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Exam 10: Property Acquisition and Cost Recovery

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Question 1

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Lax LLC purchased only one asset during the current year (a full 12-month tax year) . On August 26 Lax placed in service computer equipment (five-year property) with a basis of $41,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation) . (Use MACRS Table 1.)

A) $6,200
B) $7,058
C) $7,200
D) $8,200
E) None of the choices are correct.

F) A) and E)
G) A) and D)

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Question 2

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Patin Corporation began business on September 23 ^rd of the current year. It incurred $40,000 of start-up costs and $60,000 of organizational expenditures. How much total amortization may be deducted in the first year? (Round final answer to the nearest whole number.)

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$7,111. Total amortization is $7,111. $5,000 of start-up costs can be immediately expensed. Patin may not immediately deduct the organizational costs because the immediate deduction is phased out dollar for dollar for organization expenditures exceeding $50,000. As a result, when the expenses exceed $55,000, no immediate deduction can be taken. In addition, $2,111 ($35,000 ÷ 180)× 4 months = $778 of the start-up costs may be amortized and ($60,000 ÷ 180)× 4 months = $1,333 of the organizational expenditures may be amortized.

Question 3

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Wheeler LLC purchased two assets during the current year (a full 12-month tax year) .On November 16 Wheeler placed in service computer equipment (five-year property) with a basis of $15,000 and on April 20 placed in service furniture (seven-year property) with a basis of $11,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation) . (Use MACRS Table 2.) (Round final answer to the nearest whole number.)

Which of the following assets is eligible for §179 expensing?

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

Yasmin purchased two assets during the current year. On May 26 ^th Yasmin placed in service computer equipment (five-year property)with a basis of $13,000 and on December 9 ^th placed in service machinery (seven-year property)with a basis of $13,000. Calculate the maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)(Round final answer to the nearest whole number.)

Which depreciation convention is the general rule for tangible personal property?

Timothy purchased a new computer for his consulting practice on October 15 ^th of the current year. The basis of the computer was $4,000. During the Thanksgiving holiday, he decided the computer didn't meet his business needs and gave it to his college-aged son in another state. The computer was never used for business purposes again. Timothy had $50,000 of taxable income before depreciation. What is Timothy's total cost recovery deduction with respect to the computer during the current year?

Sequoia purchased the rights to cut timber on several tracts of land over a 15-year period. It paid $512,000 for cutting rights. A timber engineer estimates that 512,000 board feet of timber will be cut. During the current year, Sequoia cut 57,000 board feet of timber, which it sold for $912,000. What is Sequoia's cost depletion deduction for the current year?

The method for tax amortization is always the straight-line method.

Kristine sold two assets on March 20th of the current year. The first was machinery with an original basis of $60,000, currently in the fourth year of depreciation, and depreciated under the half-year convention. The second was furniture with an original basis of $25,000, placed in service during the fourth quarter, currently in the third year of depreciation, and depreciated under the mid-quarter convention. What is Kristine's depreciation deduction for the current year if the depreciation recovery period is seven years? (Use MACRS Table 1 and Table 2 and Exhibit 10-6.)(Round final answer to the nearest whole number.)

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 through 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 through 3, Lucky Strike actually extracted 300,000 ounces of silver as follows: What is Lucky Strike's depletion deduction for Year 2 if the applicable percentage depletion for silver is 15 percent?

Anne LLC purchased computer equipment (five-year property) on August 29 for $30,000 and used the half-year convention to depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum depreciation expense. (Use MACRS Table 1.)

Columbia LLC only purchased one asset this year. Columbia LLC placed in service on July 9, 2020, machinery and equipment (seven-year property)with a basis of $2,750,000. Assume that Columbia has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction, including §179 expensing (but ignoring bonus depreciation)for the year. (Use MACRS Table 1.)

Gessner LLC patented a process it developed in the current year. The patent is expected to create benefits for Gessner 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, Gessner had unamortized research expenditures of $15,000 related to the process. What is the total amortization amount Gessner may deduct during the current year?

The manner in which a business amortizes a patent or copyright is the same whether the business directly purchases the patent or copyright or whether it self-creates the intangible.

Which of the following depreciation conventions is not used under MACRS?

Which of the following assets is not eligible for bonus depreciation?

Assume that Yuri acquires a competitor's assets on May 1 ^st. The purchase price was $500,000. Of that amount, $325,000 is allocated to tangible assets and $175,000 is allocated to goodwill (a §197 intangible asset). What is Yuri's amortization deduction for the current year? (Round final answer to the nearest whole number.)

Lenter LLC placed in service on April 29, 2020, machinery and equipment (seven-year property) with a basis of $1,600,000. Assume that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction including §179 expensing (but ignoring bonus expensing) . (Use MACRS Table 1.)