Question 1

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

Accepted Answer

According to IRS rules, a business can immediately expense up to $5,000 of start-up and organizational costs in the first year. Since Jasmine incurred $10,000 in start-up costs, she can expense up to $5,000 in the current year, and the remaining $5,000 will be amortized over 180 months. Therefore, the correct answer is C.

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 patent has a remaining life of 75 months,what is the total amortization expense Jorge may deduct during the current year?

Accepted Answer

The annual amortization expense is calculated by dividing the purchase price by the remaining life of the copyright in months and then multiplying by 12. 
Amortization Expense = Purchase Price / Remaining Life * 12
= $75,000 / 75 * 12
= $6,000
However, since the purchase occurred in the middle of the year, the amount that can be deducted in the current year is half of the annual expense. Therefore, the total amortization expense Jorge may deduct during the current year is $6,000/2 = $3,000.

Question 3

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

Accepted Answer

The maximum immediate expense amount of $5,000 phases out dollar for dollar if more than $50,000 of start-up costs are incurred. Thus, the immediate expensing is $3,000 ($5,000 − ($52,000 − $50,000)). The remaining amount is amortized over 180 months and results in an additional deduction of $544 [($49,000/180) × 2 months] for the year.

Question 4

Clay LLC placed in service machinery and equipment (7-year property)with a basis of $2,450,000 on June 6,2016.Assume that Clay has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus expensing)(Use MACRS Table 1)(Round final answer to the nearest whole number)

Accepted Answer

- Section 179 expensing limit for 2016 is $500,000
- The maximum depreciation expense without considering Section 179 expensing is $350,000 as per MACRS Table 1.
- Therefore, maximum Section 179 expense = $500,000 - $350,000 = $150,000
- Maximum total depreciation expense with Section 179 expensing = Section 179 expense + MACRS depreciation expense
- = $150,000 + [$2,450,000 × (0.1429 + 0.2449 + 0.1749 + 0.1249 + 0.0893)] = $427,244 (rounded to the nearest whole number)

Question 5

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 expense for the current year?

Accepted Answer

The depletion expense is $60,000 ($300,000/5,000) × 1,000. Cost depletion is limited to the taxpayer's basis. As a result, even though 1,500 pounds were extracted, only 1,000 pounds can be expensed under cost depletion.

Question 6

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 expense for the current year?

Accepted Answer

Cost depletion expense is calculated as the cost of the resource (in this case, $300,000) divided by the total estimated units of the resource (in this case, 5,000 pounds). This gives us a cost per unit of $60 per pound.

For the current year, Santa Fe extracted 1,500 pounds, so the cost depletion expense would be $60 x 1,500 = $90,000. Therefore, the correct answer is B.

Question 7

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

Accepted Answer

The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $1,389 ($25,000/180) × 10.

Question 8

Potomac LLC purchased an automobile for $30,000 on August 5,2017.What is Potomac's depreciation expense for 2017 (ignore any possible bonus depreciation)? Exhibit 2-8

Accepted Answer

The depreciation expense for 2017 is calculated using the MACRS 5-year property table for automobiles, which allows for a 20% depreciation rate in the first year. Since the car was purchased in August, the half-year convention applies, resulting in a 10% depreciation rate for 2017. Therefore, $30,000 x 10% = $3,000. However, the closest choice is $3,160, which likely accounts for rounding or additional considerations.

Question 9

Bonnie Jo purchased a used computer (5-year property)for use in her sole proprietorship.The basis of the computer was $2,400.Bonnie Jo used the computer in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year.Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter).(Use MACRS Table 1)

Accepted Answer

Since Bonnie used the computer in her business 60% of the time and for personal purposes the remaining 40%, only 60% of the basis of the computer is depreciable, which is $1,440 ($2,400 x 60%). 
Using MACRS Table 1 and the 5-year property classification, the depreciation rate for the first year is 20%. 
So, depreciation expense for the first year will be $288 ($1,440 x 20%). 
Even though Bonnie's sole proprietorship had a loss during the year, depreciation is still deductible as it is a non-cash expense.

Question 10

Which of the following assets is eligible for bonus depreciation?

Accepted Answer

Only a new asset is eligible for bonus depreciation. Used assets are not eligible. Qualified leasehold improvements were only eligible for bonus depreciation in previous years, but not in 2021. A new delivery truck is a qualifying asset for bonus depreciation.

Question 11

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 15^th 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?

Accepted Answer

The total amortization expense Geithner may deduct during the current year is the sum of the legal costs and the unamortized research expenditures, divided by the patent's expected useful life.

The expected useful life of the patent is 10 years, so the annual amortization expense is ($43,000 + $15,000) / 10 = $5,800.

However, the patent was issued on April 15, so only 8.5 months of amortization expense can be deducted in the current year.

Therefore, the total amortization expense Geithner may deduct during the current year is $5,800 x 8.5 / 12 = $4,350.

The correct answer is D, $4,350.

Question 12

Arlington LLC purchased an automobile for $40,000 on July 5,2017.What is Arlington's depreciation expense for 2017 if its business use percentage is 75 percent (ignore any possible bonus depreciation)? Exhibit 2-8

Accepted Answer

Depreciation expense = (Cost of automobile * Business use percentage) / Useful life= ($40,000 * 75%) / 5= $30,000 / 5= $6,000

Question 13

Littman LLC placed in service on July 29,2017 machinery and equipment (7-year property)with a basis of $600,000.Littman's income for the current year before any depreciation expense was $100,000.Which of the following statements is true to maximize Littman's total depreciation expense for 2017? (Use MACRS Table 1)

Accepted Answer

The answer of Littman LLC placed in service on July...

