Chapter 10
Computers
Feb 6
5 years
$60,000
Office furniture
June 24
7 years
$110,000
Fax machine
Aug 3
5 years
$100,000
Sidewalk
Dec 11
15 years
$50,000
Boatright wants to obtain the maximum possible first year depreciation deduction for these property acquisitions including
full utilization of the election to expense property under Section 179. Boatright will report 2015 taxable income in the
amount of $5,000 before consideration of depreciation on their 2015 property acquisitions. What is the maximum
combined amount of depreciation and Section 179 expense that may be obtained under this set of fact circumstances?
a.
$34,500
b.
$45,650
c.
$50,219
d.
$100,564
e.
$210,219
c
65. The Lovell Accounting Firm places the following new property in service during the 2015 tax year:
Property
Placed in
Description
Service
MACRS Life
Cost Basis
Computers
Feb 6
5 years
$60,000
Office furniture
June 24
7 years
$110,000
Fax machine
Aug 3
5 years
$100,000
Sidewalk
Dec 11
15 years
$50,000
Lovell wants to obtain the maximum possible first year depreciation deduction for these property acquisitions including
full utilization of the election to expense property under Section 179. Lovell will report 2015 taxable income in the
amount of $10,000 before consideration of depreciation on their 2015 property acquisitions. What is the maximum
combined amount of depreciation and Section 179 expense that may be obtained under this set of fact circumstances?
a.
$10,000
b.
$25,000
c.
$49,719
d.
$50,219
e.
$60,219
66. The Ross CPA Firm places the following property in service during the 2015 tax year:
Property
Placed in
Description
Service
MACRS Life
Cost Basis
Computers
Feb 6
5 years
$40,000
Office furniture
June 24
7 years
$80,000
Switchboard system
Nov 3
5 years
$130,000
Ross wants to obtain the maximum possible depreciation deduction for these property acquisitions including full
utilization of the election to expense property under Section 179. Ross will report 2015 taxable income in the amount of
$20,000 before consideration of depreciation on their 2015 property acquisitions. What is Ross’ maximum depreciation
from these additions?
a.
$20,000
b.
$25,000
c.
$29,694
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d.
$34,780
e.
$45,432
67. The Reed CPA Firm places the following property in service during the 2015 tax year:
Property
Placed in
Description
Service
MACRS Life
Cost Basis
Computers
Feb 6
5 years
$40,000
Office furniture
June 24
7 years
$80,000
Switchboard system
Nov 3
5 years
$130,000
Reed wants to obtain the maximum possible depreciation deduction for these property acquisitions including full
utilization of the election to expense property under Section 179. Reed will report 2015 taxable income in the amount of
$5,000 before consideration of depreciation on their 2015 property acquisitions. What is Reed’ maximum depreciation
from these additions?
a.
$5,000
b.
$45,432
c.
$25,000
d.
$39,780
e.
$34,780
e
68. On July 17, 2015, Elise purchases office furniture (7-year property) costing $50,000 for use in her business. She
wishes to use the Section 179 election. Her taxable income before the depreciation deduction is $25,000. What is the
maximum total cost recovery deduction Elise can take for the current year?
a.
$7,145
b.
$24,287
c.
$23,573
d.
$28,573
e.
$29,462
69. On August 3, 2015, Yang purchases office furniture (7-year property) costing $21,000 for use in her business. She
does not wish to use the Section 179 election and makes the election to use the straight-line method over the MACRS
recovery period. What is Yang’s 2015 cost recovery deduction?
a.
$ 500
b.
$ 1,500
c.
$ 3,000
d.
$20,000
e.
$21,000
70. Delta Freight Company purchases 10 delivery vans on April 4, 2015, at a total cost of $366,000. Delta uses the regular
MACRS system on all of its delivery vans (the delivery vans are 5-year MACRS property and are not limited by listed
property rules). Delta’s annual income is $15,000 before the depreciation deduction. What is Delta’s maximum cost
recovery deduction on the vans in 2015?
a.
$15,000
Chapter 10
b.
$69,200
c.
$73,200
d.
