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Chapter 10
1. The earlier the depreciation deduction can be taken, the greater the present value of the tax savings will be to the
taxpayer.
a.
True
b.
False
2. While Congress has enacted several different depreciation methods, all currently owned assets are depreciated using the
method in effect when the asset was placed in service.
a.
True
b.
False
3. The Section 179 expense deduction is allowed on all depreciable and tangible property used in a trade or business.
a.
True
b.
False
4. Pedro purchased used delivery equipment costing $80,000 and used computers costing $90,000 (the only assets
purchased) that are used in his business. He may allocate his section 179 deduction to either or both assets.
a.
True
b.
False
5. MACRS applies to new and used depreciable personal property used for the production of income.
a.
True
b.
False
6. Sally purchased new equipment for her consulting business. She allocates the Section 179 deduction among the new
assets. One piece of equipment cost $112,500 and was allocated one-half of the allowable Section 179 deduction and
therefore has a depreciable basis of $100,000.
a.
True
b.
False
7. MACRS eliminates several sources of potential conflict between the IRS and taxpayers concerning an asset's useful life
and the calculation of the depreciation deduction.
a.
True
b.
False
8. The mid-year convention is used for personal property only.
a.
True
b.
False
9. If more than 40% of the depreciable basis of personal property is placed in service during the last three months of the
Chapter 10
tax year, the taxpayer must use the mid-quarter convention.
a.
True
b.
False
10. Under current law, taxpayers must use regular MACRS.
a.
True
b.
False
11. Under the computation of the alternative minimum tax, the Alternative Depreciation System may be used but is not
required.
a.
True
b.
False
12. To be considered predominately used in a trade or business under the listed property rules, more than 75% of an asset's
total use for each taxable year must be related to the taxpayer's trade or business.
a.
True
b.
False
13. In most cases, the taxpayer may continue to use percentage (statutory) depletion after the initial basis has been fully
recovered. In other words, the taxpayer's depletion deduction can exceed the cost of the depletable asset.
a.
True
b.
False
14. To compute cost depletion, you must know the basis subject to depletion, the recoverable quantity of the natural
resource, and the quantity of the natural resource sold during the year.
a.
True
b.
False
15. Felix purchases the franchise rights to a new sports team and will be able to amortize the cost over the 15-year
amortization period for intangibles.
a.
True
b.
False
16. Periodic capital recovery deductions for tax purposes include
I.
Depletion.
II.
Amortization.
III.
Depreciation.
IV.
Proration.
a.
Statements I and III are correct.
b.
Only statement I is correct.
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c.
Statements I, II and III are correct.
d.
Statements I, II, and IV are correct.
e.
Statements I, II, III, and IV are correct.
17. Which of the following assets would be allowed a depreciation deduction?
I.
A truck used to provide transportation to a job site.
II.
A car used for personal purposes.
III.
An apartment building rented out for the production of rental income.
IV.
A personal-use computer of the taxpayer.
a.
Only statement II is correct.
b.
Statements II and IV are correct.
c.
Only statement I is correct.
d.
Statements I and III are correct.
e.
All of the assets are depreciable.
18. Which of the following would not be allowed a depreciation deduction?
I.
Inventory.
II.
Business equipment.
III.
Land acquired as an investment.
IV.
Cattle used in a dairy herd.
a.
Only statement I is correct.
b.
Statements I and III are correct.
c.
Statements I, III and IV are correct.
d.
Only statement IV is correct.
e.
All of the assets are depreciable.
19. Which of the following assets would not be allowed a depreciation deduction?
I.
A business computer used to process payroll and maintain a company's general ledger.
II.
A personal residence of a taxpayer.
III.
A building rented out for the production of rental income.
IV.
A yacht rented to a fishing party.
a.
Only statement II is correct.
b.
Statements II and IV are correct.
c.
Only statement I is correct.
d.
Statements I and III are correct.
e.
All of the assets are depreciable.
20. Which of the following would be allowed a depreciation deduction?
I.
Inventory.
II.
Land acquired as an investment.
III.
Residence used as rental property.
IV.
