Solutions Chapter 7 - Problems Ch 7 49(pg 330 69(pg 335 Ch...

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Problems: Ch 7  49 (pg. 330) & 69 (pg. 335); 49. Comprehensive Problem for Chapters 6 and 7 Sam Johnson started a small machine shop, Machines, Inc., in his garage and incorporated it in March of 2008 as a calendar-year corporation. At that time, he began using his personal computer and tools solely for the business as part of his contribution to the corporation. The computer cost $2,700 but had a fair market value of only $900 at conversion and the tools, which had cost $1,500, were valued at $1,100. During 2008, Machines, Inc. purchased two machines: Machine A, purchased on May 2, cost $24,000; Machine B, purchased on June 5, cost $40,000. The corporation expensed Machine A under Section 179. The computer, tools and Machine B were depreciated using accelerated MACRS only. The corporation did not take any depreciation on the garage nor did Sam charge the business rent because the business moved to a building the business purchased for $125,000 on January 5, 2009. On January 20, 2009, Machines purchased $4,000 of office furniture and on July 7, it purchased Machine C for $48,000. It depreciated these assets under MACRS (including allowable bonus depreciation) but did not use Section 179 expensing. Machines acquired no new assets in 2010. On February 4, 2011, Machines bought a new computer system for $5,100. It sold the old computer the same day for $300. On March 15, it sold Machine A for $6,000 and purchased a more versatile machine for $58,000. On August 15, Machines sold bonds it had purchased with $9,800 of the cash Sam had originally contributed to the corporation for $10,400 to pay creditors. The business takes the maximum allowable depreciation deduction on assets purchased in 2011 but does not use Section 179 expensing. a. Determine Machines, Inc.'s depreciation expense deductions for 2008 through 2011. b. Determine the realized and recognized gains or losses on the property transactions in 2011. Solution: a. Depreciation deductions for years 2008 through 2011: Asset Life Basis 2008 2009 2010 2011 Computer 5 yrs. $ 900 $ 180 $ 288 $ 173 $ 52 Tools 5 yrs. 1,100 220 352 211 127 Machine A 7 yrs. 24,000 24,000 Machine B 7 yrs. 40,000 5,716 9,796 6,996 4,996 Building 39 yrs. 125,000 3,076 3,205 3,205 Off. Furniture 7 yrs. 4,000 2,286 490 350 Machine C 7 yrs. 48,000 27,430 5,878 4,198 New Computer 5 yrs. 5,100 5,100 New Machine 7 yrs. 58,000 ______ ______ ______ 58,000
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Total $30,116 $43,228 $16,953 $76,028 Depreciation for all personalty is calculated using the half-year averaging convention. Machine A is the only asset on which Section 179 expensing was claimed. Bonus depreciation is claimed only on 2009 asset acquisitions along with regular MACRS depreciation on the balance. A half-year’s depreciation is taken in the year of disposition for the old computer. b. $6,000 Section 1245 ordinary income is realized and recognized on the
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This note was uploaded on 03/12/2012 for the course ACCT 613 taught by Professor Smith during the Spring '12 term at University of Maryland Baltimore.

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Solutions Chapter 7 - Problems Ch 7 49(pg 330 69(pg 335 Ch...

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