Chapter 7: Accounting Periods and Methods and Depreciation Key
1. The hybrid method of accounting involves the use of both the accrual and cash methods of accounting.
2. In general, accrual basis taxpayers recognize income when it is earned, regardless of when it is received.
3. Generally, cash basis taxpayers must account for payments of prepaid interest using the accrual method.
4. Under MACRS the same method of depreciation (accelerated or straight-line) must be used for all property in
a given class placed in service during that year.
5. Under the cash basis of accounting, expenses are generally deducted in the year they are paid.
6. Depreciation is the process of allocating the cost of assets to expense over a period of years.
7. Maintenance costs for capital assets are deducted in the year the amount is paid or incurred.
8. The IRS will automatically grant a request for a change in tax years, provided the proper form is filed in a
timely manner.
9. “Annualizing” is a method by which the taxpayer can usually decrease the amount of tax he or she pays.
10. If land declines in value, it may be depreciated for tax purposes.
11. If an asset’s actual useful life is longer than the assigned recovery period, the MACRS tables cannot be
used.
12. All S corporations must use the accrual basis of accounting.
13. Taxpayers must use the straight-line method of depreciation for all productive assets.
14. All S corporations must adopt a calendar tax year.
15. Partnerships may adopt any fiscal tax year as long as the tax year is used consistently.
16. Residential real estate purchased during 2011 is assigned a 27.5-year cost recovery period under the
Modified Accelerated Cost Recovery System.
17. Taxpayers may expense the cost of depreciable personal property placed in service during the year and used
in a trade or business in an amount up to a maximum of $20,000 annually.
18. Automobiles placed in service in 2011 generally have a 3-year cost recovery period under the Modified
Accelerated Cost Recovery System.
19. If an automobile is purchased for 100 percent use in the taxpayer’s business, the annual automobile
depreciation limitations do not apply.
20. The tax law imposes restrictions on the depreciation of “listed” property such as automobiles and
computers.
21. Depreciation refers to the physical deterioration or loss of value of an asset.
22. Expenditures incurred to maintain an asset in good operating condition must be depreciated over the
remaining useful life of the asset.
23. In applying the statutory rates from the MACRS tables, the cost of the asset must first be reduced by the
estimated salvage value.
24. Depreciation on property in the five-year MACRS class is claimed over a period of six tax years due to the
half-year convention.
25. If listed property is used more than 50 percent in a qualified business use, depreciation must be calculated
using the straight-line method.
26. The election to expense is not permitted where listed property does not meet the qualified business use test.
27. The annual automobile depreciation limitations apply only to the first four years of the asset’s recovery
period.
28. If actual business use of an automobile is less than 100 percent, the annual automobile depreciation
limitations must be reduced to reflect the actual business use only.
29. Goodwill is considered to be a Section 197 asset amortized over 15 years for tax purposes.
30. Sales of property at a gain may be restricted under the related party rules of the Internal Revenue Code.
31. Vernon is a cash basis taxpayer with a calendar tax year. On November 1, 2011, Vernon entered into a lease
to rent a building for use in his business at $4,000 a month. On that day Vernon paid 6 months rent on the
building, a total of $24,000 ($4,000 ´ 6 months). How much may Vernon deduct for rent expense on his 2011
tax return?
A. $4,000
32. Kate is an accrual basis, calendar-year taxpayer. On November 1, 2011, Kate leased out a building for
$4,000 a month. On that day Kate received 6 months rental income on the building, a total of $24,000 ($4,000 ´
6 months). How much income must Kate include on her 2011 tax return as a result of this transaction?
A. $4,000
33. Jenny constructed a building for use as a residential rental property. The cost of the building was $180,000,
and it was placed in service on August 1, 1990. The building has a 27.5 year MACRS life. What is the amount
of depreciation on the building for 2011 for tax purposes?
34. Becky is a cash basis taxpayer with the following transactions during her calendar tax year:
Cash basis revenue
$54,000
Cash basis expenses, except rent
25,000
Rent expense (paid on December 1) for use of a building for 6 months
12,000
What is the amount of Becky’s taxable income from her business for this tax year?
35. From the records of Tom, a cash basis sole proprietor, the following information was available:
Gross receipts
$30,000
Dividend income (on personal investments)
200
Cost of sales
15,000
Other operating expenses
3,000
State business taxes paid
300
What amount should Tom report as net earnings from self-employment?
36. On January 1, 2011, Sandy, a sole proprietor, purchased for use in her business a new production machine
(7-year property) at a cost of $40,000. Sandy does not purchase any other property during 2011 and has net
income from her business of $80,000. If the standard recovery period table would allow $5,716 of depreciation
expense on the $40,000 of equipment purchased in 2011, what is Sandy’s maximum depreciation deduction,
including bonus depreciation and the Section 179 election to expense, for 2011?
37. Walnut Interests is a partnership owned equally by Bob, Jon, and Gary. Bob and Jon each have a November
30 tax year-end, while Gary has a January 31 tax year-end. Under the general rule, what tax year-end should the
partnership adopt?
