Question 1

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 through 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 through 3, Lucky Strike actually extracted 300,000 ounces of silver as follows:  What is Lucky Strike's depletion deduction for Year 2 if the applicable percentage depletion for silver is 15 percent?

Accepted Answer

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

Question 2

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 copyright has a remaining life of 75 months, what is the total amortization amount Jorge may deduct during the current year? (Assume this is not an asset acquisition to which §197 applies.)

Accepted Answer

The total amortization amount Jorge may deduct during the current year is calculated as follows:
Amortization Amount = Purchase Price / Remaining Months of Life
Amortization Amount = $75,000 / 75 months
Amortization Amount = $1,000 per month
Since the purchase occurred on July 15th, there are only 6.5 months remaining in the current year.
Amortization Amount for current year = $1,000 per month x 6.5 months
Amortization Amount for current year = $6,500
Therefore, the correct answer is C, $6,000

Question 3

Roth LLC purchased only one asset during the current year. On August 1^stRoth placed in service office equipment (seven-year property) with a basis of $47,500. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Half-Year Convention Table.) (Round final answer to the nearest whole number.)

Accepted Answer

The answer of Roth LLC purchased only one asset during...

Question 4

Jaussi purchased a computer several years ago for $2,200 and used it for personal purposes. On November 10 ^th 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?

Accepted Answer

The answer of Jaussi purchased a computer several years ago...

Question 5

Taylor LLC purchased an automobile for $55,000 on July 5, 2020. What is Taylor's maximum depreciation deduction for 2020 (including bonus depreciation) if its business use percentage is 100 percent?

Accepted Answer

Under the current tax law, the maximum bonus depreciation rate is 100%, and it applies to qualified property acquired and placed in service between September 27, 2017, and December 31, 2022. Since Taylor LLC acquired the automobile in 2020, it's eligible for bonus depreciation at 100% of the cost. Therefore, the total maximum depreciation deduction for 2020 is $55,000 x 100% = $55,000. However, there's a limit on how much depreciation can be taken on a passenger automobile, which is $18,100 for the first year under MACRS. So the answer is (C) $18,100.

Question 6

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 deducted (excluding amounts amortized over 180 months) for the year?

Accepted Answer

According to IRS rules, businesses can immediately deduct up to $5,000 of start-up costs incurred during the first year of business. Since Jasmine incurred $10,000 of start-up costs, she can deduct up to $5,000 immediately and must amortize the remaining costs over 180 months. Therefore, the correct answer is C.

Question 7

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 one-year noncompete agreement). Given that the noncompete agreement expires on September 30 ^th of Year 2, what is Brittany's amortization deduction for the second year? (Round final answer to the nearest whole number.)

Accepted Answer

The $50,000 allocated to §197 intangible assets is divided equally between goodwill and the noncompete agreement, so each is allocated $25,000. §197 intangible assets are amortized over a 15-year period. For the noncompete agreement, which expires after one year, the full $25,000 would be amortized in the first year. For the second year, only the goodwill remains to be amortized, which would be $25,000 over 15 years, resulting in an annual amortization of $1,667. However, since the acquisition occurred on September 30, only 3 months of amortization would be accounted for in Year 1, leaving 14 years and 9 months of amortization for the goodwill. The correct annual amortization for the goodwill is $25,000 divided by 15, but for the second year, we calculate for the full year, not just 3 months. Therefore, the annual amortization remains $1,667, but since we are looking for the second year's deduction and we have already accounted for 3 months in the first year, we continue with the full year's amortization for the second year, which does not change the calculation method but was misleading in the explanation. The correct answer, considering the full explanation, should reflect the amortization of the goodwill over its remaining life, which was mistakenly overlooked in the initial calculation. Given the error in the explanation regarding the second year's calculation and the focus on the first year's proration, the correct approach should involve recalculating based on the provided options and the understanding that the noncompete agreement's amortization is fully taken in the first year, leaving only the goodwill's amortization for the second year. The mistake was in the interpretation of how the amortization is applied across the years, especially with the proration in the first year and the full year's amortization in the second year for the remaining asset. Given this, the correct answer should reflect the amortization expense for the goodwill in the second year without the proration error introduced in the explanation. The calculation should solely focus on the goodwill's amortization for the second year, leading to a reconsideration of the provided options.