Airplane used by company controller to attend accounting conference.
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a.
Only statement III is correct.
b.
Only statement IV is correct
c.
Statements III and IV are correct.
d.
Statements II, III, and IV are correct.
e.
All of the assets are depreciable.
21. The Section 179 election promotes which of the following tax concept(s) or doctrine(s)?
I.
Claim of Right Doctrine.
II.
Administrative Convenience Concept.
III.
Tax benefit rule.
IV.
Substance-Over-Form Doctrine.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Statements I, II, and IV are correct.
d.
Statements II and IV are correct.
e.
Statements I, II, III, and IV are correct.
22. Which of the following statements related to the Section 179 election to expense is (are) true?
I.
A Section 179 deduction can be claimed on tangible personal property
II.
A Section 179 deduction can be claimed on property held for the production of income.
III.
A Section 179 deduction can be claimed on real property.
IV.
A Section 179 deduction is allowed only for assets used in trade or business.
a.
Only statement I is true.
b.
Only statements I and II are true.
c.
Only statements I, II, and III are true.
d.
Only statements I and IV are true.
e.
All of the statements are true.
23. Qualified Section 179 property for a retail store includes
I.
Store shelving.
II.
Company auto used by salesmen.
III.
Sidewalks in front of the store.
IV.
Delivery van owned by the store.
a.
Only statement I is correct.
b.
Only statement III is correct.
c.
Statements I and IV are correct.
d.
Statements II and III are correct.
e.
Statements I, II, and IV are correct.
24. Sorensen Corporation purchases equipment in 2015 for $200,000. Sorensen has substantial taxable income and desires
Chapter 10
to minimize this amount to the fullest extent possible. How much can Sorensen deduct under Section 179?
a.
$25,000
b.
$30,000
c.
$50,000
d.
$20,000
e.
$10,000
25. Davis, Inc., a motorcycle wheel manufacturer, purchased a new spoke machine in 2015 for $200,000. What are the tax
effects of this purchase?
I.
If taxable income is $100,000, then $25,000 can be expensed in 2015.
II.
No Section 179 election is allowed if Davis decides to use a $200,000 depreciable basis.
III.
If Davis had purchased a total of $400,000 of equipment in 2015, the corporation can
deduct none of the purchases in 2015 through use of the Section 179 election.
a.
Only statement I is correct.
b.
Statements I and II are correct.
c.
Statements II and III are correct.
d.
Statements I and III are correct.
e.
Statements I, II, and III are correct.
26. During 2015, Witt Processing Corporation places $210,000 of Section 179 property in service for use in its business.
What is the amount of Witt Processing's maximum Section 179 deduction for 2015?
a.
$15,000
b.
$20,000
c.
$25,000
d.
$10,000
e.
$5,000
27. In May 2015, Preston purchases 5-year MACRS property costing $150,000 and 7-year MACRS property costing
$60,000. Preston’s income is $100,000. If Preston wishes to maximize his total 2015 cost recovery deduction, what will
his total cost recovery deduction be on the properties purchased in 2015?
a.
$100,000
b.
$30,430
c.
$51,430
d.
$42,000
e.
$34,430
28. In 2015, Sanford Corporation purchases and places in service $210,000 of equipment for its manufacturing business.
What portion of the $210,000 may Sanford elect to treat as a Section 179 expense?
a.
$-0-
b.
$15,000
c.
$20,000
d.
$25,000
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e.
$200,000
29. Watson Company purchases used equipment (5-year MACRS property) for $210,000 on July 8, 2015. What is
Watson' maximum allowable cost recovery deduction for 2015 on the equipment if this is the only purchase of equipment
for 2015?
a.
$54,000
b.
$42,000
c.
$39,000
d.
$42,500
e.
$49,000
30. On June 1, 2015, AZ Construction Corporation places a $25,000 crane (7 year life) in service. It placed no other assets
in service during the year. What is the amount of AZ Construction’s maximum depreciation deduction for the crane for
2015?
a.
$3,573
b.
$5,000
c.
$7,555
d.
$10,500
e.
$25,000
31. During 2015, Linda has a $12,000 net loss from her beauty salon. Her spouse, Bart, earns $23,000 as a tennis
professional. During 2015, Bart purchases $15,000 of Section 179 equipment for his business. What is the amount of
Linda and Bart's Section 179 deduction for 2015?
a.
$- 0 -
b.
$4,000
c.
$11,000
d.
$15,000
e.
$23,000
32. In 2015, Henry purchases $210,000 of equipment with a useful life of 7 years. The taxable income of the business is
$100,000. What is Henry's maximum depreciation deduction in 2015?
a.
$15,000
b.
$42,865
c.
$27,865
d.
$30,009
e.
$34,212
33. In 2015, Oscar purchases $150,000 of equipment. The taxable income of the business is $20,000. What is Oscar's
maximum Section 179 deduction in 2015?
a.
$20,000
b.
$25,000
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c.
$35,000
d.
$45,000
e.
$150,000
34. In 2015, Steve purchases $175,000 of equipment. The taxable income of the business is $10,000. What is Steve’s
maximum Section 179 deduction in 2015?
a.
$10,000
b.
$- 0 -
c.
$5,000
d.
$15,000
e.
$25,000
35. Carolyn purchases a new delivery truck (5-year MACRS property) costing $30,000 for use in her floral business on
January 5, 2015. If Carolyn's taxable income from the floral business before any special elections is $8,000 for 2015, what
is her maximum allowable cost recovery on the delivery truck in 2015?
a.
$4,400
b.
$6,000
c.
$12,400
d.
$14,000
e.
$30,000
36. To compute depreciation using MACRS on an asset purchased today, you need to know
I.
the asset's depreciable basis.
II.
the recovery period of the asset.
III.
the first and last year convention that applies to the asset's class.
IV.
whether you want to minimize or maximize the current year's depreciation.
a.
Only statement II is correct.
b.
Statements I and II are correct.
c.
Statements I, III, and IV are correct.
d.
Statements II and III are correct.
e.
Statements I, II, III, and IV are correct.
37. Which of the following is not part of the modified accelerated cost recovery system (MACRS)?
a.
Salvage value is ignored.
b.
Used property can use MACRS.
c.
Straight-line depreciation is allowed.
d.
Sum-of-the-years digits depreciation is allowed.
e.
All of the above are part of MACRS.
38. Sophia purchases a completely furnished condominium in Breckenridge, Colorado. She uses the condo as a rental
property. Which of the following assets are subject to periodic cost recovery?
Chapter 10
I.
Land.
II.
Furniture.
III.
Building.
IV.
Trout fishing equipment.
V.
Kitchen appliances.
a.
Only statement III is correct.
b.
Statements II and III are correct.
c.
Statements II, III, IV, and V are correct.
d.
Statements I, and III are correct.
e.
Statements II, III, and V are correct.
39. Cruz Copy Shop purchases a new copy machine in July 2015 for $30,000. No other depreciable assets are placed in
service in 2015. Since Cruz Copy Shop expects to be in a much higher tax bracket in future years, it desires to minimize
its current cost recovery amount to the fullest extent possible. What is the amount of Cruz Copy Shop’s MACRS straight-
line depreciation for 2015?
a.
$1,500
b.
$2,143
c.
$3,000
d.
$3,213
e.
$4,500
40. Wu Copy Shop purchases a new copy machine in July 2015 for $30,000. No other depreciable assets are placed in
service in 2015. Since Wu Copy Shop expects to be in a much higher tax bracket in future years, it desires to minimize its
current cost recovery amount to the fullest extent possible. What is the amount of Wu Copy Shop’s ADS depreciation for
2015?
a.
$1,500
b.
$3,000
c.
$4,500
d.
$5,400
e.
$6,000
41. What is the MACRS recovery period for a video game used in an arcade?
a.
3 years.
b.
5 years.
c.
6 years.
d.
7 years.
e.
10 years.
42. What is the MACRS recovery period for an office desk?
a.
3 years.
b.
5 years.
c.
6 years.
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d.
7 years.
e.
10 years.
43. What is the MACRS recovery period for a warehouse placed in service on August 31, 2015?
a.
