100
B) $1,800
C) $4,000
D) The computer cannot be depreciated because it was a personal asset.

Question 74

Harris Corporation (a calendar-year taxpayer), acquired a 5-year asset costing $10,000 on October 2^nd. What are the first and last years of MACRS depreciation deductions using the mid-quarter convention?

A) $3,500 and $138
B) $2,500 and $426
C) $1,500 and $706
D) $500 and $958

Question 75

Moore Corporation (a calendar-year taxpayer), acquired a 5-year asset costing $10,000 on April 2^nd. What are the first and last years of MACRS depreciation deductions using the mid-quarter convention?

A) $3,500 and $138
B) $2,500 and $426
C) $1,500 and $706
D) $500 and $958

Question 76

The first and last years of MACRS depreciation deductions for a 5-year asset costing $10,000 using the half-year convention are:

A) $2,000 and $2,000
B) $2,000 and $1,152
C) $2,000 and $576
D) $2,000 and $1,000

Question 77

During the year, Garbin Corporation (a calendar-year corporation that manufactures furniture) purchased the following assets: In computing depreciation of these assets, which of the following averaging conventions will be used?

A) Half-year and mid-month
B) Mid-quarter and mid-month
C) Half-year, mid-quarter, and mid-month
D) Mid-quarter only

Question 78

Conrad Corporation has a June 30 year end. What is the MACRS depreciation percentage deduction for the first year for a 5-year asset acquired October 15 under the mid-quarter convention.

A) 35%
B) 25%
C) 15%
D) 5%

Question 79

All of the following are acceptable conventions for MACRS property except:

A) Mid-week
B) Mid-month
C) Mid-quarter
D) Half-year

Question 80

Lopez Corporation is a calendar-year taxpayer. What is the MACRS depreciation percentage deduction for the last year for a 7-year asset acquired May 12 under the mid-quarter convention.

A) 1.09%
B) 3.33%
C) 5.53%
D) 7.64%