Question 1

Depreciation on property in the five-year MACRS class is claimed over a period of six tax years due to the half-year convention.

Accepted Answer

Property in the five-year MACRS class is typically subject to the half-year convention, which means that depreciation is claimed for half of the first year and the full amount of depreciation is claimed for the next four years. However, since the property is being depreciated over five years but only allowed six years under the half-year convention, the depreciation will be claimed over a period of six tax years.

Question 2

Residential real estate purchased during 2014 is assigned a 27.5-year cost recovery period under the Modified Accelerated Cost Recovery System.

Accepted Answer

This statement is true according to IRS guidelines.

Question 3

Automobiles placed in service in 2014 generally have a 3-year cost recovery period under the Modified Accelerated Cost Recovery System (MACRS).

Accepted Answer

Under MACRS, automobiles generally have a 5-year cost recovery period, not 3 years.

Question 4

In general, accrual basis taxpayers recognize income when it is earned, regardless of when it is received.

Accepted Answer

Accrual basis taxpayers recognize income when it is earned, regardless of when it is received. This is in contrast to cash basis taxpayers who only recognize income when it is actually received.

Question 5

Under MACRS, the same method of depreciation (accelerated or straight-line) must be used for all property in a given class placed in service during that year.

Accepted Answer

This statement is true. MACRS (Modified Accelerated Cost Recovery System) specifies a set of recovery periods and depreciation methods to be used for different classes of property. The same depreciation method (either accelerated or straight-line) must be used for all property within a given class placed in service during the same tax year.

Question 6

Taxpayers may expense the cost of depreciable personal property placed in service during the year and used in a trade or business in an amount up to a maximum of $20,000 annually.

Accepted Answer

The answer of Taxpayers may expense the cost of depreciable...

Question 7

In applying the statutory rates from the MACRS tables, the cost of the asset must first be reduced by the prior year's depreciation.

Accepted Answer

The answer of In applying the statutory rates from the...

Question 8

All S corporations must use the accrual basis of accounting.

Accepted Answer

S corporations are allowed to use either the accrual basis or the cash basis of accounting.

Question 9

Taxpayers must use the straight-line method of depreciation for all productive assets.

Accepted Answer

Taxpayers have the option to use different methods of depreciation such as accelerated depreciation or the MACRS (Modified Accelerated Cost Recovery System) for certain assets. However, some assets may be required to use the straight-line method by law.

Question 10

Expenditures incurred to maintain an asset in good operating condition must be depreciated over the remaining useful life of the asset.

Accepted Answer

Expenditures incurred to maintain an asset in good operating condition are considered repairs and maintenance expenses, which are expensed in the period they are incurred, not depreciated over time.

Question 11

The hybrid method of accounting involves the use of both the accrual and cash methods of accounting.

Accepted Answer

The hybrid method of accounting combines the accrual and cash methods, allowing businesses to use whichever method is most appropriate for each transaction.

Question 12

Depreciation is the process of allocating the cost of assets to expense over a period of years.

Accepted Answer

Depreciation is indeed the process of spreading out the cost of long-term assets over their useful lives to match the expense with the revenue they generate.

Question 13

Depreciation refers to the physical deterioration or loss of value of an asset.

Accepted Answer

Depreciation refers to the allocation of the cost of an asset over its useful life for accounting and tax purposes, not necessarily its physical deterioration.

Question 14

Most partnerships, S corporations, and personal service corporations owned by individuals choose a September 30 year-end so that they may defer 3 months of income.

Accepted Answer

There is no one specific year-end that is preferred by all partnerships, S corporations, and personal service corporations. It depends on the specific business and its individual circumstances. Deferring income is one possible reason for choosing a later year-end, but it is not the only reason or the most important factor to consider.

Question 15

If land declines in value, it may be depreciated for tax purposes.

Accepted Answer

Land is considered a non-depreciable asset for tax purposes. It does not lose value over time like buildings or equipment, so it cannot be depreciated.

Question 16

Maintenance costs for capital assets are deducted in the year the amount is paid or incurred.

Accepted Answer

Maintenance costs for capital assets are considered an expense and are deductible in the year they are paid or incurred. This helps to offset the cost of maintaining the asset and ensure its continued usefulness over time.

Question 17

Generally, cash basis taxpayers must account for payments of prepaid interest using the accrual method.

Accepted Answer

This is because prepaid interest is considered an expense that has been paid in advance and should be recognized as an expense when it becomes due, which is typically over the life of the loan or mortgage.

Question 18

Under the cash basis of accounting, expenses are generally deducted in the year they are paid.

Accepted Answer

Under the cash basis of accounting, expenses are deducted in the year they are paid, regardless of when they were incurred. This is different from the accrual basis of accounting, where expenses are deducted in the year they were incurred, regardless of when they are paid.

Question 19

If an asset's actual useful life is longer than the assigned recovery period, the MACRS tables cannot be used.

Accepted Answer

The MACRS tables can be used regardless of the actual useful life of the asset. However, if the actual useful life is longer than the assigned recovery period, a portion of the asset's basis may still be depreciated using the straight-line method after the end of the recovery period. This is known as the "unrecovered basis."

Question 20

"Annualizing" is a method by which the taxpayer can usually decrease the amount of tax he or she pays.

Accepted Answer

Annualizing does not decrease the amount of tax paid by the taxpayer. It is a method used to calculate the amount of tax owed when the taxpayer has uneven income throughout the year. This allows for more accurate estimated tax payments and can prevent underpayment penalties.

Quiz 7: Accounting Periods and Methods and Depreciation