10 years.
b.
27.5 years.
c.
31.5 years.
d.
39 years.
e.
40 years.
44. What is the Alternative Depreciation System (ADS) recovery period for a light general purpose truck?
a.
3 years.
b.
5 years.
c.
6 years.
d.
10 years.
e.
12 years.
45. Residential rental real estate placed in service on July 17, 2015, is depreciated over
a.
39 years, straight-line method, mid-month convention.
b.
40 years, straight-line method, mid-month convention.
c.
27.5 years, 150%-declining-balance method, mid-year convention.
d.
27.5 years, straight-line method, mid-month convention.
e.
39 years, 150%-declining-balance method, mid-year convention.
46. Nonresidential commercial realty placed in service on March 2, 2015, is depreciated over
a.
27.5 years, 200%-declining-balance method, mid-year convention.
b.
31.5 years, straight-line method, mid-month convention.
c.
31.5 years, 200%-declining-balance method, mid-year convention.
d.
39 years, straight-line method, mid-month convention.
e.
40 years, straight-line method, mid-month convention.
47. MACRS requires the use of one of three conventions. For personal property, the general and most common
convention is
a.
mid-life
b.
mid-quarter.
c.
mid-month.
d.
mid-year.
48. The mid-year convention under MACRS provides that
Chapter 10
a.
Depreciation is allowable in the year of acquisition of qualified property only if the property is placed in
service in the first one-half of that year.
b.
One half of the year-of-acquisition depreciation is allowed regardless of when the property is placed in service
during the year. One-half year's depreciation is allowable for the year of disposition.
c.
Depreciation is allowable in the year of disposition only if the property is disposed of in the last one-half of
that year.
d.
The cost recovery deduction is based on the number of months the property was in service in the year of
acquisition. Therefore, one-half month's cost recovery is allowable for the month in which the property is
place in service and for the month of disposition.
49. The mid-month convention under MACRS provides that
a.
Depreciation is allowable for the month of disposition only if the property is disposed of in the last one-half of
that month.
b.
Depreciation is allowable for the month of acquisition of qualified property only if the property is placed in
service in the first one-half of that month.
c.
One half of the year-of-acquisition depreciation is allowed regardless of when the property is placed in service
during the year. One-half year's depreciation is allowable for the year of disposition.
d.
The cost recovery deduction is based on the number of months the property was in service in the year of
acquisition. Therefore, one-half month's cost recovery is allowable for the month in which the property is
placed in service and for the month of disposition.
50. The mid-quarter convention under MACRS provides that
a.
Depreciation is allowable in the year of acquisition of qualified property only if the property is placed in
service in the first one-fourth of that year.
b.
One half of the year-of-acquisition depreciation is allowed regardless of when the property is placed in service
during the year. One-half year's depreciation is allowable for the year of disposition.
c.
The cost recovery deduction is based on the number of months the property was in service in the year of
acquisition. Therefore, one-half month's cost recovery is allowable for the month in which the property is
place in service and for the month of disposition.
d.
Any property placed in service in the last 3 months of a tax year is depreciated using this convention.
e.
Depreciation is calculated from the middle of the quarter in which an asset is placed in service through the end
of the year.
51. Serena owns a van that she paid $22,000 for in 2010 and used exclusively for personal purposes until May 9, 2014,
when she began using the van in her plumbing business. On May 9, 2014, a comparable van was selling for $13,000.
Serena sells the van on October 28, 2016. Assuming that the van is 5-year MACRS property, it is not listed property, and
that Serena did not make the Section 179 election to expense on the van, what is her allowable depreciation deduction in
2016?
a.
$749
b.
$1,248
c.
$1,267
d.
$2,112
e.
$2,496
52. Weston purchases equipment classified as 7-year property on January 5, 2014, at a cost of $80,000. Section 179 was
not elected. He sells the equipment on February 12, 2016. What is Weston's 2016 depreciation deduction?
a.
$- 0 -
b.
$3,498
c.
$6,996
d.
$9,794
e.