$85,200
e.
$91,200
c
71. Chestnut Furniture Company purchases a delivery van on June 14, 2015, at a cost of $30,000. The delivery van has a
5-year MACRS life and an ADS recovery period of 5 years. What is Chestnut’s minimum cost recovery deduction on the
van in 2015?
a.
$- 0 –
b.
$3,000
c.
$4,500
d.
$6,000
e.
$26,850
72. Greenville Floral places a new tractor (7-year MACRS) into service on January 8, 2015. They pay $28,000 for the
tractor. This is the only business asset placed into service during this year. Greenville Floral wants to minimize the
amount of depreciation deductible in 2015. What is Greenville Floral’s cost recovery for 2015?
a.
$1,400
b.
$2,000
c.
$2,999
d.
$4,000
e.
$4,001
73. Jim places a new lift truck (7-year MACRS property) into service on January 16, 2015. He pays $30,000 for the truck.
This is the only business asset placed into service during this year. Jim does not desire to use the Section 179 election.
How much depreciation may Jim deduct for 2015?
a.
$- 0 –
b.
$4,287
c.
$6,000
d.
$8,574
e.
$15,000
74. Wellington Company purchases a new warehouse on August 24, 1995, for $1,000,000 (exclusive of the cost allocated
to the land). What is the 2015 MACRS depreciation deduction?
a.
$11,900
b.
$25,640
c.
$31,740
d.
$48,694
75. Wellington Apartments purchases an apartment building on November 9, 2015, for $1,000,000 (exclusive of the cost
allocated to the land). What is the 2015 MACRS depreciation deduction?
Chapter 10
a.
$3,970
b.
$4,550
c.
$7,580
d.
$36,364
e.
$45,500
76. Lindale Rentals places an apartment building in service on November 22, 2015. The building‘s depreciable basis is
$3,300,000. What is Lindale Homes’ 2015 depreciation deduction on the property?
a.
$7,507
b.
$15,015
c.
$59,994
d.
$104,990
77. Tucker Estates places an apartment building in service on November 22, 2012. The building’s depreciable basis is
$3,300,000. Tucker Estates sells the building on March 5, 2015. What is Tucker Estates’ 2015 depreciation deduction on
the property?
a.
$15,015
b.
$21,828
c.
$24,998
d.
$119,988
c
78. Why might a taxpayer elect to depreciate assets using the Alternative Depreciation System (ADS)?
I.
The taxpayer desires rapid write off of assets.
II.
The taxpayer may be close to being subject to the alternative minimum tax.
III.
The taxpayer is experiencing a low income time period.
a.
Statements I and III are correct.
b.
Only statement I is correct.
c.
Statements II and III are correct.
d.
Statements I and II are correct.
e.
Statements I, II, and III are correct.
c
79. During 2015, Duncan Company purchases and places in service office equipment with a cost of $40,000. The
equipment is 7-year MACRS property with an ADS recovery period of 10 years. Duncan desires to avoid the AMT. What
is its minimum 2015 depreciation deduction?
a.
$2,000
b.
$2,857
c.
$3,000
d.
$4,000
e.
$5,714
a
80. During 2015, Williams Company purchases and places in service office equipment with a cost of $40,000. The
Chapter 10
equipment is 7-year MACRS property. What is its 2015 depreciation deduction for purposes of the alternative minimum
tax?
a.
$2,000
b.
$2,856
c.
$3,000
d.
$4,000
e.
$5,714
81. Wilson Corporation purchases a factory building on September 29, 2015, for $4,000,000 (exclusive of the amount
allocated to the land). It elects the alternative depreciation system (ADS). What is the 2015 depreciation deduction?
a.
$29,167
b.
$30,000
c.
$42,424
d.
$70,833
e.
$100,000
82. Listed property rules include the following:
I.
If listed property is not predominantly used in the taxpayer’s business, the business-use
portion of the asset cannot be depreciated.
II.
If more than 50 percent of the listed property’s total use for each year is related to the
taxpayer’s business, the asset is treated the same as any other mixed-use business asset.
III.
