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Exam 9: Property Acquisition and Cost Recovery

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Question 1

True/False

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In general,a taxpayer should select longer-lived property for the §179 immediate expensing election.

A) True
B) False

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True

Question 2

Multiple Choice

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Bonnie Jo purchased a used computer (5-year property) for use in her sole proprietorship.The basis of the computer was $2,400.Bonnie Jo used the computer in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year.Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter) :

A) $240
B) $288
C) $480
D) $2,400
E) None of these

F) B) and D)
G) A) and B)

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Question 3

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Assume that Bethany acquires a competitor's assets on March 31^st.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?

Goodwill and customer lists are examples of §197 amortizable assets.

Which of the following is not depreciated?

Real property is always depreciated using the straight-line method.

How is the recovery period of an asset determined?

All assets subject to amortization have the same recovery period.

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.All real property is depreciated using the mid-month convention.

Tax cost recovery methods include depreciation,amortization,and depletion.

Businesses deduct percentage depletion when they sell the natural resource and they deduct cost depletion in the year they produce or extract the natural resource.

In general,major integrated oil and gas producers may take the greater of cost or percentage depletion.Depletion of timber and major integrated oil companies must be calculated using only the cost depletion method (no percentage depletion is available) .

Billie Bob purchased a used computer (5-year property) for use in his sole proprietorship in the prior year.The basis of the computer was $2,400.Billie Bob used the computer in his business 60 percent of the time during the first year.During the second year,Billie Bob used the computer 40 percent for business use.Calculate Billie Bob's depreciation expense during the second year assuming the sole proprietorship had a loss during the year (Billie Bob did not place the asset in service in the last quarter) :

Occasionally bonus depreciation is used as a stimulus tool by tax policy makers.

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

If tangible personal property is depreciated using the half-year convention and is disposed of during the first quarter of a subsequent year,the taxpayer must use the mid-quarter convention for the year of disposition.

Clay LLC placed in service machinery and equipment (7-year property) with a basis of $2,450,000 on June 6,2013.Assume that Clay has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus expensing) ,rounded to a whole number:

The alternative depreciation system requires both a slower method of recovery and longer recovery periods.

Which of the allowable methods allows the most accelerated depreciation?

PC Mine purchased a platinum deposit for $3,500,000.It estimated it would extract 17,000 ounces of platinum from the deposit.PC mined the platinum and sold it reporting gross receipts of $500,000 and $8 million for years 1 and 2,respectively.During years 1 and 2,PC reported net income (loss) from the platinum deposit activity in the amount of ($100,000) and $3,800,000,respectively.In years 1 and 2,PC actually extracted 2,000 and 8,000 ounces of platinum.What is PC's depletion expense for years 1 and 2 if the applicable percentage depletion for platinum is 22 percent,rounded to the nearest whole number?