$13,992
53. Brent purchases a new warehouse building on May 16, 2014, for $6,000,000 (exclusive of the cost of the land). What
is Brent's 2015 depreciation deduction?
a.
$- 0 -
b.
$76,924
c.
$153,840
d.
$119,040
e.
$400,000
54. Ying pays $170,000 for an office building on August 27, 2014, to use in his consulting business. He properly allocates
$150,000 to the building and $20,000 to the land. What is Ying's 2015 depreciation deduction on the property?
a.
$1,124
b.
$1,443
c.
$1,923
d.
$3,846
e.
$5,454
55. Rafael bought an apartment building on March 27, 1998, at a cost of $2,000,000 (exclusive of the cost allocated to the
land). He sells the building on November 3, 2015. What is Rafael's cost recovery deduction on the building for 2015 if he
wants to take the maximum deduction allowable on the building?
a.
$44,870
b.
$63,630
c.
$66,660
d.
$69,690
e.
$72,740
56. The mid-quarter convention
I.
never applies to real estate.
II.
is required when more than 30% of the depreciable basis of certain property is placed into
service during the last 3 months of the tax year.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
Chapter 10
57. Ralph buys a new truck (5-year MACRS property) to use in his landscaping business on May 13, 2015, at a cost of
$18,000. On November 5, 2015, Ralph takes advantage of an end of the season clearance sale to purchase various
landscaping equipment (7-year MACRS property) costing $34,000. Assuming that Ralph does not wish to immediately
expense any of the cost of the property purchased this year, what is his 2015 maximum allowable cost recovery
deduction?
a.
$2,114
b.
$5,714
c.
$8,459
d.
$2,086
e.
$15,500
58. Aaron purchases a taxicab (5-year MACRS property) for $20,000 on December 3, 2015. This is the only business
asset Aaron acquires in 2015. He does not desire to use the Section 179 election. What is the maximum amount of
depreciation that he can deduct in 2015?
a.
$1,000
b.
$3,000
c.
$4,000
d.
$10,500
e.
$14,000
59. On March 23, 2015, Saturn Investments Corporation purchases a $5,000 computer (5-year property) for business-use.
On November 27, 2015, it pays $4,000 for new office furniture (7-year property). It does not wish to use the Section 179
election to expense. How much depreciation may Saturn deduct on the computer for 2015?
a.
$1,000
b.
$1,750
c.
$2,625
d.
$3,325
e.
$3,500
60. Shannon purchases equipment classified as 3-year property on December 19, 2015, at a cost of $100,000. Section 179
is not elected and Shannon does not use the straight-line method. Shannon purchased no other depreciable property in
2015. What is the amount of the MACRS depreciation deduction for 2015?
a.
$5,000
b.
$8,330
c.
$20,000
d.
$33,333
61. Mountain View Development Co. purchases a new high volume paper shredder for use in their document management
2015. The paper shredder is 7-year MACRS property, the Section 179 election to expense was not exercised. What is
Mountain View's 2015 depreciation deduction on the paper shredder?
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a.
$714
b.
$2,498
c.
$2,812
d.
$2,980
62. The Cox Accounting 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
$8,000
Office furniture
June 24
7 years
$27,000
Copier
Aug 3
5 years
$10,000
Phone system
Dec 11
5 years
$5,000
Cox 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. Cox will report 2015 taxable income in the amount of
$100,000 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.
$5,800
b.
$8,458
c.
$29,886
d.
$29,907
e.
$50,000
63. The Anderson Accounting 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
$80,000
Office furniture
June 24
7 years
$70,000
Fax machine
Aug 3
5 years
$100,000
Phone system
Dec 11
5 years
$50,000
Anderson 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. Anderson will report 2015 taxable income
in the amount of $20,000 before consideration of depreciation on their 2015 property acquisitions. What is the maximum
combined amount of cost recovery expense that may be obtained under this set of fact circumstances?
a.
$28,001
b.
$56,003
c.
$150,000
d.
$170,001
e.
$178,001
64. The Boatright Accounting Firm places the following property in service during the 2015 tax year:
Property
Placed in
Description
Service
MACRS Life
Cost Basis
