Depreciation, Cost Recovery, amortization, Patent valuations

Depreciation, Cost Recovery, amortization, Patent...

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Chapter I:10 Depreciation, Cost Recovery, Depletion and Amortization Discussion Questions I:10-1 a. An automobile that is held for personal use is not eligible for depreciation or amortization. b. Goodwill is a Sec. 197 intangible asset amortizable ratably over a 15-year period beginning with the month of acquisition. c. Since the cost of the customer list represents a Sec. 197 intangible, its cost is amortizable on a ratable basis over a 15-year period beginning with the month of acquisition. d. A patent is amortizable over its legal life of seventeen years since the cost of the patent has a definite and limited life. The patent does not qualify for 15-year amortization under Sec. 197 because it was not acquired in connection with a transaction that involves the acquisition of a trade or business or a substantial portion of a trade or business. e. Land is not eligible for depreciation or amortization. f. A covenant not to compete is a Sec. 197 intangible amortizable ratably over a 15- year period despite the fact that the period under the agreement may be different (e.g., five years). In such case no loss is recognized and the basis of retained Sec. 197 intangibles is increased by the unrecognized loss. pp. I:10-2, I:10-3 and I:10-15. I:10-2 Depreciation deductions are not discretionary. The basis of property must be reduced by the amount of depreciation that should have been taken (allowable depreciation) even if no depreciation was claimed. The basis of the property must be reduced on a consistent basis by depreciation computed using one of several accounting methods provided under the tax law. If no method had previously been used, allowable is defined as the slowest possible method allowed by law (e.g., straight-line using the longest permissible recovery period). So, Rick could wind up recognizing a gain to the extent the asset is sold for more than its adjusted basis. p. I:10-3. I:10-3 The basis of property converted from personal-use to business or investment use is the lesser of the adjusted basis or the FMV of the property (at the date of conversion). The decline in value of $20,000 ($120,000 - $100,000) represents a nondeductible personal loss and is not depreciable. Therefore, the depreciable basis is $100,000 of which a portion must be allocated to land. This lower of cost or market rule is intended to prevent taxpayers from depreciating unrealized nondeductible personal losses. p. I:10-4. I:10-1
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I:10-4 a. Furniture Yes No 7 years Plumbing fixtures Yes No 7 years Land No No N/A Trademark No Yes 15 years Goodwill No Yes 15 years Automobile Yes No 5 years Heavy Truck Yes No 5 years Machinery Yes No 7 years Building used in manufacturing Yes No 39 years pp. I:10-5 and I:10-6, I:10-14 and I:10-15. I:10-5
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This note was uploaded on 01/14/2011 for the course MBA 561 taught by Professor Various during the Spring '10 term at University of Phoenix.

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Depreciation, Cost Recovery, amortization, Patent...

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