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8 CHAPTER DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION Instructor: The test items in both the print Test Bank and ExamView test-creation software are numbered by question type within each chapter. Thus, users of ExamView can more easily preview their selections using the printed Test Bank in the same numbering system. Learning Objective, Level of Difficulty, Estimated Time to Completion, and the AACSB's and AICPA's Core Competencies for each test item are located within the item itself. Question/ Problem Status: Present Edition Q/P in Prior Edition Topic TRUE OR FALSE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Cost recovery: concept Cost recovery: allowed and allowable Cost recovery: antiques Cost recovery: recovery period commences Cost recovery: land improvements Cost recovery: conversion to business use Cost recovery: MACRS Cost recovery: MACRS Cost recovery: half-year convention Cost recovery: mid-quarter convention Cost recovery: mid-quarter convention Cost recovery: MACRS real property Cost recovery: MACRS real property Cost recovery: MACRS real property Cost recovery: straight-line Cost recovery: straight-line and mid-quarter convention Cost recovery: farm property Cost recovery: farm property Cost recovery: farm property Cost recovery: leasehold improvement property Cost recovery: leasehold improvement property Section 179 expensing Section 179 expensing Section 179 expensing Section 179 expensing: effect of MACRS Section 179 expensing: effect on basis New Unchanged New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New New Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged New Modified Unchanged Unchanged Unchanged Unchanged 2 4 5 6 7 8 9 12 13 14 15 16 18 19 20 22 23 24 25 26 Question/ Problem 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Topic Section 179 expensing: production of income property Listed property: 280F limits Listed property: 179 expensing Listed property: 50% business use test Listed property: effect of statutory dollar amounts Listed property: statutory dollar amounts Listed property: statutory dollar amounts and mid-quarter convention Listed property: cost recovery recapture Listed property: leasing and inclusion amount Listed property: substantiation Alternative depreciation system (ADS): AMT adjustment ADS: straight-line ADS: convention for personalty ADS: election to use ADS: election to use ADS: convention for realty Covenant not to compete: 197 intangible Amortization of acquired goodwill Amortization: self-created intangibles Start-up expenditures Start-up expenditures Depletion: cost Depletion: percentage Depletion: intangible drilling costs MULTIPLE CHOICE Status: Present Edition Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged Modified Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged Q/P in Prior Edition 27 28 30 31 32 33 34 35 36 38 39 40 41 42 43 44 45 47 48 49 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Cost recovery: placed in service Cost recovery: eligible property Cost recovery: basis of property converted to rental use Cost recovery: allowed and allowable Cost recovery: MACRS personal property Cost recovery: MACRS personal property Cost recovery: MACRS personal property Cost recovery: MACRS personal property Cost recovery: MACRS personal property Cost recovery: MACRS personal property Cost recovery: MACRS real property Cost recovery: MACRS real property Cost recovery: MACRS real property Cost recovery: MACRS real property Farm property Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Modified Unchanged Unchanged Modified Unchanged Unchanged Unchanged Unchanged Unchanged 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Question/ Problem 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Farm property Farm property Topic Leasehold improvement property Leasehold improvement property Section 179 expensing and MACRS Section 179 expensing and MACRS Section 179 expensing Listed property Listed property Listed property: luxury auto Listed property: luxury auto Listed property: luxury auto Listed property: luxury auto Listed property: cost recovery recapture Listed property: cost recovery recapture Listed property: luxury auto and weight exception Listed property: leasing Listed property: leasing Alternative depreciation system (ADS) ADS: E & P ADS Amortization: self-created goodwill Amortization: 197 intangible Start-up expenditures Depletion: cost versus percentage PROBLEMS New New Status: Present Edition Modified Modified New New Unchanged Unchanged Unchanged Modified Modified Modified Modified Modified Modified Modified Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Q/P in Prior Edition 18 19 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 1 2 3 4 5 6 7 8 9 10 11 12 13 Cost recovery: MACRS personal property Cost recovery: MACRS real property Cost recovery: MACRS personal property and 179 expensing Cost recovery: MACRS real property Cost recovery: MACRS personal property and 179 expensing Cost recovery: MACRS personal property, 179 expensing, and mid-quarter convention Cost recovery: farm property Cost recovery: leasehold improvement property Listed property and 179 expensing Listed property: luxury auto and recapture Listed property: luxury auto Listed property: predominant business use Depletion: cost versus percentage Unchanged Unchanged Modified Unchanged Modified Modified Modified Modified Unchanged Modified Unchanged Unchanged Unchanged 1 2 3 4 5 6 7 8 9 10 11 12 13 Question/ Problem Topic ESSAY Status: Present Edition Q/P in Prior Edition 1 2 3 4 5 6 7 Cost recovery: half-year versus mid-quarter convention Cost recovery: MACRS realty and residential rental classification Cost recovery: farm property Listed property: 179 and production of income use Listed property: luxury auto and SUV limit Listed property: leasing Start-up expenditures Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged 1 2 3 4 5 6 7 TRUE/FALSE 1. The concept of depreciation is based on the premise that an asset benefits more than one accounting period. Register to View AnswerOBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-3 NAT: AICPA FN-Reporting | AACSB Analytic 2. The basis of cost recovery property must be reduced by the cost recovery allowed and by not less than the cost recovery allowable. Register to View AnswerOBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: NAT: AICPA FN-Reporting | AACSB Analytic p. 8-4 3. Antiques are not eligible for cost recovery. Register to View AnswerOBJ: 1 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-4 NAT: AICPA FN-Reporting | AACSB Analytic 4. The key date for calculating cost recovery is the date the asset is purchased. Register to View AnswerThe key date for calculating cost recovery is the date the asset is placed in service. PTS: 1 DIF: 1 REF: p. 8-4 NAT: AICPA FN-Reporting | AACSB Analytic 5. Land improvements