When listed property is used 50% or less in the taxpayer’s business, the Section 179
expense election does not apply to the asset.
IV.
Listed property includes computers, and passenger automobiles.
a.
Statements I and III are correct.
b.
Only statement IV is correct.
c.
Statements II and III are correct.
d.
Statements II, III, and IV are correct.
e.
Statements I, II, III, and IV are correct.
83. Which of the following would not be considered to be Listed Property for depreciation purposes?
a.
A camera owned and used by a taxpayer in his real estate business.
b.
Computer owned and used by a taxpayer at his home office.
c.
Taxpayer’s automobile that he uses 30% for business purposes.
d.
All of the above are listed property
a
84. Daniel purchases 5-year class listed property (a computer) on March 2, 2015, for $30,000. It is used 75% for business,
and the remainder for personal use. Daniel wishes to maximize his 2015 depreciation deduction. What is Daniel ‘s 2015
depreciation deduction?
a.
$2,250
b.
$2,700
c.
$3,375
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d.
$4,500
e.
$6,000
85. Mike purchases a computer (5-year property) for $3,000 during the current year. He uses the computer 40% of the
time in his consulting business. Mike would like to maximize his cost recovery deduction. What is his allowable cost
recovery deduction on the computer?
a.
$- 0 –
b.
$120
c.
$180
d.
$300
e.
$1,200
86. Which of the following correctly describe(s) cost recovery of automobiles placed in service in 2014?
a.
Total depreciation, including bonus depreciation, cannot exceed $9,600.
b.
No cost recovery is allowed if the automobile is used 50% or less for trade or business.
c.
The amount of the depreciation deduction cannot exceed $11,160.
d.
No cost recovery is allowed for automobiles used for production of income activities.
c
87. A limitation exists on the annual amount of deductible depreciation for passenger automobiles. The limitation rules
include which of the following?
I.
If the automobile is used less than 100% for business, the annual limitation amount is
reduced by multiplying it by the business-use percentage.
II.
Section 179 expensing is available for passenger automobiles, but often is not
advantageous.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
88. Rand Company purchases and places into service a company automobile costing $40,000 in April 2014. What is the
2014 depreciation deduction on the auto?
a.
$2,960
b.
$7,200
c.
$8,000
d.
$11,160
e.
$40,000
89. In June 2014, Chase purchases a new car for $37,000. He uses the car 75% for business purposes. What is Chase’s
maximum depreciation deduction for the car in 2014?
a.
$5,550
b.
$2,960
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c.
$4,200
d.
$8,370
e.
$11,160
90. Which income tax concepts/constructs might taxpayers who take depletion deductions be violating?
I.
Accounting method construct.
II.
All-inclusive income concept.
III.
Capital recovery concept.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Statements I and III are correct.
e.
Statements I, II, and III are correct.
91. Annie owns a mine, which cost her $460,000 several years ago. In prior years she had claimed depletion in the amount
of $140,000. It is estimated that 800,000 tons of minerals remained in the mine at the beginning of the year. During the
current year, Annie mined and sold 180,000 tons. What is the amount of Annie’s cost depletion deduction for the current
year?
a.
$56,000
b.
$72,000
c.
$80,500
d.
$103,500
e.
$180,000
92. Charles purchases an interest in a uranium mine for $2,500,000 on June 7, 2015. Recoverable tonnage is estimated at
500,000. During 2015, 25,000 tons are mined and sold for $800,000. Charles incurs $500,000 of expenses during 2015.
The percentage depletion rate for uranium is 22%. What is the depletion deduction for 2015?
a.
$125,000
b.
$150,000
c.
$176,000
d.
$200,000
e.
$250,000
93. Cost recoverable intangible properties include
I.
Uranium ore.
II.
Patents.
III.
Agreements not to compete.
IV.
Copyrights.
a.
Statements I and IV are correct.
b.
Only statement IV is correct.
c.
Statements II and III are correct.
Chapter 10
d.
Statements II, III, and IV are correct.
e.
Statements I, II, III, and IV are correct.
