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Exam 10: Property Acquisition and Cost Recovery

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Question 1

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Clay LLC placed in service machinery and equipment (7-year property) with a basis of $2,450,000 on June 6,2016.Assume that Clay has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus expensing) (Use MACRS Table 1 in the text) (Round final answer to the nearest whole number)

A) $350,105
B) $427,244
C) $778,070
D) $860,105
E) None of the choices are correct.

F) A) and B)
G) A) and E)

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Question 2

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Taxpayers may always expense a portion of start-up costs and organizational expenditures.

A) True
B) False

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Question 3

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Simmons LLC purchased an office building and land several years ago for $250,000.The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land.The property was placed in service on October 2.If the property is disposed of on February 27 during the 10ᵗʰ year,calculate Simmons' maximum depreciation in the 10ᵗʰ year.(Use MACRS Table 5 in the text)   EXHIBIT 10-6 in the text

Sequoia purchased the rights to cut timber on several tracts of land over a fifteen-year period.It paid $500,000 for cutting rights.A timber engineer estimates that 500,000 board feet of timber will be cut.During the current year,Sequoia cut 45,000 board feet of timber,which it sold for $900,000.What is Sequoia's cost depletion expense for the current year?

Suvi,Inc.purchased two assets during the current year (a full 12-month tax year) .Suvi placed in service computer equipment (5-year property) on August 10 with a basis of $20,000 and machinery (7-year property) on November 18 with a basis of $10,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation) .(Use MACRS Table 1 in the text) (Round final answer to the nearest whole number)

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) .(Use MACRS Table 1 in the text)

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) .(Use MACRS Table 1 in the text)

In general,major integrated oil and gas producers may take the greater of cost or percentage depletion.

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: $\begin{array} { c c c } { \text { Ources extracted per year } } \\\text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\50,000 & 150,000 & 100,000\end{array}$ What is Lucky Strike's depletion expense for year 2 if the applicable percentage depletion for silver is 15 percent?

Taxpayers may use historical data to determine the recovery period for tax depreciation.

Northern LLC only purchased one asset this year.In 2017,Northern LLC placed in service on September 6ᵗʰ machinery and equipment (7-year property)with a basis of $2,200,000.Assume that Northern has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (ignore any potential bonus expensing).(Use MACRS Table 1 in the text)(Round final answer to the nearest whole number)

The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year.

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?

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

An office building was purchased on December 9ᵗʰ several years ago for $2,500,000.The purchase price was allocated as follows: building $1,900,000,landscaping $100,000,and land $500,000.During the current year,the 10ᵗʰ year,the building was sold on March 10ᵗʰ.Calculate the maximum depreciation expense for the real property during the current year,rounded to the nearest whole number.(Use MACRS Table 5 in the text)

Teddy purchased only one asset during the current year.Teddy placed in service machinery (7-year property)on October 1ˢᵗ with a basis of $76,500.Calculate the maximum depreciation expense,rounded to the nearest whole number (ignoring §179 and bonus depreciation).(Use MACRS Table 2 in the text)

Potomac LLC purchased an automobile for $30,000 on August 5,2017.What is Potomac's depreciation expense for 2017 (ignore any possible bonus depreciation) ?  Exhibit 10-8 in the text

All assets subject to amortization have the same recovery period.

Timothy purchased a new computer for his consulting practice on October 15ᵗʰ of the current year.The basis of the computer was $4,000.During the Thanksgiving holiday,he decided the computer didn't meet his business needs and gave it to his college-aged son in another state.The computer was never used for business purposes again.Timothy had $50,000 of taxable income before depreciation.What is Timothy's total cost recovery expense with respect to the computer during the current year?

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