Exam 7: Property Acquisitions and Cost Recovery Deductions

In an inflationary economy,the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.

Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000.Which of the following statements is true?

Ferelli Inc.is a calendar year taxpayer.On September 1,Ferelli signed a 24-month lease on 3,600 square feet of commercial office space and paid a $3,240 fee to the agent who located the space and negotiated the lease.Ferelli paid $5,900 to install new overhead lighting in the office space.The lighting is 7-year recovery property.Compute Ferelli's current-year cost recovery deduction with respect to the $9,140 costs associated with the office space.

Hextone Inc.,which has a 21% tax rate,purchased a new business asset.First-year book depreciation was $14,890,and first-year MACRS depreciation was $27,090.As a result of this book/tax difference,Hextone recorded a $2,562 deferred tax liability.

Elakin Inc.,a calendar year taxpayer,paid $1,339,000 for new machinery (seven-year recovery property)placed in service on August 29,2019.The machinery was Elakin's only asset purchase during 2019,and Elakin's taxable income before any Section 179 deduction was $14 million. a.Compute Elakin's 2019 cost recovery deduction with respect to the machinery. b.How would your answer change if the cost of the machinery was $2,150,000 instead of $1,339,000? c.How much Section 179 expense would be taken in part a if Elakin's taxable income before any Section 179 deduction was $281,400 instead of $14 million?

Maxcom Inc.purchased 15 passenger automobiles for use by its sales force.Which of the following statements is true?

Creighton,a calendar year corporation,reported $5,571,000 net income before tax on its financial statements prepared in accordance with GAAP.The corporate records reveal the following information. • Creighton's depreciation expense per books was $40,980,and its MACRS depreciation deduction was $77,270. • Creighton capitalized $32,670 indirect expenses to manufactured inventory for book purposes and $48,020 indirect expenses to manufactured inventory under the unicap tax rules. • Creighton's cost of goods sold for book purposes was $1,093,800,and its cost of goods sold for tax purposes was $1,107,200. • Creighton purchased a competitor's business on May 1 and allocated $468,000 to the business' goodwill. Compute Creighton's taxable income.

Essco Inc.,a calendar year taxpayer,made two asset purchases this year.The first purchase was a machine costing $836,000,and the second purchase was equipment costing $494,000.Both assets are 7-year recovery property.Essco placed the machine in service on July 21 and the equipment in service on October 14.How many months of MACRS depreciation is Essco allowed for each asset this year?

Cosmo Inc.paid $15,000 plus $825 sales tax plus a $200 delivery charge for a new business asset.Cosmo's tax basis in the asset is $15,200,and it can deduct the sales tax.

Lovely Cosmetics Inc.incurred $785,000 research costs on the development of its formula for a new line of face creams.Lovely obtained a 17-year patent on the formula from the U.S.government.Which of the following statements is true?

Moses Inc.purchased office furniture for $8,200 plus $492 sales tax and a $150 delivery charge.Which of the following is true?

On May 1,Sessi Inc.,a calendar year corporation,purchased a business for a $2 million lump-sum price.The business' balance sheet assets had the following appraised FMV. a.Compute the cost basis of the goodwill acquired by Sessi Inc.on the purchase of this business. b.Compute Sessi's goodwill amortization deduction for the year of purchase. c.Use a 21 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

Stanley Inc.,a calendar year taxpayer,purchased a building and placed it in service on June 12.The MACRS depreciation calculation assumes that the building was placed in service on May 15 (midquarter).

Which of the following intangible assets is not amortizable for tax purposes?

Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.

Inger Associates,which manufactures plastic containers,recently sold 12,000 containers to R&A Inc.The selling price per container was $18.R&A paid for the containers by transferring 864 shares of its common stock to Inger.On date of payment,R&A stock was selling on Nasdaq at $250 per share.Compute Inger's tax basis in the R&A stock.

Follen Company is a calendar year taxpayer.On September 1,Follen signed a 24-month lease on 3,800 square feet of commercial office space.Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease.It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements.The rewiring qualifies as five-year recovery property.Compute Follen's first-year cost recovery deductions relating to the lease space.

Colby Company performed professional services for M&E Inc.In exchange for the services,M&E gave Colby a 12-month lease on commercial office space.M&E could have charged $4,350 monthly rent for the space on the open market.Compute Colby's tax basis in the lease.

Cosmo Inc.purchased an asset costing $67,500 by paying $13,500 cash at date of purchase and giving the seller a 5-year interest-bearing note for the $54,000 balance.Cosmo's tax basis in the asset is $13,500.

Cobly Company,a calendar year taxpayer,made only one asset purchase this year: machinery costing $1,932,500.The machinery is 7-year recovery property,and Cobly placed it in service on October 12.How many months of MACRS depreciation on the machinery is Cobly allowed this year?