Question 1

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

Accepted Answer

The cash outflow is the cost of the asset when acquired. The cash inflow is the sum of the present value of inflows in years one through six in which depreciation is taken. The present value of the inflow in each year is determined by the cost recovery deduction times the taxpayer's marginal tax rate (the tax reduction due to depreciation expense) times the discount factor used by the taxpayer for evaluation. The net cash flow is the difference between this initial outflow and the sum of the present value of inflows.

Question 2

Wolfgang, a calendar-year taxpayer, purchased a $100,000 piece of residential rental realty in April of year 1.
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?

Accepted Answer

a. Year 1: $100,000 x .02576 = $2,576; Year 2: $100,000 x .03636 = $3,636
b. Year 20: $100,000 x .03637 x (7.5/12) = $2,273
c. Year 1: $100,000 x .01819 = $1,819; Year 2 = $100,000 x .02564 = $2,564
Year 20: $100,000 x .02564 x (7.5/12) = $1,603

Question 3

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 $130,000 of additional new office furniture in December.
a. What is the corporation's maximum cost recovery deduction for 2011 assuming the corporation expects at least $2,000,000 of income before depreciation deductions in 2011.
b. How would your answers change if the furniture and machinery will not be purchased until 2012?

Accepted Answer

a. For 2011: $1,030,000/$2,060,000 = 50% personalty acquired in the last quarter of the tax year; Section 179 allows $500,000 to be expensed but qualifying assets exceed $2,000,000 by $60,000; thus the corporation can only expense $440,000 under Section 179. If the corporation expenses $440,000 of the used machines acquired in October, the half-year convention can be used for the remaining machines and office equipment ($590,000/$1,620,000 = 36%). It is important to maximize the Section 179 expense deduction on the used machines as they are not eligible for bonus depreciation.
Building: $2,800,000 x .02247 = $62,916 depreciation
New Machinery: $950,000 @ 100% bonus depreciation
New Office furniture 1: $80,000 @ 100% bonus depreciation
New Office furniture 2: $130,000 @ 100% bonus depreciation
Used Machinery: $440,000 expensed under Section 179 + ([$900,000 - $440,000] .1429) = $505,734
Total cost recovery in 2011 = $1,728,650 ($62,916 + $950,000 + $80,000 + $130,000 + 505,734)
b. Income exceeds $625,000 in 2012 so that no Section 179 expense deduction is allowed and bonus depreciation is reduced to 50%. The new machinery and the office furniture are eligible for the 50% bonus depreciation.
Building: $2,800,000 x .02247 = $62,916 depreciation
New Machinery: ($950,000 x .50) + ([$950,000 - $475,000].1429) = $542,877.50 bonus and MACRS depreciation
Office furniture 1: ($80,000 x .50) + ([$80,000 - $40,000] .1429) = $45,716 bonus and MACRS depreciation
Office furniture 2: ($130,000 x .50) + ([$130,000 - $65,000] .1429) = $74,288.50 bonus and MACRS depreciation
Used Machinery: $900,000 x .1429) = $128,610
Total cost recovery in 2012 = 854,408 ($62,916 + $542,877.50 + $45,716 + $74,288.50 + $128,610)

Question 4

Warren leases an auto valued at $19,750 for his business and personal use on May 1, 2011. 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, 2011. What are the tax consequences for Warren in years 1 and 2 as a result of this lease contract?

Accepted Answer

The answer of Warren leases an auto valued at $19,750...

Question 5

Concorde Corporation purchased a coal mine for $2,000,000. It estimates the mine contains at least 800,000 tons of coal. In year 1, it mines and sells 40,000 tons. At the end of the year, it revises the estimates of the tons of coal available for mining to 600,000. In year 2 it sells the 60,000 of 75,000 tons mined in year 2. Determine Concorde's depletion deduction in years 1 and 2.

Accepted Answer

The answer of Concorde Corporation purchased a coal mine for...

Question 6

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) depreciation applies to both personalty (personal property) and realty (real property).

Question 7

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

Section 179 expensing primarily applies to personal property (personalty) used in a business, allowing businesses to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost to be capitalized and depreciated.

Question 8

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

The answer of Indicated by a P for personalty, R...

Question 9

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

The alternative depreciation system can apply to both personalty (personal property) and realty (real property), depending on specific circumstances and tax regulations.

Question 10

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

The answer of Indicated by a P for personalty, R...

Question 11

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

The mid-quarter convention is applicable to personal property (personalty), not real property (realty). It is used for tax depreciation purposes to determine the depreciation schedule for personal property acquired and placed in service during the tax year.

Question 12

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

Lease inclusion amounts typically apply to personalty (personal property) leases, such as leases for vehicles or equipment, rather than realty (real estate) leases.

Question 13

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

Listed property limitations apply to personalty, which includes certain types of property that can be used for both business and personal purposes, such as vehicles and computers. These limitations do not apply to realty.

Question 14

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

The half-year convention is a method used primarily for personal property (personalty) in tax calculations, allowing for a half-year's worth of depreciation in the year the property is placed in service and the year it is disposed of, regardless of the actual date of acquisition or disposal. This convention is not typically applied to real property (realty).

Question 15

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
A)personalty(P)
B)realty(R)
C)both(B)

Accepted Answer

Mixed-use depreciation limitations apply to both personalty and realty, as these rules can affect assets that are used for both personal and business purposes, encompassing both types of property.

Question 16

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?
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

Accepted Answer

The answer of Joan gives an asset valued at $12,000...

Question 17

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

Accepted Answer

The Modified Accelerated Cost Recovery System (MACRS) allows for a half-year convention, meaning in the first year, only half a year's depreciation is claimed regardless of when the asset was actually purchased. For a 5-year asset, the first year's depreciation is 20% of the cost, so $2,000 for a $10,000 asset. In the final year, the asset is also subject to the half-year convention, which results in a smaller amount than the standard yearly depreciation. The correct final year amount, according to the MACRS 5-year schedule, is $576, which accounts for the half-year convention and the diminishing balance method used in MACRS.

Question 18

During the year, Garbin Corporation (a calendar-year corporation that manufactures furniture) purchased the following assets:
$$\begin{array} { l c r } 
\text { Date } &  { \text { Asset } } & { \text { Cost } } \
\text { February 15 } & \text { Tools } & \$ 40,000 \
\text { March 3 } & \text { Machines } & 50,000 \
\text { October 6 } & \text { Office Building } & 110,000
\end{array}$$
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

Accepted Answer

The half-year convention is used for assets placed in service or disposed of during the first half of the year, and the mid-month convention is used for assets placed in service or disposed of during the second half of the year.

Question 19

Cora purchased a new machine for $1,735,000 and some used office furniture for $480,000 in July 2011. What is Cora's maximum cost recovery deduction?
A) $316524
B) $886,092
C) $2,047,866
D) $2,215,000

Accepted Answer

$1,735,000 bonus depreciation; $285,000 Sec. 179 Exp. [$500,000 - ($2,215,000 - $2,000,000)];($480,000 - $285,000) x .1429 = $27,866 MACRS depreciation; total cost recovery = $1,735,000 + $285,000 + $27,866 = $2,047,866

Question 20

Chipper, a calendar-year corporation, purchased new machinery for $1,125,000 in February, 2011. In October, it purchased $1,075,000 of used machinery. What is Chipper's maximum cost recovery deduction for 2011?
A) $2,200,000
B) $1,578,603
C) $1,452,668
D) $1,321,473

Accepted Answer

$1,125,000 bonus depreciation + [$500,000 - ($2,500,000 - $2,200,000) = $300,000 Sec. 179 expense allowed on the used machinery] + ($775,000 x .0357)= $1,452,667.50 The mid-quarter convention must be used because more than 40% is placed in service in the last quarter [($1,075,000 - $300,000) / ($1,125,000 + $1,075,000 - $300,000) = 40.79%]

Quiz 6: Property Acquisitions and Cost Recovery Deductions

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

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

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

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

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

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

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

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

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

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

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

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?

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

Cora purchased a new machine for $1,735,000 and some used office furniture for $480,000 in July 2011. What is Cora's maximum cost recovery deduction?

Chipper, a calendar-year corporation, purchased new machinery for $1,125,000 in February, 2011. In October, it purchased $1,075,000 of used machinery. What is Chipper's maximum cost recovery deduction for 2011?