are generally not eligible for cost recovery. Register to View AnswerLand improvements are 15-year class property. PTS: 1 DIF: 1 REF: Exhibit 8.1 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min OBJ: 1 MSC: 2 min 6. The cost recovery basis for property converted from personal use to business use is the adjusted basis of the property at the time of the conversion. Register to View AnswerThe cost recovery basis for property converted from personal use to business use is the lower of the fair market value or the adjusted basis at the time of the conversion. PTS: 1 DIF: 1 REF: p. 8-5 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 2 min 7.The cost recovery method for all personal property under MACRS is 200% declining balance. Register to View AnswerMACRS uses both 200% and 150% declining balance depending on the class of the property. PTS: 1 DIF: 1 REF: p. 8-7 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 2 min 8. If 150% declining-balance is used, there is no straight-line switchover. Register to View AnswerThe straight-line switchover takes place whether 200% or 150% declining-balance is used. PTS: 1 DIF: 1 REF: p. 8-7 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 2 min 9. Under the MACRS half-year convention, an asset sold on December 10 will be treated as though it were sold on July 1 for a calendar year taxpayer. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-8 NAT: AICPA FN-Measurement | AACSB Analytic 10. If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property will be allowed 1.5 months of cost recovery. Register to View AnswerOnly the property placed in service during the last quarter will be allowed 1.5 months of cost recovery. PTS: 1 DIF: 1 REF: p. 8-9 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 2 min 11. Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is sold. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-9 NAT: AICPA FN-Measurement | AACSB Analytic 12. All eligible real estate under MACRS is permitted a full month of cost recovery in the month of disposition. Register to View AnswerOne-half month of cost recovery is permitted in the month of disposition for realty under MACRS. PTS: 1 OBJ: 2 MSC: 2 min DIF: 1 REF: p. 8-11 | Concept Summary 8.2 NAT: AICPA FN-Measurement | AACSB Analytic 13.Hotels placed in service after May 12, 1993 have a cost recovery period of 39 years. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-10 NAT: AICPA FN-Measurement | AACSB Analytic 14. Apartment buildings are classified as residential rental real estate. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-10 NAT: AICPA FN-Measurement | AACSB Analytic 15. Taxpayers may elect to use the straight-line method under MACRS for personalty. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-11 NAT: AICPA FN-Measurement | AACSB Analytic 16. Under the MACRS straight-line election for personalty, the mid-quarter convention is not applicable. Register to View AnswerThe mid-quarter convention is applicable under the MACRS straight-line election for personalty. PTS: 1 DIF: 1 REF: p. 8-11 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 2 min 17. The cost recovery period for new farm equipment placed in service during 2009 is seven years. Register to View AnswerThe cost recovery period for such farm equipment is five years. PTS: 1 DIF: 1 REF: p. 8-12 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 2 MSC: 2 min 18. In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-11 | p. 8-12 NAT: AICPA FN-Measurement | AACSB Analytic 19. In a farming business, if an election is made to not have the uniform capitalization rules apply, cost is recovered using the ADS straight-line method. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-12 NAT: AICPA FN-Measurement | AACSB Analytic 20. When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss can be taken for the unrecovered basis. Register to View AnswerPTS: 1 DIF: 1 REF: p. 8-13 OBJ: 2 MSC: 2 min NAT: AICPA FN-Measurement | AACSB Analytic 21. The costs of qualified leasehold improvements owned by the lessee are recovered over a 15-year MACRS recovery period. Register to View AnswerOBJ: 2 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-12 NAT: AICPA FN-Measurement | AACSB Analytic 22. For all property placed in service in 2009, the 179 maximum deduction is limited to $250,000. Register to View AnswerThis is the statutory ceiling amount for the deduction in 2009, but only personalty is eligible for 179 expensing. PTS: 1 DIF: 1 REF: p. 8-14 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 3 MSC: 2 min 23. The 179 deduction can exceed $250,000 in 2009 if the taxpayer had a 179 amount which exceeded the taxable income limitation in the prior year. Register to View AnswerThe 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1) the statutory dollar amount ($250,000 in 2009) reduced by the cost of 179 property placed in service in excess of $800,000 in the carryforward year or (2) the business income limitation in the carryforward year. PTS: 1 DIF: 1 REF: p. 8-14 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 3 MSC: 5 min 24. Any 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year. Register to View AnswerOBJ: 3 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-14 NAT: AICPA FN-Measurement | AACSB Analytic 25. Taxable income for purposes of 179 limited expensing is computed without regard to MACRS. Register to View AnswerMACRS depreciation is a deduction in computing taxable income for purposes of the 179 limitations. PTS: 1 DIF: 1 REF: p. 8-14 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 3 MSC: 2 min 26. The basis of property for cost recovery is reduced by the 179 amount that is disallowed because of the business income limitation. Register to View AnswerThe basis is reduced by the 179 amount before the business income ceiling is applied. PTS: 1 DIF: 1 REF: p. 8-15 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 3 MSC: 2 min 27.Property used for the production of income is not eligible for 179 expensing. Register to View AnswerOBJ: 3 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-14 NAT: AICPA FN-Measurement | AACSB Analytic 28. The statutory dollar cost recovery limits under 280F apply to all automobiles. Register to View AnswerThe statutory cost recovery limits under 280F apply only to automobiles which meet the definition of a passenger automobile (e.g., do not apply to a taxi). PTS: 1 DIF: 1 REF: p. 8-16 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min 29. The 179 limit for a sports utility vehicle with a GVW of 7,000 pounds used in a trade or business is $25,000. Register to View AnswerOBJ: 3 | 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-14 | p. 8-18 NAT: AICPA FN-Measurement | AACSB Analytic 30. Once the more-than-50% business usage test is passed for listed property, it does not matter if the business usage for the property drops to 50% or less during