94. If the total amount paid for a business is greater than the sum of the net fair market values of the assets of the business,
the excess
a.
Is currently deductible.
b.
May be amortized over the period of 15 years.
c.
May be characterized as goodwill and amortized over a period of not more than 60 months.
d.
May be allocated to a noncompetition covenant and amortized over the period of time of the covenant.
e.
Is never deductible.
95. Manu bought Franklin’s ownership interest in Antoine Company on July 1 of the current year. Manu pays Franklin
$30,000 cash not to compete or interfere with Manu’s business activities over the next three years. How much cost
recovery can Manu claim in the current year because of the covenant not to compete?
a.
$1,000
b.
$2,000
c.
$3,000
d.
$6,000
e.
$30,000
a
96. Which of the following intangible assets is not subject to the 15-year amortization period?
a.
Purchased goodwill.
b.
A professional football franchise purchased and relocated to Indianapolis.
c.
A covenant not to compete.
d.
A purchased customer list for mail order clothing.
e.
A trademark.
97. Which of the following intangible assets is subject to the 15-year amortization period?
a.
The ownership rights to the TV program “Wheel of Fortune”.
b.
A professional football franchise purchased and relocated to Los Angeles.
c.
Covenant not to compete for five years as part of the purchase of a business.
d.
A purchased interest in a high tech partnership.
e.
An interest under an existing lease of a oil rig.
c
98. Jason purchases a patent at a cost of $24,000. The patent has 8 years of legal life remaining from the date of purchase.
I.
If the patent is the only asset Jason purchased, he must amortize the patent over 15 years.
II.
If the patent was part of the purchase of all the assets of a business, he must amortize the
patent over 15 years.
a.
Only statement I is correct.
b.
Only statement II is correct.
Chapter 10
c.
Both statements are correct.
d.
Neither statement is correct.
99. Contrast the facts and circumstances depreciation approach commonly used before 1981 with Modified Accelerated
Cost Recovery (MACRS).
100. Eduardo is a single taxpayer with a farming operation that suffered a net loss of $30,000 in 2015. In addition, he
earned $50,000 from his accounting firm. Eduardo purchased $50,000 of equipment for his farm. He wants to maximize
his cost recovery deduction and believes the Section 179 election will help achieve that goal. What is the amount of the
maximum Section 179 deduction Eduardo can use? Explain the optimum approach to attain his goal. Assume Eduardo’s
total taxable business income in 2016 will be $60,000, and he plans to add about $20,000 of equipment to the farm
operation.
101. Why would a taxpayer ever elect to use the alternative depreciation system (ADS) rather than the MACRS?
MACRS will help alleviate AMT potential.
102. Discuss why listed property gets special attention.
provisions with personal-use property.
103. Determine the MACRS cost recovery deductions for 2015 and 2016 on the following assets that were purchased for
use in a farming business on July 15, 2015. The taxpayer does not wish to use the Section 179 election.
Chapter 10
Assets
Cost
Breeding hogs
$20,000
Dairy cattle
20,000
Tractor
20,000
a.
Breeding hogs depreciation:
Total 2015 Breeding hogs Cost Recovery Deduction (show your calculations)
Total 2016 Breeding hogs Cost Recovery Deduction (show your calculations)
b.
Dairy cattle depreciation:
Total 2015 Dairy Cattle Cost Recovery Deduction (show your calculations)
Total 2016 Dairy Cattle Cost Recovery Deduction (show your calculations)
c.
Tractor depreciation:
Total 2015 Tractor Cost Recovery Deduction (show your calculations)
Total 2016 Tractor Cost Recovery Deduction (show your calculations)
d.
Assume the Breeding hogs are sold for $25,000 on February 1, 2017. Determine the
adjusted basis of the hogs as of the sale date and the realized gain (loss) on the sale. Show
your calculations.
Adjusted basis
__________
Realized gain (loss)
__________
a.
Breeding hogs depreciation:
b.
Dairy cattle depreciation:
c.
