Question 1

Terrance Inc., a calendar year taxpayer, purchased used equipment for $2,765,000 and placed it in service on March 4, 2017. The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2017.
a. Compute Terrance's tax depreciation with respect to the equipment for 2017 and 2018.
b. Compute Terrance's adjusted basis in the equipment on December 31, 2018.
c. How would your answers to a. and b. change if the equipment was placed in service in 2018 instead of 2017?

Accepted Answer

The answer of Terrance Inc., a calendar year taxpayer, purchased...

Question 2

Creighton, a calendar year corporation, reported $5,571,000 net income before tax on its financial statements prepared in accordance with GAAP. 
The corporate records reveal the following information.
• Creighton's depreciation expense per books was $40,980, and its MACRS depreciation deduction was $77,270.
• Creighton capitalized $32,670 indirect expenses to manufactured inventory for book purposes and $48,020 indirect expenses to manufactured inventory under the unicap tax rules.
• Creighton's cost of goods sold for book purposes was $1,093,800, and its cost of goods sold for tax purposes was $1,107,200.
• Creighton purchased a competitor's business on May 1 and allocated $468,000 to the business' goodwill.
Compute Creighton's taxable income.

Accepted Answer

The answer of Creighton, a calendar year corporation, reported $5,571,000...

Question 3

NRW Company, a calendar year taxpayer, purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building. NRW placed the realty in service on August 2, 2018.
a. Compute NRW's MACRS depreciation with respect to the realty for 2018 and 2019.
b. Compute NRW's adjusted basis in the land and building on December 31, 2019.
c. How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?

Accepted Answer

The answer of NRW Company, a calendar year taxpayer, purchased...

Question 4

Which of the following statements about the depletion deduction is false?

Accepted Answer

The depletion deduction can exceed the unrecovered cost basis in the depletable asset if the taxpayer uses percentage depletion.

Question 5

Shelley purchased a residential apartment for $1,400,000 and placed it in service on September 5. Which of the following statements is false?

Accepted Answer

Shelley is allowed a prorated amount of MACRS depreciation based on the mid-month convention, not a half-year, since the property was placed in service in September.

Question 6

B&P Inc., a calendar year corporation, purchased only one operating asset during 2017: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2017.

Accepted Answer

Accumulated tax depreciation is $527,980 ($510,000 Section 179 deduction + 20% × ($599,900 - $510,000). Adjusted tax basis is $71,920 ($599,900 - $527,980).

Question 7

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. Which of the following statements is true?

Accepted Answer

The answer of Driller Inc. has $498,200 of unrecovered capitalized...

Question 8

Follen Company is a calendar year taxpayer. On September 1, Follen signed a 24-month lease on 3,800 square feet of commercial office space. Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease. It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements. The rewiring qualifies as five-year recovery property. Compute Follen's first-year cost recovery deductions relating to the lease space.

Accepted Answer

The answer of Follen Company is a calendar year taxpayer....

Question 9

On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:

Accepted Answer

The mid-quarter convention is used when more than 40% of the total depreciable basis of property is placed in service in the last quarter of the tax year. Since the property was placed in service in November, which is in the last quarter, the mid-quarter convention applies.

Question 10

Which of the following intangible assets is not amortizable for tax purposes?

Accepted Answer

Partnership interest is not amortizable for tax purposes as it is not considered as an intangible asset by the IRS. Organizational costs and patents are both amortizable over their useful lives for tax purposes, but a partnership interest does not fall under the category of assets that can be amortized through tax deductions.

Question 11

On May 1, Sessi Inc., a calendar year corporation, purchased a business for a $2 million lump-sum price. 
The business' balance sheet assets had the following appraised FMV.
Accounts receivable $\quad$$\quad$$ 38,900 
Inventory $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$450,000 
Tangible personality $\quad$$\quad$ 225,000 
*Realty: 
Building $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$500,000 
Land $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 50,000 
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$1,263,900 
a. Compute the cost basis of the goodwill acquired by Sessi Inc. on the purchase of this business.
b. Compute Sessi's goodwill amortization deduction for the year of purchase.
c. Use a 35 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

Accepted Answer

The answer of On May 1, Sessi Inc., a calendar...

Question 12

Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. 
-This year, Bettis' auditors required Bettis to write the goodwill down to $500,000 and record a $100,000 impairment expense. Because of the accounting treatment of goodwill, Bettis has a current:

Accepted Answer

Bettis's $40,000 annual amortization deduction and its $100,000 nondeductible impairment expense net to a $60,000 unfavorable excess of taxable income over book income.

Question 13

Pratt Inc. reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return. As a result, Pratt has a $57,800:

Accepted Answer

The difference between book depreciation and MACRS depreciation is a temporary difference, as it will reverse over time. Since MACRS depreciation is higher, it results in a lower taxable income, which is favorable.

Question 14

Which of the following expenditures must be capitalized for tax purposes?

Accepted Answer

Leasehold costs must be capitalized for tax purposes as they are considered an improvement to the property and provide a benefit over a period of time.

Question 15

Lisle Inc. manufactures small appliances in three plants in the Southeast. Which of the following statements is true?

Accepted Answer

If a company uses LIFO for tax purposes in the United States, it must also use LIFO for financial reporting purposes due to the LIFO conformity rule.

Quiz 7: Property Acquisitions and Cost Recovery Deductions