Question 8

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $956,250 for extraction rights. A geologist estimates that Santa Fe will recover 11,250 pounds of turquoise. During the current year, Santa Fe extracted 3,375 pounds of turquoise, which it sold for $608,000. What is Santa Fe's cost depletion deduction for the current year?

Accepted Answer

Cost depletion is calculated by dividing the cost of the extraction rights ($956,250) by the total estimated pounds of turquoise to be extracted (11,250 pounds) to get the depletion per pound ($85 per pound).

For the current year, Santa Fe extracted 3,375 pounds of turquoise, so the depletion expense is 3,375 x $85 = $286,875.

Question 9

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 amount she may deduct with respect to the start-up costs for her initial year, rounded to the nearest whole number?

Accepted Answer

The answer of Racine started a new business in the...

Question 10

Roth LLC purchased only one asset during the current year. On August 1^st Roth placed in service office equipment (seven-year property) with a basis of $42,500. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Half-Year Convention Table.) (Round final answer to the nearest whole number.)

Accepted Answer

The answer of Roth LLC purchased only one asset during...

Question 11

Daschle LLC completed some research and development during June of the current year. The related costs were $69,600. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization amount Daschle may deduct during the current year?

Accepted Answer

Research and development costs may be expensed or capitalized, with the latter option allowing for amortization over a period of time. The maximum period over which these costs can be amortized is five years. Therefore, if Daschle LLC wants to amortize the costs as quickly as possible, they would choose to amortize the full $69,600 over five years, resulting in an annual amortization amount of $13,920 ($69,600/5). However, since the costs were incurred in June of the current year, only half of this amount ($6,960) can be amortized in the current year. Therefore, the total amortization amount Daschle may deduct during the current year is $8,120 ($6,960 + $1,160 [half-year convention]).

Question 12

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

Accepted Answer

The answer of Eddie purchased only one asset during the...

Question 13

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

Accepted Answer

The answer of Flax LLC purchased only one asset this...

Question 14

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 deduction for the current year?

Accepted Answer

The answer of Santa Fe purchased the rights to extract...

Question 15

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 amount Daschle may deduct during the current year?

Accepted Answer

The answer of Daschle LLC completed some research and development...

Question 16

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 deduction for the current year? (Round final answer to the nearest whole number.)

Accepted Answer

Bethany can amortize the $25,000 allocated to goodwill over 15 years (180 months) starting with the month of acquisition. Since the acquisition was in March, there are 10 months remaining in the year (March through December). The annual amortization is $25,000 / 15 = $1,666.67. For 10 months, it's $1,666.67 * (10/12) = $1,388.89, which rounds to $1,389.

Question 17

Gessner LLC patented a process it developed in the current year. The patent is expected to create benefits for Gessner 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, Gessner had unamortized research expenditures of $15,000 related to the process. What is the total amortization amount Gessner may deduct during the current year?

Accepted Answer

The answer of Gessner LLC patented a process it developed...

Question 18

Jasmine started a new business in the current year. She incurred $22,000 of start-up costs. How much of the start-up costs can be immediately deducted (excluding amounts amortized over 180 months) for the year?

Accepted Answer

According to IRS guidelines, businesses can immediately deduct up to $5,000 of start-up costs in the first year. Jasmine incurred $22,000 of start-up costs, but only $5,000 can be immediately deducted, leaving $17,000 to be amortized over 180 months. Therefore, the correct answer is choice C, $5,000.

Question 19

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 deduction for the current year?

Accepted Answer

To calculate the cost depletion deduction, we need to first determine the cost per pound of turquoise. 
Cost per pound = total cost of extraction rights / estimated pounds of turquoise = $300,000 / 5,000 pounds = $60/pound. 
Next, we can calculate the depletion deduction for the year by multiplying the cost per pound by the number of pounds extracted and sold during the year: 
Depletion deduction = cost per pound x pounds extracted and sold = $60/pound x 1,500 pounds = $90,000.

Question 20

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 $66,000. If the copyright has a remaining life of 75 months, what is the total amortization amount Jorge may deduct during the current year? (Assume this is not an asset acquisition to which §197 applies.)

Accepted Answer

The amortization amount is calculated by dividing the purchase price by the remaining life in months and then multiplying by the number of months in the current year. $66,000 / 75 months = $880 per month. For the current year (July 15 to December 31), Jorge can amortize 6 months: $880 * 6 = $5,280.

Quiz 2: Property Acquisition and Cost Recovery

Jaussi purchased a computer several years ago for $2,200 and used it for personal purposes. On November 10 th 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?