Tax Chapter 10B

Flashcard maker : Lily Taylor
Chapter 10B – Property Acquisition and Cost Recovery

True / False Questions

1. If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-quarter convention must be used.

FALSE – All real property is depreciated using the mid-month convention.
2. Real property (excluding land) is always depreciated using the straight-line method.
TRUE
3. The mid-month convention applies to real property in the year of acquisition and disposition.
TRUE
4. The method for tax amortization is always the straight-line method.
TRUE
5. All assets subject to amortization have the same recovery period.
FALSE- various recovery periods based on type of intangible asset.
6. Goodwill and customer lists are examples of §197 amortizable assets.
TRUE
7. Taxpayers may always expense a portion of start-up costs and organizational expenditures.
FALSE
8. Businesses may immediately expense research and experimentation expenditures or they may elect to capitalize these costs and amortize them using the straight-line method over a period of not less than 60 months.
TRUE
9. 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.
FALSE
10. Depletion is the method taxpayers use to recover their capital investment in natural resources.
TRUE
Multiple Choice Questions

11. Poplock LLC purchased a warehouse and land during the current year for $350,000. The purchase price was allocated as follows: $275,000 to the building and $75,000 to the land. The property was placed in service on August 12. Calculate Poplock’s maximum depreciation for this first year, rounded to the nearest whole number:

A. $2,648
B. $3,371
C. $3,751
D. $4,774
E. None of these

A. $2,648

The mid-month convention applies. Non-residential property has a 39-year recovery period. The depreciation is $2,648 ($275,000 × .963%).

12. Tom Tom LLC purchased a rental house and land during the current year for $150,000. The purchase price was allocated as follows: $100,000 to the building and $50,000 to the land. The property was placed in service on May 22. Calculate Tom Tom’s maximum depreciation for this first year:

A. $1,605
B. $2,273
C. $2,408
D. $3,410
E. None of these

B. $2,273

The mid-month convention applies. Residential property has a 27.5-year recovery period. The depreciation is $2,273 ($100,000 × 2.273%).

13. Simmons LLC purchased an office building and land several years ago for $250,000. The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land. The property was placed in service on October 2. If the property is disposed of on February 27 during the 10th year, calculate Simmons’ maximum depreciation in the 10th year:

A. $641
B. $909
C. $5,128
D. $7,346
E. None of these

A. $641

The mid-month convention applies. Non-residential property has a 39-year recovery period. The depreciation is $641 ($200,000 × 2.564% × 1.5/12).

14. Assume that Bethany acquires a competitor’s assets on March 31st. The purchase price was $150,000. Of that amount, $125,000 is allocated to tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset). What is Bethany’s amortization expense for the current year, rounded to the nearest whole number?

A. $0
B. $1,250
C. $1,319
D. $1,389
E. None of these

D. $1,389

The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $1,389 ($25,000/180) × 10).

15. 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 expensed for the year?

A. $0
B. $2,500
C. $5,000
D. $10,000
E. None of these

C. $5,000

$5,000 of start-up expenses can be immediately expensed. The $5,000 maximum phases out dollar for dollar if more than $50,000 of start-up costs are incurred.

16. Racine started a new business in the current year. She incurred $52,000 of start-up costs. If her business started on November 23rd of the current year, what is the total expense she may deduct with respect to the start-up costs for her initial year, rounded to the nearest whole number?

A. $2,555
B. $3,544
C. $5,522.
D. $52,000
E. None of these

B. $3,544
The maximum immediate expense amount of $5,000 phases out dollar for dollar if more than $50,000 of start-up costs are incurred. Thus, the immediate expensing is $3,000 ($5,000 – ($52,000 – $50,000)). The amortization is $544 ($49,000/180) × 2 months).
17. Daschle LLC completed some research and development during June of the current year. The related costs were $60,000. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization expense Daschle may deduct during the current year?

A. $0
B. $6,500
C. $7,000
D. $12,000
E. None of these

C. $7,000

The amortization when capitalization is elected is $7,000 ($60,000/60) × 7 months). The amortization period on capitalized research and development is not less than 60 months—and 60 months is the most often elected.

18. Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15th and the purchase price was $75,000. If the patent has a remaining life of 75 months, what is the total amortization expense Jorge may deduct during the current year?

A. $0
B. $5,500
C. $6,000
D. $12,000
E. None of these

C. $6,000

The amortization is $6,000 ($75,000/75) × 6). The amortization period on a purchased patent is the asset’s remaining useful life.

19. Geithner LLC patented a process it developed in the current year. The patent is expected to create benefits for Geithner over a 10 year period. The patent was issued on April 15th and the legal costs associated with the patent were $43,000. In addition, Geithner had unamortized research expenditures of $15,000 related to the process. What is the total amortization expense Geithner may deduct during the current year?

A. $2,417
B. $2,559
C. $4,108
D. $4,350
E. None of these

D. $4,350

The amortization is $4,350 ($58,000/120) × 9 months). The amortization period is the asset’s expected useful life (10 years in this case) or 17 years (whichever is longer).

Chapter 9A Refresher Questions (Personal Property Depreciation)

20. Amit purchased two assets during the current year. Amit placed in service computer equipment (5-year property) on April 16th with a basis of $5,000 and furniture (7-year property) on September 9th with a basis of $20,000. Calculate the maximum depreciation expense (ignoring section 179 or bonus expensing):

$3,858

The half-year convention applies since less than 40 percent of the property was placed in service during the fourth quarter. The calculations are $5,000 × .2 = $1,000 and $20,000 × .1429 = $2,858. The total is $3,858 ($1,000 + $2,858).

21. Yasmin purchased two assets during the current year. Yasmin placed in service computer equipment (5-year property) on May 26th with a basis of $10,000 and machinery (7-year property) on December 9th with a basis of $10,000. Calculate the maximum depreciation expense (ignoring section 179 or bonus expensing):
$2,857

The mid-quarter convention applies since more than 40 percent of the property was placed in service during the fourth quarter. The calculations are $10,000 × .25 = $2,500 and $10,000 × .0357 = $357. The total is $2,857 ($2,500 + $357).

22. Columbia LLC placed in service on October 9, 2014 machinery and equipment (7-year property) with a basis of $2,400,000. Assume that Columbia has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing) for the year, rounded to the nearest whole number.
$182,110.

The $500,000 section 179 expense is limited to $100,000 because of the property placed in service limitation ($2,500,000 – $2,400,000). The mid-quarter convention applies. The expense is $130,345 which is depreciation of $2,300,000 × .0357 = $82,110 plus $100,000 of section 179 expense.

23. Kristine sold two assets on March 20th of the current year. The first was machinery with an original basis of $51,000, currently in the fourth year of depreciation, and under the half-year convention. The second was furniture with an original basis of $16,000 placed in service during the fourth quarter, currently in the third year of depreciation, and under the mid-quarter convention. What is Kristine’s depreciation expense for the current year, rounded to the nearest whole number?
$3,579.

The depreciation on those assets are $51,000 × .1249 × 1/2 year = $3,185 and $16,000 × .1968 × 1.5/12 = $394, the total is $3,579 ($3,185 + $394).

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