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Exam 8: Depreciation Cost Recovery Amortization and Depletion

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Question 21

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An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate.

A) True
B) False

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Question 22

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On April 5,2016,Orange Corporation purchased,and placed in service,seven-year class assets costing $540,000 and five-year class assets costing $140,000.Orange elects to expense the maximum amount under § 179.Orange does not take additional first-year depreciation (if available).Assume taxable income is not a limitation.Determine Orange Corporation's cost recovery with respect to the assets for 2016.

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§ 179 limit
$ 500,000
Seven-year asset...

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Question 23

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Motel buildings have a cost recovery period of 27.5 years.

The key date for calculating cost recovery is the date the asset is placed in service.

The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000,even if $20,000 cannot be expensed in the current year because of the taxable income limitation.

Bhaskar purchased a new factory building and land on September 10,2016,for $3,700,000.($500,000 of the purchase price was allocated to the land. ) He elected the alternative depreciation system (ADS) .Determine the cost recovery deduction for 2017.

George purchases used seven-year class property at a cost of $200,000 on April 20,2016.Determine George's cost recovery deduction for 2016 for alternative minimum tax purposes,assuming George does not elect § 179 and does not take additional first-year depreciation,if available.

The only asset Bill purchased during 2016 was a new seven-year class asset.The asset,which was listed property,was acquired on June 17 at a cost of $50,000.The asset was used 40% for business,30% for the production of income,and the rest of the time for personal use.Bill always elects to expense the maximum amount under § 179 whenever it is applicable.The net income from the business before the § 179 deduction is $100,000.Determine Bill's maximum deduction with respect to the property for 2016.

Rustin bought used 7-year class property on May 15,2016,for $728,000.Rustin elects § 179 and straight-line cost recovery.Rustin's taxable income would not create a limitation for purposes of the § 179 deduction.Determine the maximum cost recovery deduction Rustin can claim for 2016.

Discuss the difference between the half-year convention and the mid-quarter convention.

Orange Corporation begins business on April 2,2016.The corporation reports startup expenditures of $64,000 all incurred last year.Determine the total amount that Orange can elect to deduct in 2016

On June 1,2016,Norm leases a taxi and places it in service.The lease payments are $1,000 per month.Assuming the dollar amount from the IRS table for such leases is $241,determine Norm's gross income inclusion amount.

Tara purchased a machine for $40,000 to be used in her business.The cost recovery allowed and allowable for the three years the machine was used are computed as follows. Cost Recovery Allowed Cost Recovery Allowable Year 1 $16,000 $ 8,000 Year 2 9,600 12,800 Year 3 5,760 7,680 If Tara sells the machine after three years for $15,000,how much gain should she recognize?

On June 1,2016,Red Corporation purchased an existing business.With respect to the acquired assets of the business,Red allocated $300,000 of the purchase price to a patent.The patent will expire in 20 years.Determine the total amount that Red may amortize for 2016 for the patent.

On May 30,2015,Jane purchased a factory building to use for her business.In August 2016,Jane paid $300,000 for improvements to the building.Determine Jane's total deduction with respect to the building improvements for 2016.

A used $35,000 automobile that is used 100% for business is placed in service in 2016.If the automobile fails the 50% business usage test in the second year,no cost recovery will be recaptured.

Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.

Norm purchases a new sports utility vehicle (SUV)on October 12,2016,for $60,000.The SUV has a gross vehicle weight of 6,200 lbs.It is used 100% of the time for business and it is the only business asset acquired by Norm during 2016.Compute the maximum deduction with respect to the SUV for 2016.Norm does not take additional first-year depreciation (if available).

If more than 40% of the value of property,other than real property,is placed in service during the last quarter,all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery.

Under MACRS,if the mid-quarter convention is applicable,all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service.