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Exam 9: Property Acquisition and Cost Recovery

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Question 21

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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?

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Question 22

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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?

A) $200,000
B) $375,000
C) $400,000
D) $450,000
E) None of these

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

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Question 23

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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 for the year?

Deirdre's business purchased two assets during the current year.It placed in service computer equipment (5-year property) on January 20 with a basis of $15,000 and machinery (7-year property) on October 1 with a basis of $15,000.Calculate the maximum depreciation expense,rounded to a whole number (ignoring §179 and bonus depreciation) :

The method for tax amortization is always the straight-line method.

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

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.

Daschle LLC completed some research and development during June of the current year.The related costs were $60,000.If Daschle wants to capitalize and amortize the costs as quickly as possible,what is the total amortization expense Daschle may deduct during the current year?

The MACRS depreciation tables automatically switch to the straight-line method when it exceeds the declining balance method.

Phyllis purchased $8,000 of specialized audio equipment that she uses in her business regularly.Occasionally,she uses the equipment for personal use.During the first year,Phyllis used the equipment for business use 70 percent of the time;however,during the current (second) year the business use fell to 40 percent.Assume that the equipment is seven-year MACRS property and is under the half-year convention.Assume the ADS recovery period is 10 years.What is the depreciation allowance for the current year,rounded 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.

Anne LLC purchased computer equipment (5-year property) on August 29 with a basis of $30,000 and used the half-year convention.During the current year,which is the fourth year Anne LLC owned the property,the property was disposed of on January 15.Calculate the maximum depreciation expense:

Potomac LLC purchased an automobile for $30,000 on August 5,2012.What is Potomac's depreciation expense for 2012 (ignore any possible bonus depreciation) ?

Like financial accounting,most business property must be capitalized for tax purposes.

An asset's capitalized cost basis includes only the actual purchase price;whereas the other expenses associated with the asset are immediately expensed.

The manner in which a business amortizes a patent or copyright is the same whether the business directly purchases the patent or copyright or whether it self-creates the intangible.

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 10^th year,calculate Simmons' maximum depreciation in the 10^th year:

Tax cost recovery methods do not include:

Racine started a new business in the current year.She incurred $52,000 of start-up costs.If her business started on November 23^rd of the current year,what is the total expense she may deduct with respect to the start-up costs for her initial year,rounded to the nearest whole number?

Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS) .