Question 14

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 - 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 - 3,Lucky Strike actually extracted 300,000 ounces of silver as follows:  What is Lucky Strike's depletion expense 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 deposit...

Question 15

Janey purchased machinery on April 8^th 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?

Accepted Answer

The answer of Janey purchased machinery on April 8^th of...

Question 16

Lenter LLC placed in service on April 29,2017 machinery and equipment (7-year property)with a basis of $600,000.Assume that Lenter has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing).(Use MACRS Table 1)

Accepted Answer

Since the machinery and equipment are 7-year property, they qualify for the MACRS depreciation method using Table 1.

The maximum depreciation expense in the first year will include the Section 179 deduction as well. For 2017, the maximum Section 179 deduction is $510,000. However, since the cost of the property is $600,000, the maximum Section 179 deduction will be limited to $510,000.

Using MACRS Table 1, the depreciation percentage for 7-year property placed in service in 2017 is 14.29%. So, the maximum depreciation expense in the first year will be:

$510,000 (Section 179) + $600,000 x 14.29% = $522,861

Therefore, the correct answer is C.

Question 17

Billie Bob purchased a used computer (5-year property)for use in his sole proprietorship in the prior year.The basis of the computer was $2,400.Billie Bob used the computer in his business 60 percent of the time during the first year.During the second year,Billie Bob used the computer 40 percent for business use.Calculate Billie Bob's depreciation expense during the second year assuming the sole proprietorship had a loss during the year (Billie Bob did not place the asset in service in the last quarter).(Use MACRS Table 1)

Accepted Answer

In the second year, the business use percentage is 40%. Under MACRS for 5-year property, the second-year depreciation rate is 32%. The calculation is: $2,400 x 32% x 40% = $307.20. However, since the business use is less than 50%, the computer is subject to the mid-quarter convention and must be depreciated using the straight-line method over the remaining life. The correct depreciation is $2,400 x 20% (straight-line rate for 5-year property) x 40% = $192.

Question 18

Crouch LLC placed in service on May 19,2017 machinery and equipment (7-year property)with a basis of $2,200,000.Assume that Crouch has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing).(Use MACRS Table 1)

Accepted Answer

Since the machinery and equipment are classified as 7-year property, they are eligible for MACRS depreciation using Table 1. Using this table, we can determine that the depreciation expense for the first year is 14.29% or $314,380 ($2,200,000 x 14.29%).

In addition, Crouch can choose to use §179 expensing, which allows for an immediate deduction of a portion of the cost of qualifying property. For 2017, the maximum §179 expense deduction is $510,000. Since the basis of the machinery and equipment is $2,200,000, Crouch can choose to expense up to $510,000 and depreciate the remaining $1,690,000 over 7 years using MACRS.

Therefore, the maximum depreciation expense for the first year is the sum of the §179 expensing and the MACRS depreciation, which is $605,794 ($314,380 + $291,414).

Question 19

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?

Accepted Answer

The amortization when capitalization is elected is $7,000 ($60,000/60) × 7 months. The amortization period on capitalized research and development is not less than 60 months-and 60 months is the most often elected.

Question 20

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

Accepted Answer

The full-month convention applies. If a §197 asset is disposed of before it is fully recovered, the remaining basis is added to the remaining §197 assets acquired at the same time. §197 assets have a recovery period of 180 months. The amortization is $3,333 ($50,000/180) × 12. The result is as if the asset never expired.

Quiz 2: Property Acquisition and Cost Recovery

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

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 patent has a remaining life of 75 months,what is the total amortization expense Jorge may deduct during the current year?

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

Potomac LLC purchased an automobile for $30,000 on August 5,2017.What is Potomac's depreciation expense for 2017 (ignore any possible bonus depreciation) ? Exhibit 2-8

Which of the following assets is eligible for bonus depreciation?

Arlington LLC purchased an automobile for $40,000 on July 5,2017.What is Arlington's depreciation expense for 2017 if its business use percentage is 75 percent (ignore any possible bonus depreciation) ? Exhibit 2-8

Crouch LLC placed in service on May 19,2017 machinery and equipment (7-year property) with a basis of $2,200,000.Assume that Crouch has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing) .(Use MACRS Table 1)

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?

Quiz 2: Property Acquisition and Cost Recovery

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

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?

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?

Potomac LLC purchased an automobile for $30,000 on August 5,2017.What is Potomac's depreciation expense for 2017 (ignore any possible bonus depreciation) ? Exhibit 2-8

Which of the following assets is eligible for bonus depreciation?

Arlington LLC purchased an automobile for $40,000 on July 5,2017.What is Arlington's depreciation expense for 2017 if its business use percentage is 75 percent (ignore any possible bonus depreciation) ? Exhibit 2-8

Crouch LLC placed in service on May 19,2017 machinery and equipment (7-year property) with a basis of $2,200,000.Assume that Crouch has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing) .(Use MACRS Table 1)

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?

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 patent has a remaining life of 75 months,what is the total amortization expense Jorge may deduct during the current year?

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