the recovery period. Register to View AnswerIf the business usage declines to 50% or less, the straight-line method must be used and the property is subject to cost recovery recapture. PTS: 1 OBJ: 4 MSC: 2 min DIF: 1 REF: p. 8-18 | p. 8-19 NAT: AICPA FN-Measurement | AACSB Analytic 31. If a new car that is used predominantly in business is placed in service in 2009, the statutory dollar cost recovery limit under 280F will depend on whether the taxpayer takes MARCS or straight-line depreciation. Register to View AnswerThe statutory cost recovery limits apply regardless of whether MACRS or straight-line apply. PTS: 1 OBJ: 4 MSC: 2 min DIF: 1 REF: p. 8-16 | p. 8-17 NAT: AICPA FN-Measurement | AACSB Analytic 32. If an automobile is placed in service in 2009, the limitation for cost recovery in 2011 will be based on the cost recovery limits for the year 2011. Register to View AnswerThe limits will be based on the limits for automobiles placed in service in 2009. PTS: 1 DIF: 1 REF: p. 8-17 OBJ: 4 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 2 min 33. The statutory dollar cost recovery limits under 280F for passenger automobiles do not apply if midquarter cost recovery is used. Register to View AnswerThe 280F limits apply to all passenger automobiles, regardless of the MACRS convention used. PTS: 1 DIF: 1 REF: p. 8-16 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 2 min 34. If an $80,000 automobile used 100% for business in the first year (2009) fails the 50% business usage test in the second year, no cost recovery will be recaptured. Register to View AnswerThe total cost recovery deduction for the first year would be $10,960 ( 280F limit). The cost recovery in the first year using straight-line would be $8,000 [($80,000 10% = $8,000) (limited to $10,960; 280F limit)]. So the cost recovery recapture would be $2,960 ($10,960 $8,000). PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-18 | p. 8-19 NAT: AICPA FN-Measurement | AACSB Analytic 35. The inclusion amount for a leased automobile is not adjusted by a business usage percentage. Register to View AnswerThe inclusion amount for a leased automobile is adjusted for business use. PTS: 1 OBJ: 4 MSC: 2 min DIF: 1 REF: p. 8-19 | p. 8-20 NAT: AICPA FN-Measurement | AACSB Analytic 36. All listed property is subject to the substantiation requirements of 274. Register to View AnswerOBJ: 4 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-20 NAT: AICPA FN-Measurement | AACSB Analytic 37. If a taxpayer uses regular MACRS for all property, an alternative minimum tax adjustment is made with respect to the depreciation on all property. Register to View AnswerNo adjustment is required on 15 and 20-year class property because they use 150% declining-balance depreciation. PTS: 1 OBJ: 2 | 5 MSC: 2 min DIF: 1 REF: p. 8-20 to 8-22 NAT: AICPA FN-Measurement | AACSB Analytic 38.ADS 150% declining-balance depreciation is used to compute earnings and profits. Register to View AnswerADS straight-line depreciation is used to compute earnings and profits. PTS: 1 DIF: 1 REF: p. 8-20 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 5 MSC: 2 min 39. Under the alternative depreciation system (ADS), only the half-year convention is applicable for personalty. Register to View AnswerThe mid-quarter convention also is applicable for personalty. PTS: 1 OBJ: 5 MSC: 2 min DIF: 1 REF: p. 8-20 | p. 8-21 NAT: AICPA FN-Measurement | AACSB Analytic 40. A taxpayer may elect to use the alternative depreciation system (ADS) for computing taxable income. Register to View AnswerOBJ: 5 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-20 | p. 8-21 NAT: AICPA FN-Measurement | AACSB Analytic 41. An election to use straight-line under ADS is made on a class-by-class basis for property other than eligible real estate. Register to View AnswerOBJ: 5 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-22 NAT: AICPA FN-Measurement | AACSB Analytic 42. For real property, the ADS convention is the mid-month convention. Register to View AnswerOBJ: 5 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-21 NAT: AICPA FN-Measurement | AACSB Analytic 43. The cost of a covenant not to complete for five years incurred in connection with the acquisition of a business is amortized over 15 years. Register to View AnswerOBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-22 NAT: AICPA FN-Measurement | AACSB Analytic 44. Goodwill associated with the acquisition of a business cannot be amortized. Register to View AnswerSuch goodwill is a 197 intangible and is amortized over a 15-year period. PTS: 1 DIF: 1 REF: p. 8-22 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 7 MSC: 2 min 45.Self-created intangibles are generally not 197 intangibles. Register to View AnswerOBJ: 7 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-22 NAT: AICPA FN-Measurement | AACSB Analytic 46. If startup expenses total $60,000, the total amount is amortized over 180 months. Register to View AnswerThe potential $5,000 deduction available in addition to the 180-month amortization in the first year has been phased out. PTS: 1 DIF: 1 REF: p. 8-23 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 7 MSC: 2 min 47. The amortization period for $4,000 of startup expenses is 180 months. Register to View AnswerThe first $5,000 of startup expenses may be expensed if total startup expenses do not exceed $50,000. PTS: 1 DIF: 1 REF: p. 8-23 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 7 MSC: 2 min 48. Cost depletion is determined by multiplying the depletion cost per unit by the number of units produced. Register to View AnswerCost depletion is determined by multiplying the depletion cost per unit by the number of units sold (not produced). PTS: 1 DIF: 1 REF: p. 8-25 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 8 MSC: 2 min 49. Percentage depletion enables the taxpayer to recover more than the cost of an asset. Register to View AnswerPercentage depletion can be taken even though the basis in the asset has been reduced to zero by depletion deductions. PTS: 1 OBJ: 8 MSC: 2 min DIF: 1 REF: p. 8-26 | p. 8-27 NAT: AICPA FN-Measurement | AACSB Analytic 50. Intangible drilling costs may be expensed rather than capitalized and written off through depletion. Register to View AnswerOBJ: 8 MSC: 2 min PTS: 1 DIF: 1 REF: p. 8-27 NAT: AICPA FN-Measurement | AACSB Analytic MULTIPLE CHOICE 1. Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in February of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin: a. In the current year using a mid-quarter convention. b. In the current year using a half-year convention. c. In the following year using a mid-quarter convention. d. In the following year using a half-year convention. e. None of the above. Register to View AnswerOBJ: 1 | 2 MSC: 5 min PTS: 1 DIF: 1 REF: p. 8-4 | p. 8-8 | p. 8-9 NAT: AICPA FN-Measurement | AACSB Analytic 2. Which of the following assets would be subject to cost recovery? a. A painting by Picasso hanging on a doctor's office wall. b. An antique vase in a doctor's waiting room. c. Improvements to a parking lot used by a doctor's patients. d. a., b., and c. e. None of the above. Register to View AnswerPersonal property used in a trade or business is subject to cost recovery. Neither of the assets in a. or b. is subject to a decline in value from use. Therefore, neither is eligible for cost recovery. PTS: 1 DIF: 1 REF: p. 8-4 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 1 MSC: 5 min 3. On June 1 of the current year, Tab converted a machine to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery? a. $70,000. b. $90,000. c. $120,000. d. $140,000. e. None of the above. Register to View AnswerThe basis is $90,000, the lower of the adjusted basis ($120,000) or fair market value ($90,000) at the date of conversion. PTS: 1 OBJ: 1 MSC: 5 min DIF: 1 REF: p. 8-5 | Example 3 NAT: AICPA FN-Measurement | AACSB Analytic 4.Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows: Year 1 Year 2 Year 3 Cost Recovery Allowed $16,000 9,600 5,760 Cost Recovery Allowable $ 8,000 12,800 7,680 If Tara sells the machine after three years for $15,000, how much gain should she recognize? a. $3,480. b. $6,360. c. $9,240. d. $11,480. e. None of the above. Register to View AnswerCost Less the greater of cost recovery allowed or allowable ($16,000 + $12,800 + $7,680) Adjusted basis The recognized gain is $11,480 ($15,000 $3,520). PTS: 1 DIF: 1 REF: Example 2 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 1 MSC: 5 min $40,000 (36,480) $ 3,520 5. Hazel purchased a new business asset (five-year property) on November 30, 2009, at a cost of $100,000. This was the only asset acquired by Hazel during 2009. On January 7, 2010, Hazel placed the asset in service. She did not elect to expense any of the asset cost under 179, nor did she elect straight-line cost recovery. Hazel did elect not to take additional first-year depreciation. On October 25, 2011, Hazel sold the asset. Determine the cost recovery for 2011. a. $9,600. b. $16,000. c. $26,000. d. $38,000. e. None of the above. Register to View AnswerThe asset was placed in service in 2010; so 2011 is the second year in the cost recovery period. $100,000 .32 1/2 = $16,000. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-7 | p. 8-8 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic 6.Tan Company acquires a new machine (ten-year property) on January 15, 2009, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2009, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the 179 election. Tan did elect not to take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2009. a. $24,000. b. $25,716. c. $102,000. d. $132,858. e. None of the above. Register to View AnswerThe regular MACRS is calculated as follows: 10-year property ($200,000 .10) 7-year property ($40,000 .1429) Total regular MACRS PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-5 to 8-8 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic $20,000 5,716 $25,716 7. James purchased a new business asset (three-year property) on July 23, 2009, at a cost of $50,000. He did not elect to expense any of the asset under 179, nor did he elect straight-line cost recovery. Determine the cost recovery deduction for 2009. a. $8,333. b. $16,665. c. $33,333. d. $41,665. e. None of the above. Register to View AnswerAdditional first-year depreciation is $25,000 ($50,000 50%). Regular MACRS is $8,333 ($25,000 . 3333). So the total cost recovery deduction is $33,333 ($25,000 + $8,333). PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-5 to 8-9 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic 8. Alice purchased office furniture on September 20, 2009, for $100,000. On October 10, she purchased business computers for $80,000. Alice did not elect to expense any of the assets under 179, nor did she elect straight-line cost recovery. Alice does elect not to take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2009. a. $6,426. b. $14,710. c. $25,722. d. $30,290. e. None of the above. Register to View AnswerThe mid-quarter convention applies. Regular MACRS Furniture (seven-year property) $100,000 .1071 Computers (five-year property) $80,000 .05 Total cost recovery PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-5 to 8-9 | Table 8.2 NAT: AICPA FN-Measurement | AACSB Analytic $10,710 4,000 $14,710 9. Barry purchased a used business asset (seven-year property) on November 30, 2009, at a cost of $60,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under 179, nor did he elect straight-line cost recovery. Barry sold the asset on July 17, 2010. Determine the cost recovery deduction for 2010. a. $9,566. b. $9,975. c. $10,331. d. $16,530. e. None of the above. Register to View AnswerThe mid-quarter convention applies in this case [$60,000 .2755 2.5/4 = $10,331]. Additional firstyear depreciation was not taken in 2009 because the business asset was used rather than being new. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-5 to 8-10 | Table 8.2 NAT: AICPA FN-Measurement | AACSB Analytic 10. Bonnie purchased a new business asset (five-year property) on March 10, 2009, at a cost of $20,000. She also purchased a new business asset (seven-year property) on November 20, 2009, at a cost of $13,000. Bonnie did not elect to expense either of the assets under 179, nor did she elect straight-line cost recovery. Determine the cost recovery deduction for 2009 for these assets. a. $5,858. b. $7,464. c. $9,586. d. $19,429. e. None of the above. Register to View AnswerThe half-year convention applies in this case. Five-year property: Additional first-year depreciation ($20,000 50%) Regular MACRS ($10,000 .20) $10,000 2,000 Seven-year property: Additional first-year depreciation ($13,000 50%) Regular MACRS ($6,500 .1429) Total cost recovery PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-5 to 8-10 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic 6,500 929 $19,429 11. Doug purchased a new factory building on January 15, 1987, for $4,000,000. On March 1, 2009, the building was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS straight-line method. a. $0. b. $15,870. c. $26,450. d. $126,960. e. None of the above. Register to View Answer.03174 $4,000,000 2.5/12 = $26,450. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-10 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 12. Cora purchased a hotel building on May 17, 2009, for $3,000,000. Determine the cost recovery deduction for 2010. a. $48,150. b. $59,520. c. $69,000. d. $109,080. e. None of the above. Register to View AnswerThe hotel building is nonresidential realty. .02564 $3,000,000 = $76,920. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-10 | p. 8-11 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 13. Carlos purchased an apartment building on November 16, 1989, for $1,000,000. Determine the cost recovery for 2009. a. $36,360. b. $32,100. c. $45,500. d. $331,850. e. None of the above. Register to View Answer$1,000,000 .03637 = $36,370. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-10 | p. 8-11 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 14. Diane purchased a factory building on November 15, 1993, for $5,000,000. She sells the factory building on February 2, 2009. Determine the cost recovery deduction for the year of the sale. a. $16,025. b. $19,844. c. $26,458. d. e. $158,750. None of the above. Register to View Answer.02564 $5,000,000 1.5/12 = $16,025. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-10 | p. 8-11 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 15. Howard's business is raising and harvesting peaches. On March 10, 2009, Howard purchased 10,000 new peach trees at a cost of $50,000. Howard does not elect to expense assets under 179. Determine the cost recovery deduction for 2009. a. $0. b. $1,250. c. $2,500. d. $10,000. e. None of the above. Register to View Answer.05 $50,000 = $2,500. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-11 | p. 8-12 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic 16. On May 15, 2009, Brent purchased new farm equipment for $40,000. Brent used the equipment in connection with his farming business. Brent does not elect to expense assets under 179. Brent does elect not to take additional first-year depreciation. Determine the cost recovery deduction for 2009. a. $4,000. b. $6,000. c. $8,000. d. $10,000. e. None of the above. Register to View Answer.15 $40,000 = $6,000. PTS: 1 DIF: 1 REF: p. 8-11 | p. 8-12 | Table 8.4 OBJ: 2 MSC: 5 min NAT: AICPA FN-Measurement | AACSB Analytic 17.On June 1, 2009, Sam purchased new farm machinery for $50,000. Sam used the machinery in connection with his farming business. Sam does not elect to expense assets under 179. Sam has, however, made an election to not have the uniform capitalization rules apply to the farming business. Sam does elect not to take additional first-year depreciation. Determine the cost recovery deduction for 2009. a. $5,000. b. $7,500. c. $10,000. d. $12,500. e. None of the above. Register to View Answer.05 $50,000 = $2,500. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-11 | p. 8-12 | Table 8.5 NAT: AICPA FN-Measurement | AACSB Analytic 18. On May 30, 2009, Jane signed a 20-year lease on a building to use for her business. The lease begins on June 1, 2009. In August of 2009, Jane paid $100,000 for qualified leasehold improvements to the building. Determine Jane's cost recovery for the improvements for 2009. a. $0. b. $963. c. $1,391. d. $5,000. e. None of the above. Register to View Answer.05 $100,000 = $5,000. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-12 | p. 8-13 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 19. On February 20, 2009, Susan paid $200,000 for a unique qualified leasehold improvement to a building that she is going to lease to John. The lease will begin on June 1, 2009, and terminate on May 31, 2029. At the termination of the lease, the improvement will be worthless. Determine Susan's deductible loss as a result of the termination of the lease. a. $0. b. $97,863. c. $99,786. d. $102,991. e. None of the above. Register to View AnswerCost Less: cost recovery (all recovered over 16 years) Loss (unrecovered cost) PTS: 1 OBJ: 2 MSC: 10 min DIF: 2 REF: p. 8-11 | p. 8-12 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic $200,000 (200,000) $ 0 20. White Company acquires a new machine (seven-year property) on January 10, 2009, at a cost of $840,000. White makes the election to expense the maximum amount under 179. No election is made to use the straight-line method. White does elect not to take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2009 assuming White has taxable income of $500,000. a. $90,027. b. $120,036. c. $250,000. d. $334,311. e. None of the above. Register to View Answer 179 deduction [$250,000 ($840,000 $800,000)] Regular MACRS [($840,000 $210,000) .1429] Total deduction PTS: 1 OBJ: 2 | 3 MSC: 10 min DIF: 2 REF: p. 8-14 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic $210,000 90,027 $300,027 21. Augie purchased one new asset during the year (five-year property) on November 10, 2009, at a cost of $600,000. She made the 179 election. The income from the business before the cost recovery deduction and the 179 deduction was $300,000. Determine the total cost recovery deduction with respect to the asset for 2009. a. $120,000. b. $433,750. c. $552,500. d. $600,000. e. None of the above. Register to View AnswerThe mid-quarter convention applies to the MACRS calculation. 179 amount Additional first-year depreciation [($600,000 $250,000) 50%] Regular MACRS [($600,000 $250,000 $175,000) .05] Income from the business before cost recovery Less: MACRS 179 business income limitation So the total cost recovery deduction is $433,750 ($250,000 + $175,000 + $8,750). PTS: 1 OBJ: 2 | 3 MSC: 10 min DIF: 2 REF: p. 8-14 | Table 8.2 NAT: AICPA FN-Measurement | AACSB Analytic $250,000 $175,000 $ 8,750 $300,000 (8,750) $291,250 22.In 2008, Gail had a 179 deduction carryover of $15,000. In 2009, she elected 179 for an asset acquired at a cost of $115,000. Gail's 179 business income limitation for 2009 is $127,000. Determine Gail's 179 deduction for 2009. a. $15,000. b. $115,000. c. $128,000. d. $130,000. e. None of the above. Register to View Answer$130,000 ($15,000 + $115,000), limited to $127,000. PTS: 1 OBJ: 3 MSC: 5 min DIF: 1 REF: p. 8-14 | p. 8-15 NAT: AICPA FN-Measurement | AACSB Analytic 23. The only asset Bill purchased during 2009 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under 179 whenever it is applicable. The net income from the business before the 179 deduction is $100,000. Determine Bill's maximum deduction with respect to the property for 2009. a. $1,428. b. $2,499. c. $26,749. d. $33,375. e. None of the above. Register to View AnswerThe listed property does not pass the predominantly business usage test. Therefore, neither 179 expensing nor additional first-year depreciation can be taken. In addition, only straight-line cost recovery can be used. Maximum deduction ($50,000 .0714 70%) PTS: 1 OBJ: 2 | 3 | 4 MSC: 5 min DIF: 1 REF: p. 8-15 to 8-18 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic $2,499 24. Mary purchased a new five-year class asset on March 7, 2009. The asset was listed property (not an automobile). It was used 60% for business and the rest of the time for personal use. The asset cost $120,000. Mary made the 179 election. The income from the business before the 179 deduction was $200,000. Determine the total deductions with respect to the asset for 2009. a. $18,000. b. $24,000. c. $72,000. d. $102,000. e. None of the above. Register to View AnswerCost 179 expense Basis for cost recovery PTS: 1 OBJ: 3 | 4 MSC: 5 min Business Use (60%) $72,000 (72,000) $ 0 Personal Use (40%) $48,000 DIF: 1 REF: p. 8-14 to 8-16 NAT: AICPA FN-Measurement | AACSB Analytic 25. Hans purchased a new passenger automobile on August 17, 2009, for $40,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2009. a. $500. b. $1,000. c. $1,184. d. $1,500. e. None of the above. Register to View AnswerThe car, which is listed property, does not pass the predominantly business usage test. Therefore, neither 179 expensing nor additional first-year depreciation can be taken. $40,000 .100 = $4,000 (not over $2,960 limit*). $2,960 40% = $1,184. *These depreciation limits are indexed annually. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-16 | p. 8-17 | Example 25 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic 26. On June 1, 2009, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does elect not to take additional first-year depreciation. Determine the cost recovery deduction for 2010. a. $3,060. b. $3,290. c. $3,360. d. $6,720. e. None of the above. Register to View Answer$21,000 32% = $6,720 (limited to $4,800*). $4,800 70% = $3,360. *These depreciation limits are indexed annually. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: Example 24 | Example 25 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic 27.On June 1, 2009, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) Determine the cost recovery deduction for 2009. a. $1,836. b. $4,800. c. $8,000. d. $11,060. e. None of the above. Register to View Answer$40,000 .20 = $8,000 (limited to $10,960*). $8,000 60% = $4,800. *These depreciation limits are indexed annually. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-16 to 8-18 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic 28. On May 2, 2009, Karen places in service a new sports utility vehicle that cost $70,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 40% for business and 60% for personal use. Determine the cost recovery deduction for 2009. a. $1,224. b. $2,800. c. $7,000. d. $18,000. e. None of the above. Register to View AnswerThe vehicle is not a passenger automobile because the gross vehicle weight exceeds 6,000 lbs. Therefore, it is not subject to the statutory dollar cost recovery limits under 280F. However, the vehicle is listed property. Because it does not pass the more-than-50% business use test, Karen must use straight-line cost recovery, cannot elect 179 expensing, and is not eligible for deducting additional first-year depreciation. $70,000 .10 40% = $2,800. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-16 to 8-18 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic 29. On July 17, 2009, Kevin places in service a used automobile that cost $15,000. The car is used 80% for business and 20% for personal use. In 2010, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2010. a. $0. b. $1,168. c. $1,200. d. $2,400. e. None of the above. Register to View AnswerCost recovery in 2009: MACRS ($15,000 .20) = $3,000 (limited to $2,960*); $2,960 80% Straight-line ($15,000 .10) = $1,500 (limited to $2,960*); $1,500 80% Cost recovery recapture in 2010 *These depreciation limits are indexed annually. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-18 | p. 8-19 | Table 8.1 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic $2,368 (1,200) $1,168 30. Janet purchased a new car on June 5, 2009, at a cost of $18,000. She used the car 80% for business and 20% for personal use in 2009. She used the automobile 40% for business and 60% for personal use in 2010. Determine Janet's cost recovery recapture for 2010. a. $0. b. $928. c. $1,008. d. $1,440. e. None of the above. Register to View AnswerCost recovery in 2009: MACRS [($18,000 .50) + ($9,000 .20)]= $10,800 (limited to $10,960*); $10,800 80% Straight-line ($18,000 .10) = $1,800 (limited to $2,960*); $1,800 80% Cost recovery recapture in 2010 *These depreciation limits are indexed annually. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-18 | p. 8-19 | Table 8.1 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic $8,640 (1,440) $7,200 31. On July 10, 2009, Ariff places in service a new sports utility vehicle that cost $60,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2009, assuming Ariff's 179 business income is $110,000. a. $10,960. b. $25,000. c. $52,000. d. $70,000. e. None of the above. Register to View AnswerSince the SUV weighs over 6,000 pounds, it is not subject to the statutory dollar limits on luxury automobiles. 179 expensing (limited to $25,000 for such SUVs) Additional first-year depreciation [($70,000 $25,000) .50] Regular MACRS [($70,000 $25,000 $22,500) .20] Total PTS: 1 OBJ: 3 | 4 MSC: 5 min DIF: 1 REF: p. 8-15 to 8-18 NAT: AICPA FN-Measurement | AACSB Analytic $25,000 22,500 4,500 $52,000 32. On March 1, 2009, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $900 per month. During 2009, she uses her car 20% for business and 80% for personal activities. Assuming the dollar amount from the IRS table is $233, determine Lana's deduction for the lease payments. a. $0. b. $1,800. c. $2,000. d. $2,330. e. None of the above. Register to View Answer$900 10 months 20% = $1,800. PTS: 1 DIF: 1 REF: p. 8-19 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 5 min 33. On June 1, 2009, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table is $241, determine Norm's inclusion amount. a. $0. b. $241. c. $907. d. $1,687. e. None of the above. Register to View AnswerA taxi is not a passenger automobile. Thus, it is not subject to the lease inclusion amount provision. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-16 | p. 8-19 NAT: AICPA FN-Measurement | AACSB Analytic 34. Bhaskar purchased a new factory building on September 2, 2009, for $4,000,000. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2010. a. $30,000. b. $36,000. c. $44,000. d. $100,000. e. None of the above. Register to View Answer.025 $4,000,000 = $100,000. PTS: 1 OBJ: 5 MSC: 5 min DIF: 1 REF: p. 8-20 | p. 8-21 | Table 8.7 NAT: AICPA FN-Measurement | AACSB Analytic 35. Pat purchased a used five-year class asset on March 15, 2009, for $60,000. He did not elect 179 expensing. Determine the cost recovery deduction for 2009 for earnings and profits purposes. a. $2,000. b. $3,000. c. $6,000. d. $12,000. e. None of the above. Register to View Answer.10 $60,000 = $6,000. PTS: 1 OBJ: 5 MSC: 5 min DIF: 1 REF: p. 8-20 | Table 8.5 NAT: AICPA FN-Measurement | AACSB Analytic 36. George purchases used office furniture (seven-year class property) at a cost of $50,000 on April 20, 2009. Determine George's cost recovery deduction for 2009 for alternative minimum tax purposes, assuming George does not elect 179 and the maximum cost recovery deduction is taken for regular income tax purposes. a. $2,500. b. $3,750. c. $5,355. d. $6,212. e. None of the above. Register to View Answer.1071 $50,000 = $5,355. PTS: 1 OBJ: 5 MSC: 5 min DIF: 1 REF: p. 8-20 | p. 8-21 | Table 8.4 NAT: AICPA FN-Measurement | AACSB Analytic 37. During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange Corporation may amortize. a. $16,667. b. $26,667. c. $33,333. d. $100,000. e. None of the above. Register to View AnswerSelf-created goodwill is not a 197 intangible and thus cannot be amortized. PTS: 1 DIF: 1 REF: p. 8-22 OBJ: 7 NAT: AICPA FN-Measurement | AACSB Analytic MSC: 5 min 38. On November 1, 2009, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $500,000 of the purchase price to a patent. The patent will expire in seven years. Determine the total amount that Red may amortize for 2009 for the patent. a. $0. b. $5,556. c. $33,333. d. $500,000. e. None of the above. Register to View Answer$500,000 (2 months/180 months) = $5,556. The statutory amortization period for 197 intangibles is 15 years. PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 8-22 | p. 8-23 NAT: AICPA FN-Measurement | AACSB Analytic 39. Orange Corporation begins business on April 2, 2009. The corporation has startup expenditures of $54,000. If Orange Corporation elects 195, determine the total amount that Orange may deduct in 2009. a. $1,000. b. $2,650. c. $3,650. d. $5,000. e. None of the above. Register to View AnswerDeductible amount [$5,000 ($54,000 $50,000)] Amortizable amount {[($54,000 $1,000)/180] 9 months} Total deduction PTS: 1 OBJ: 7 MSC: 5 min DIF: 1 REF: p. 8-23 | Example 37 | Example 38 NAT: AICPA FN-Measurement | AACSB Analytic $1,000 2,650 $3,650 40. On January 15, 2009, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2009 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2009. a. $150,000. b. $175,000. c. $176,000. d. $200,000. e. $250,000. Register to View Answer$3,500,000/500,000 = $7 per unit 25,000 units sold $7 = $175,000 cost depletion 22% $800,000 = $176,000 percentage depletion Percentage limit ($800,000 $500,000) 50% = $150,000 Thus, the deduction is $175,000. PTS: 1 OBJ: 8 MSC: 10 min PROBLEM 1. Jim acquires a new seven-year class asset on September 20, 2009, for $60,000. He placed the asset in service on October 5, 2009. He does not elect to expense any of the asset under 179 or elect straight-line cost recovery. He elects not to take additional first-year depreciation. He sells the asset on August 25, 2010. This is the only asset he acquires in 2009. Determine Jim's cost recovery in 2009 and 2010. ANS: The mid-quarter convention applies. 2009: $60,000 .0357 = $2,142. 2010: $60,000 .2755 (2.5/4) = $10,331. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-5 to 8-9 | Table 8.2 NAT: AICPA FN-Measurement | AACSB Analytic DIF: 2 REF: p. 8-24 to 8-27 NAT: AICPA FN-Measurement | AACSB Analytic 2. Rod paid $950,000 for a new warehouse on April 14, 2009. He sold the warehouse on September 29, 2014. Determine the cost recovery deduction for 2009 and 2014. ANS: 2009: $950,000 .01819 = $17,281. 2014: $950,000 .02564 8.5/12 = $17,254. PTS: 1 OBJ: 2 MSC: 10 min DIF: 1 REF: p. 8-10 | p. 8-11 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 3. Sid bought a $700,000 seven-year class asset on August 2, 2009. On December 2, 2009, he purchased $160,000 of used five-year class assets. If Sid elects 179, what is the maximum write-off for these purchases for 2009? ANS: Seven-year property: 179 deduction [$250,000 ($860,000 $800,000)] Additional first-year depreciation [($700,000 $190,000) .50] Regular MACRS [($700,000 $190,000 $255,000) .1429 (Table 8.1)] Five-year property: Regular MACRS [$160,000 .20 (Table 8.1)] Total deduction $190,000 255,000 36,440 32,000 $513,440 Using the 179 deduction for the longer lived asset produces a greater total deduction in 2009. PTS: 1 OBJ: 2 | 3 MSC: 10 min DIF: 2 REF: p. 8-5 to 8-9 | p. 8-14 NAT: AICPA FN-Measurement | AACSB Analytic 4. Polly purchased a new hotel on July 20, 2009, for $4,000,000. On January 20, 2016, the building was sold. Determine the cost recovery deduction for the year of the sale. ANS: $4,000,000 .02564 .5/12 = $4,273. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-10 | p. 8-11 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 5. Rustin bought used 7-year class property on May 15, 2009, for $325,000. Rustin elects 179 and straightline cost recovery. Rustin's taxable income would not create a limitation for purposes of the 179 deduction. Determine the write-off Rustin can take in 2009. ANS: 179 expense election Cost recovery [($325,000 $250,000) .0714 (Table 8.3)] Total deduction PTS: 1 OBJ: 2 | 3 MSC: 5 min DIF: 1 REF: p. 8-14 | p. 8-15 NAT: AICPA FN-Measurement | AACSB Analytic $250,000 5,355 $255,355 6. Audra acquires the following new five-year class property in 2009: Asset A B C Total Acquisition Date January 10 July 5 November 15 Cost $106,000 70,000 250,000 $426,000 Audra elects 179 for Asset C. Audra's taxable income from her business would not create a limitation for purposes of the 179 deduction. Determine her total cost recovery deduction (including the 179 deduction) for the year. ANS: $250,000/$426,000 = 58.7%. Therefore, Audra must use the mid-quarter convention. Asset A: Additional first-year depreciation ($106,000 .50) Regular MACRS [($106,000 $53,000) .35)] $ 53,000 18,550 Asset B: Additional first-year depreciation ($70,000 .50) Regular MACRS [($70,000 $35,000) .15)] 35,000 5,250 Asset C: 179 expense Additional first-year depreciation [($250,000 $250,000) .50] Regular MACRS [($250,000 $250,000 $0) .05] Total deduction PTS: 1 OBJ: 2 | 3 MSC: 5 min $250,000 0 0 250,000 $361,800 DIF: 1 REF: p. 8-10 | p. 8-14 | p. 8-15 | Table 8.2 NAT: AICPA FN-Measurement | AACSB Analytic 7. On February 21, 2009, Joe purchased new farm equipment for $500,000. Joe has made an election to not have the uniform capitalization rules apply to his farming business. He also elects not to take additional first-year depreciation. If Joe elects 179, what is the maximum write-off for this purchase for 2009? ANS: 179 ADS straight-line [($500,000 $250,000) .15] Total deduction PTS: 1 OBJ: 2 | 3 MSC: 5 min DIF: 1 REF: p. 8-10 | p. 8-11 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic $250,000 37,500 $287,500 8. On August 20, 2008, May signed a 10-year lease on a building for her business. On November 28, 2009, May paid $80,000 for a qualified leasehold improvement to the building. What is May's cost recovery deduction for the improvement in 2009? ANS: .05 $80,000 = $4,000. PTS: 1 OBJ: 2 MSC: 10 min DIF: 2 REF: p. 8-12 | p. 8-13 | Table 8.6 NAT: AICPA FN-Measurement | AACSB Analytic 9. Joe purchased a new five-year class asset on June 1, 2009. The asset is listed property (not an automobile). It was used 55% for business and 45% for the production of income. The asset cost $240,000. Joe made the 179 election. Joe's taxable income would not create a limitation for purposes of the 179 deduction. Joe elects not to take additional first-year depreciation. Determine Joe's total cost recovery (including the 179 deduction) for the year. ANS: Business use: $132,000 ($240,000 55%) 179 expense Regular MACRS [($132,000 $132,000) .20] Production of income use: $108,000 ($240,000 