Deck 10: Property Acquisition and Cost Recovery

Question 1

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.

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

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.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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

Question 10

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 11

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

Question 12

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.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

Taxpayers use the half-year convention for all assets.

Question 20

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

Question 21

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

Question 22

Tax cost recovery methods do not include:

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

Question 23

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

Question 24

Which of the following business assets is not depreciated?

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

Question 25

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 theintangible.

Question 26

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 27

An office desk is an example of:

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

Question 28

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

Question 29

All assets subject to amortization have the same recovery period.

Question 30

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

Question 31

Significant limits are placed on the depreciation of luxury automobiles.

Question 32

Cost depletion is available to all natural resource producers.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

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

Question 37

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

Question 38

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

Question 39

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 company airplane used by the CEO for business travel.
D) A computer used solely to monitor the CEO's investments and to complete her Form 1040.
E) All of the assets are personal-use and personal property.

Question 40

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 41

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

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

Question 42

Which is not an allowable method under MACRS?

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

Question 43

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

Question 44

The MACRS recovery period for automobiles and computers is:

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

Question 45

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

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

Question 46

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

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

Question 47

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

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

Question 48

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

Question 49

Which of the following assets is eligible for bonus depreciation?

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

Question 50

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

Question 51

Which of the allowable methods allows the most accelerated depreciation?

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

Question 52

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

Question 53

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

Question 54

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

Question 55

depreciation). (Use MACRS Table 2 in the text) (Round final answer to the nearest whole number)

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

Question 56

How is the recovery period of an asset determined?

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

Question 57

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

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

Question 58

Tax depreciation is currently calculated under what system?

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

Question 59

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

Question 60

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

Question 61

Jaussi purchased a computer several years ago for $2,200 and used it for personal purposes. On November 10th of the current year, when the fair market value of the computer was $800, Jaussi converted it to business use. What is Jaussi's tax basis for the computer?

Question 62

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 63

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-yearperiod. 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 depletionexpense for the current year?

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

Question 64

During August of the prior year, Julio purchased an apartment building that he used as a rental property. The basis was $1,400,000. Calculate the maximum depreciation expense during the current year. (Use MACRS Table 3 in the text)

Question 65

An office building was purchased on December 9th several years ago for $2,500,000. The purchase price was allocated as follows: building $1,900,000, landscaping $100,000, and land $500,000. During the current year, the 10th year, the building was sold on March 10th. Calculate the maximum depreciation expense for the real property during the current year, rounded to the nearest wholenumber. (Use MACRS Table 5 in the text)

Question 66

Eddie purchased only one asset during the current year. Eddie placed in service furniture (7-year property) on May 1st with a basis of $26,500. Calculate the maximum depreciation expense, rounded to the nearest whole number (ignoring §179 and bonus depreciation). (Use MACRS Table 1)

Question 67

Bonnie Jo used two assets during the current year. The first was computer equipment with an original basis of $15,000, currently in the second year of depreciation, and under the half-yearconvention. This asset was disposed of on October 1st of the current year. The second was furniture with an original basis of $24,000 placed in service during the first quarter, currently in the fourth year of depreciation, and under the mid-quarter convention. What is Bonnie Jo's depreciationexpense for the current year? (Round final answer to the nearest whole number) (Use MACRSTable 1 and Table 2)

Question 68

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

Question 69

Yasmin purchased two assets during the current year. Yasmin placed in service computer equipment(5-year property) on May 26th with a basis of $10,000 and machinery (7-year property) on December9th with a basis of $10,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2 in the text)

Question 70

Roth, LLC purchased only one asset during the current year. Roth placed in service computer equipment (5-year property) on November 1st with a basis of $42,500. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2 in the text)

Question 71

During April of the current year, Ronen purchased a warehouse that he used for business purposes.The basis was $1,600,000. Calculate the maximum depreciation expense during the current year. (Use MACRS Table 5 in the text)

Question 72

Kristine sold two assets on March 20th of the current year. The first was machinery with an original basis of $51,000, currently in the fourth year of depreciation, and under the half-year convention. The second was furniture with an original basis of $16,000 placed in service during the fourth quarter, currently in the third year of depreciation, and under the mid-quarter convention. What is Kristine's depreciation expense for the current year if the depreciation recovery period is 7-years? (Use MACRS Table 1 and Table 2) EXHIBIT 10-6 (Round final answer to the nearest whole number)

Question 73

Flax, LLC purchased only one asset this year. Flax placed in service a computer (5-year property) on January 16 with a basis of $14,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1)

Question 74

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-yearperiod. 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, whichit sold for $250,000. What is Santa Fe's cost depletion expense for the current year?

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

Question 75

Teddy purchased only one asset during the current year. Teddy placed in service machinery (7-year property) on October 1st with a basis of $76,500. Calculate the maximum depreciation expense,rounded to the nearest whole number (ignoring §179 and bonus depreciation). (Use MACRS Table2 in the text)

Question 76

Amit purchased two assets during the current year. Amit placed in service computer equipment(5-year property) on April 16th with a basis of $5,000 and furniture (7-year property) on September9th with a basis of $20,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1)

Question 77

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

Question 78

Timothy purchased a new computer for his consulting practice on October 15th of the current year.The basis of the computer was $4,000. During the Thanksgiving holiday, he decided the computer didn't meet his business needs and gave it to his college-aged son in another state. The computer was never used for business purposes again. Timothy had $50,000 of taxable income before depreciation. What is Timothy's total cost recovery expense with respect to the computer during the current year?

Question 79

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

Question 80

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