Tractor depreciation:
$2,962 = $20,000 – $17,038 {$6,667 + $8,890 +
Realized gain (loss)
$22,038 = $25,000 – $2,962
104. Determine the largest possible MACRS cost recovery deduction for 2015 on the following assets, which were
purchased for use in Greg’s Accounting Services on July 1, 2015.
Asset
Cost
Office equipment
$86,000
Computer and printers
40,000
Office building (exclusive of land)
150,000
a.
Office equipment depreciation for 2015:
MACRS recovery period
__________
Chapter 10
Depreciable basis
__________
Depreciation
__________
b.
Computer and printer depreciation for 2015:
MACRS recovery period
__________
Depreciable basis
__________
Depreciation
__________
c.
Office building depreciation for 2015:
MACRS Class Life
__________
Depreciable basis
__________
Depreciation
__________
d.
Assume the office equipment is sold on December 2, 2017. Determine the cost recovery
deduction for the year 2017.
Depreciation:
e.
Assume the building is sold on December 2, 2017. Determine the cost recovery deduction
for the year 2017.
Depreciation:
a.
$86,000.
b.
$40,000
$8,000 = ($40,000 × 20% = $8,000)
c.
39
$150,000
$1,766 = ($150,000 × 1.177%)
d.
$61,000 x .1749 x .5 = $5,334
e.
$3,686 = ($150,000 × 2.564% × 11.5 /12)
105. Fonzi purchases a personal computer for $4,000 on March 19, 2015. He used it personally for correspondence,
keeping track of personal finances, and on-line data base services. His children used it for schoolwork and games. On
June 1, 2015, Fonzi starts a new secretarial service business and he converts the personal computer to 100% business use.
The computer is worth $2,500 at the time (similar computers were selling for that amount in the used-computer market).
a.
What is Fonzi’s depreciable basis? Briefly explain your reasoning.
b.
Fonzi desires to minimize depreciation deductions on the computer. What is the minimum
allowable depreciation for 2015?
deduction is allowed for personal use losses. That amount is not included in the depreciable
mid-year convention.
106. Kuo Corporation uses the following assets in its business in 2015:
Chapter 10
Asset
Date Purchased
Cost
MACRS Life
ADS Life
Office Building
5-12-2010
$400,000
39 yr
40 yr
Furniture
6-19-2013
15,000
7 yr
10 yr
Equipment
6-15-2011 (sold 9-9-15)
10,000
7 yr
10 yr
Truck
7-1-2012
30,000
5 yr
5 yr
Computer
12–24-2012
30,000
5 yr
5 yr
Assume Kuo Corporation does not utilize Sec 179 expense, has not disposed of any asset since 2002, and has never
expensed an asset previously. The equipment was sold on 9-9-15 for $4,000.
What is Kuo’s 2015 depreciation expense using MACRS and for ADS?
2015 MACRS
2015 ADS
Building
_____________
____________
Furniture
_____________
____________
Equipment
_____________
____________
Truck
_____________
____________
Computer
_____________
____________
Building:
Furniture
Equipment
Truck
Computer
*mid-quarter convention used since more than 40% of assets in 2012 were added in the fourth quarter
Match each statement with the correct term below.
a.
Computers, and automobiles.
b.
Used to recover the investment in intangible assets.
c.
Used to recover the investment in long-lived tangible business-use assets.
d.
An attempt to stimulate capital investment by small businesses.
e.
Used to recover the investment in assets that waste away through extraction.
107. Amortization
108. Depletion
e
109. Depreciation
c
110. Listed property
a
111. Section 179
Match each statement with the correct term below.
a.
The depreciation method for real estate.
b.
A term used synonymously with the term depreciation.
Chapter 10
c.
The depreciation system for assets placed in service after 1986.
d.
The initial basis of an asset minus the amount of capital recovered.
e.
The term used to describe the amount multiplied by the MACRS percentages to calculate the annual depreciation
deduction.
f.
A provision intended to provide relief to small companies by allowing an immediate deduction for small purchases
of business equipment and by simplifying record keeping.
112. Adjusted basis
113. Capital recovery
114. Depreciable basis
115. MACRS
116. Section 179 expense
117. Straight line