45%) Regular MACRS ($108,000 .20) Total deduction *Property used for the production of income is not eligible for 179 expensing. PTS: 1 OBJ: 2 | 3 | 4 MSC: 10 min DIF: 2 REF: p. 8-14 | p. 8-15 | Table 8.1 NAT: AICPA FN-Measurement | AACSB Analytic $132,000 0 21,600 $153,600 10. Nora purchased a new automobile on July 20, 2009, for $29,000. The car was used 60% for business and 40% for personal use. In 2010, the car was used 30% for business and 70% for personal use. Determine the cost recovery recapture and the cost recovery deduction for 2010. ANS: Cost recovery in 2009: MACRS [($29,000 .50) + ($14,500 .20)] = $17,400 (limited to $10,960*); $10,960 60% Straight-line ($29,000 .10) = $2,900 (limited to $2,960*); $2,900 60% Cost recovery recapture in 2010 Cost recovery in 2010: Straight-line ($29,000 .20) = $5,800 (limited to $4,800*); $4,800 .30 *These depreciation limits are indexed annually. PTS: 1 OBJ: 2 | 4 MSC: 10 min DIF: 2 REF: p. 8-14 to 8-18 | Table 8.1 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic $6,576 (1,740) $4,836 $1,440 11. Norm purchases a new sports utility vehicle (SUV) on October 12, 2009, for $50,000. The SUV has a gross vehicle weight of 6,200 lbs. It is used 100% of the time for business and it is the only business asset acquired by Norm during 2009. Compute the maximum deduction with respect to the SUV for 2009. ANS: The SUV is not classified as a passenger automobile because of its GVW exceeding 6,000 lbs. Therefore, it is not subject to the cost recovery limits of 280F. Section 179 expense (limited to $25,000) Additional first-year depreciation [($50,000 $25,000) .50] MACRS [($50,000 $25,000 $12,500) .05] Total deduction $25,000 12,500 625 $38,125 PTS: 1 OBJ: 3 | 4 MSC: 10 min DIF: 1 REF: p. 8-5 | p. 8-6 | p. 8-14 to 8-18 | Table 8.2 NAT: AICPA FN-Measurement | AACSB Analytic 12. On June 1, 2009, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000. She used the assets 40% for business, 50% for the production of income, and 10% for personal use. These are the only assets Gabriella purchased during the current year. Determine her total cost recovery deduction for the current year. Register to View Answercomputer and peripheral equipment are listed property. Since the more-than-50% business use test is not satisfied, Gabriella cannot elect 179 expensing, she must use straight-line cost recovery, and is not eligible for additional first-year depreciation. The 10% of personal usage does not qualify for cost recovery. $25,000 .10 90% = $2,250. PTS: 1 OBJ: 4 MSC: 5 min DIF: 1 REF: p. 8-18 | p. 8-19 | Table 8.3 NAT: AICPA FN-Measurement | AACSB Analytic 13. Rick purchased a uranium interest for $10,000,000 on January 3, 2009, when recoverable reserves were estimated at 200,000 units. A total of 10,000 units were extracted in 2009 and 7,000 units were sold in 2009. Gross income from the property was $2,800,000 and taxable income without the allowance for depletion was $1,000,000. Determine the depletion deduction for 2009. ANS: Cost depletion Percentage depletion Lesser of: 22% $2,800,000 = $616,000 50% $1,000,000 = $500,000 Therefore the depletion deduction would be $500,000. PTS: 1 OBJ: 8 MSC: 10 min ESSAY 1. Discuss the difference between the half-year convention and the mid-quarter convention. ANS: DIF: 2 REF: p. 8-24 to 8-27 | Exhibit 8.3 NAT: AICPA FN-Measurement | AACSB Analytic The half-year convention assumes property is placed in service at mid-year and thus provides for a halfyear's cost recovery for that year. The mid-quarter convention assumes property placed in service during the year is placed in service at the middle of the quarter in which it is actually placed in service. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-8 | p. 8-9 NAT: AICPA FN-Measurement | AACSB Analytic 2. Discuss the criteria used to determine whether a building is residential or nonresidential realty. Also explain the tax consequences resulting from this determination if the property is placed in service in 2009. ANS: Residential realty is property for which 80% or more of the gross rental revenues are from nontransient dwelling units. Residential realty has a recovery period of 27.5 years. Nonresidential realty has a recovery period of 39 years. PTS: 1 DIF: 1 REF: p. 8-10 NAT: AICPA FN-Reporting | AACSB Analytic OBJ: 2 MSC: 5 min 3. Discuss the effect on the cost recovery method of a taxpayer's election to not have the uniform capitalization rules apply to a farming business. ANS: When the election is made, the cost recovery method required is the ADS straight-line method. PTS: 1 OBJ: 2 MSC: 5 min DIF: 1 REF: p. 8-11 | p. 8-12 NAT: AICPA FN-Measurement | AACSB Analytic 4. Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business. ANS: Section 179 expensing cannot be taken associated with the property's use for the production of income. Likewise, the taxpayer is not eligible for additional first-year depreciation for the production of income part. PTS: 1 OBJ: 2 | 3 | 4 MSC: 5 min DIF: 1 REF: p. 8-14 | p. 8-15 NAT: AICPA FN-Measurement | AACSB Analytic 5. Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile. ANS: If an automobile is not classified as a passenger automobile, it is not subject to the statutory dollar cost recovery limits under 280F. In addition to a larger cost recovery deduction each year, it also results in the total recovery of the cost over a six-year period. While the automobile is still listed property, if it passes the more-than-50% business use test, MACRS cost recovery can be used as well as an election under 179. However, the 179 limit for SUVs is $25,000 rather than $250,000 in 2009. The automobile also is eligible for additional first-year depreciation. PTS: 1 OBJ: 3 | 4 MSC: 10 min DIF: 1 REF: p. 8-16 to 8-18 NAT: AICPA FN-Measurement | AACSB Analytic 6. Discuss the reason for the inclusion amount with respect to leased automobiles. ANS: The purpose of the inclusion amount is to prevent taxpayers from circumventing the cost recovery dollar limitations by leasing, instead of purchasing, an automobile. PTS: 1 DIF: 1 REF: p. 8-19 NAT: AICPA FN-Measurement | AACSB Analytic OBJ: 4 MSC: 5 min 7. Discuss the requirements in order for startup expenditures to be amortized under 195. ANS: The expenditures must meet two requirements. The expenditures must be paid or incurred in connection with: Creating an active trade or business; Investigating the creation or acquisition of an active trade or business; or Any activity engaged in for profit in anticipation of such activity becoming an active trade or business. Such costs must be the kinds of costs that would be currently deductible if paid or incurred in connection with the operation of an existing trade or business in the same field as that entered into by the taxpayer. OBJ: 7 MSC: 10 min PTS: 1 DIF: 1 REF: p. 8-23 NAT: AICPA FN-Measurement | AACSB Analytic ... View Full Document

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