Question 1

Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.

Accepted Answer

The IRS allows firms to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero. This is because percentage depletion is based on the gross income from the property, rather than its adjusted tax basis.

Question 2

Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false? 
A) Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years.
B) Poole must capitalize the expenditure if it extends the estimated useful life of an existing asset by three years.
C) Poole must capitalize the expenditure if it results in a long-term economic benefit to the company.
D) None of the above is false.

Accepted Answer

All of the statements are true. Poole must capitalize the expenditure if it creates a new asset, extends the useful life of an existing asset, or results in a long-term economic benefit to the company.

Question 3

NLT Inc. purchased only one item of tangible personalty in 2018. The cost of the item was $24,000. NLT's taxable income before any Section 179 deduction was $7,100. NLT can elect Section 179 for only $7,100 of the cost of the property.

Accepted Answer

NLT can elect to expense the entire cost but it can deduct only $7,100 of this expense.

Question 4

BriarHill Inc. purchased four items of tangible personalty in 2018 at a total cost of $3,579,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

Accepted Answer

Because BriarHill purchased more than $3,500,000 of qualifying property, its limited dollar amount is reduced to zero.

Question 5

A firm must capitalize start-up expenditures of a new business in excess of $5,000 but may deduct expansion costs of an existing business.

Accepted Answer

Start-up expenditures for a new business must be capitalized if they exceed $5,000, but expansion costs for an existing business may be deducted, subject to certain limitations.

Question 6

Selkie Inc. paid a $2 million lump sum to purchase a business. According to the contract, the seller of the business is prohibited from engaging in a similar business for 18 months. Selkie allocated $300,000 of the purchase price to this covenant not to compete. Selkie may amortize the $300,000 over 15 years.

Accepted Answer

This is correct. The $300,000 allocated to the covenant not to compete can be amortized over 15 years according to the contract terms.

Question 7

Purchased goodwill is amortizable both for book and tax accounting purposes.

Accepted Answer

While purchased goodwill was previously amortizable for book accounting purposes, it is now considered to have an indefinite life and is no longer amortized. However, for tax accounting purposes, purchased goodwill is still amortizable over 15 years.

Question 8

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 12. The MACRS depreciation calculation assumes that the building was placed in service on May 15 (midquarter).

Accepted Answer

The MACRS calculation for buildings uses a midmonth convention.

Question 9

The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.

Accepted Answer

The cost is depreciable under MACRS.

Question 10

This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return.

Accepted Answer

The answer of This year, Nigle Inc.'s auditors required the...

Question 11

Conant Company purchased only one item of tangible personalty in 2018. The cost of the item was $2,539,700. Conant can elect to expense $1,000,000 of this cost.

Accepted Answer

Conant can elect to expense $960,300 of the cost ($1,000,000 ? [$2,539,700 - $2,500,000]).

Question 12

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

Accepted Answer

The first $5,000 of organizational costs are deductible in the year incurred.

Question 13

The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes.

Accepted Answer

The answer of The uniform capitalization rules generally allow many...

Question 14

MACRS depreciation for buildings is based on the straight-line method.

Accepted Answer

MACRS depreciation for buildings is based on the straight-line method over a 39-year period.

Question 15

For tax purposes, the cost basis of an asset does not include any portion of the purchase price paid through debt financing.

Accepted Answer

The cost basis of an asset includes any portion of the purchase price paid through debt financing, in addition to the cash paid. This is because the leverage used to purchase the asset also affects the cost basis.

Question 16

If a business expenditure creates or enhances an identifiable asset with a useful life substantially beyond the current year, the expenditure must be capitalized.

Accepted Answer

This is the general rule for capitalizing business expenditures under GAAP (Generally Accepted Accounting Principles).

Question 17

Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

Accepted Answer

Firms can deduct the greater of cost depletion or percentage depletion.

Question 18

Stanley Inc., a calendar year taxpayer, purchased a building and placed it in service on June 3. The MACRS depreciation calculation assumes that the building was placed in service on June 15.

Accepted Answer

MACRS depreciation assumes that property is placed in service in the middle of the month in which it was actually placed in service, unless the taxpayer elects out of this convention. Therefore, if the building was placed in service on June 3, MACRS depreciation would assume it was placed in service on June 15.

Question 19

An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.

Accepted Answer

Adjusted book basis and adjusted tax basis represent the historical cost of an asset with adjustments made for depreciation and other factors. Fair market value is determined by market conditions and may be higher or lower than the adjusted book basis or adjusted tax basis.

Question 20

Richland Company purchased an asset in 2015 for $50,000 and sold it in 2018. The asset was 7-year recovery property. Richland's 2018 MACRS depreciation on the asset was $6,245.

Accepted Answer

MACRS depreciation was $3,123 ([$50,000 × 12.49%] × 50% [half-year]).

Quiz 7: Property Acquisitions and Cost Recovery Deductions