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Exam 10: Property Acquisition and Cost Recovery

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Question 21

True/False

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Depletion is the method taxpayers use to recover their capital investment in natural resources.

A) True
B) False

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Question 22

Multiple Choice

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Beth's business purchased only one asset during the current year (a full 12-month tax year) . Beth placed in service machinery (7-year property) on December 1 with a basis of $50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation) . (Use MACRS Table 2)

A) $1,785.
B) $2,500.
C) $7,145.
D) $10,000.
E) None of the choices are correct.

F) A) and D)
G) None of the above

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Question 23

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Littman LLC placed in service on July 29, 2018 machinery and equipment (7-year property) with a basis of $600,000. Littman's income for the current year before any depreciation expense was $100,000. Which of the following statements is true to maximize Littman's total depreciation expense for 2018? (Use MACRS Table 1)

Amit purchased two assets during the current year. Amit placed in service computer equipment (5-year property) on April 16^th with a basis of $5,000 and furniture (7-year property) on September 9^th with a basis of $20,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1)

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A geologist estimated that Santa Fe will recover 5,000 pounds of turquoise. During the past several years, 4,000 pounds were extracted. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $250,000. What is Santa Fe's cost depletion expense for the current year?

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 (excluding amounts amortized over 180 months) for the year?

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. (Use MACRS Table 3)

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.

Significant limits are placed on the depreciation of luxury automobiles.

The basis for a personal use asset converted to business use is the lesser of the asset's cost basis or fair market value on the date of the transfer or conversion.

Patin Corporation began business on September 23^rd of the current year. It incurred $40,000 of start-up costs and $60,000 of organizational expenditures. How much total amortization may be deducted in the first year? (Round final answer to the nearest whole number.)

If a machine (seven-year property) being depreciated using the half-year convention is disposed of during the seventh year, a taxpayer must multiply the appropriate depreciation percentage from the MACRS table percentage by 50 percent to calculate the depreciation expense properly.

Assume that Cannon LLC acquires a competitor's assets on June 15^th of a prior year. The purchase price was $450,000. Of the amount, $196,200 is allocated to tangible assets and $253,800 is allocated to three §197 intangible assets: $153,000 to goodwill, $50,400 to a customer list with an expected life of 8 years, and $50,400 to a 3 year non-compete agreement. On May 30^th of the second year, the customer list is sold for $10,000. (Round your amortization and final answer to the nearest whole number. Round your allocation percentage to the nearest whole percentage e.g., 0.1234 as 12%.) 1) What is Cannon's amortization expense for the second year? 2) What is the basis of the intangibles at the end of the second year?

All taxpayers may use the §179 immediate expensing election on certain property.

Billie Bob purchased a used camera (5-year property) for use in his sole proprietorship in the prior year. The basis of the camera was $2,400. Billie Bob used the camera in his business 60 percent of the time during the first year. During the second year, Billie Bob used the camera 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) . (Use MACRS Table 1)

Which of the following assets are eligible for §179 expensing?

Deirdre's business purchased two assets during the current year (a full 12-month tax year) . Deirdre placed in service computer equipment (5-year property) on January 20 with a basis of $15,000 and machinery (7-year property) on September 1 with a basis of $15,000. Calculate the maximum depreciation expense, (ignoring §179 and bonus depreciation) . (Use MACRS Half-Year Convention) (Round final answer to the nearest whole number.)

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.

Which depreciation convention is the general rule for tangible personal property?

Lucky Strike Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined the silver and sold it reporting gross receipts of $1.8 million, $2.5 million, and $2 million for years 1 through 3, respectively. During years 1 - 3, Lucky Strike reported net income (loss) from the silver deposit activity in the amount of ($100,000) , $400,000, and $100,000, respectively. In years 1 - 3, Lucky Strike actually extracted 300,000 ounces of silver as follows: What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?