38. William, a cash-basis sole proprietor, had the following receipts and disbursements for 2011:
Gross receipts
$60,000
Cost of sales
30,000
Other operating expenses
6,000
Medical expenses
600
For 2011, what amount should William report as net earnings from self-employment?
39. Which of the following is not an acceptable method of accounting under the tax law?
40. Cork Oak Corporation purchased a heavy-duty truck (not considered a passenger automobile for purposes of
the listed property and luxury automobile limitations) on June 1, 2011 for use in its business. The truck, with a
cost basis of $18,000, has a 5-year estimated life. It also is 5-year recovery property. How much depreciation
should be taken on the truck for the 2011 calendar tax year using the conventional (for financial accounting
purposes) straight-line depreciation method?
A. $1,800
41. On June 1, 2011, Cork Oak Corporation purchased a passenger automobile for 100 percent use in its
business. The auto, with a cost basis of $22,000, has a 5-year estimated life. It also is 5-year recovery property.
How much depreciation should be taken for 2011, assuming Cork Oak Corporation uses the accelerated
depreciation method under MACRS but does not choose to make the election to expense or take bonus
depreciation?
42. Grevilla Inc. is an S corporation that has chosen a fiscal year ending November 30. For the fiscal year ended
November 30, 2011, Grevilla Inc. had taxable income of $180,000 and the prior year made a required payment
of $1,000. What is the amount of the required tax payment which should be made in 2012?
43. On June 1, 2011, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its
business. The automobile is in the 5-year cost recovery class and has a basis for depreciation of $30,000.
Assuming that the corporation elects the accelerated method of cost recovery for the asset and does not elect to
expense any of its cost or take bonus depreciation, what is the total tax depreciation deduction for the 2011
calendar tax year (Year 1)?
44. What is the minimum number of years over which computers may be depreciated under MACRS?
45. An asset other than a passenger automobile is placed in service on May 15, 2011 and has a depreciable basis
of $32,000. The asset is in the 7-year recovery class. What is the maximum depreciation deduction that may be
claimed for 2011, excluding the election to expense and bonus depreciation?
46. Which of the following statements with respect to the depreciation of real property under MACRS is
correct?
47. John purchases residential rental property on October 31, 2011 for a cost of $290,000. Of this amount,
$140,000 is allocable to the cost of the home and the remaining $150,000 is allocable to the cost of the land.
What is John’s maximum depreciation deduction for 2011?
48. What is the maximum depreciation expense deduction for Year 2 (2012) for a passenger automobile, used
100 percent for qualified business use, placed in service on June 15, 2011 and costing $12,000 (the election to
expense is not made and no bonus depreciation was taken)?
49. On January 1, 2011, Roxburgia Company places a commercial storage building in service. The costs
allocated to construction of the building total $300,000 and land is accounted for separately. Which of the
following is a true statement with respect to the depreciation of the building?
A. The period over which the building must be depreciated is shorter than the period over which a residential
building must be depreciated.
50. During 2011, Travis purchases $425,000 of manufacturing equipment (7-year property) for use in his
business. Travis has taxable income from his business of $500,000. What is the maximum amount that Travis
may deduct under the election to expense?
51. Jasper is a self-employed businessman. On March 5, 2011 he purchases a personal computer for use at his
home. He uses the computer for personal purposes 50 percent of the time and for business use the remainder of
the time. The computer cost $2,100. Jasper wants to claim the maximum amount of depreciation possible for
2011, including the election to expense, if it is available. What is the amount of depreciation that Jasper should
claim on the computer for 2011?
A. $2,100
52. Section 197 intangibles:
A. Are amortized over a 15-year period
53. If a loss from sale or exchange of property between related parties is disallowed and the property is
subsequently sold to an unrelated party,
54. Which of the following is true with respect to the related party rules?
A. Bill sells stock to his sister for a $3,000 loss. Bill can deduct the loss on his tax return.
55. Jerry and Julie are brother and sister. Jerry sold stock to Julie for $5,000, its fair market value. The stock
cost Jerry $10,000 5 years ago. Also, Jerry sold Carol (an unrelated party) stock for $2,000 that cost $10,000 3
years ago. What is Jerry’s recognized loss before the $3,000 capital loss limitation?
A. $0
56. On January 1, 2011, Ted purchased a small software company for $200,000. He paid $95,000 for the fixed
assets of the company and $105,000 for goodwill. How much amortization may Ted deduct on his 2011 tax
return for the purchased goodwill?
57. Mark the correct answer. Partnerships and S corporations differ in that:
A. Partnerships can have a fiscal year deferral period of 3 months while S corporations can have a fiscal year
deferral period of only 2 months.
58. Mark the correct answer. In cash basis accounting, for tax purposes:
59. Mark the correct answer. In calculating depreciation:
60. Mark the correct statement.
61. Taxpayers choosing the election to expense: