Exam 7: Property Acquisitions and Cost Recovery Deductions

The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes.

W&F Company,a calendar year taxpayer,purchased a total of $2,594,700 tangible personalty in 2019.How much of this cost can W&F elect to expense under Section 179?

Pratt Inc.reported $198,300 book depreciation on its financial statements and deducted $256,000 MACRS depreciation on its tax return.As a result,Pratt has a $57,800:

Terrance Inc.,a calendar year taxpayer,purchased used equipment for $2,765,000 and placed it in service on March 4,2019.The equipment was seven-year recovery property and was the only depreciable asset that Terrance purchased during 2019 (assume no election for Section 179 expense and no Bonus Depreciation taken). a.Compute Terrance's tax depreciation with respect to the equipment for 2019 and 2020. b.Compute Terrance's adjusted basis in the equipment on December 31,2020.

Four years ago,Bettis Inc.paid a $5 million lump-sum price to purchase a business.Bettis allocated $600,000 of the price to goodwill.Which of the following statements is true?

NRW Company,a calendar year taxpayer,purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building.NRW placed the realty in service on August 2,2019. a.Compute NRW's MACRS depreciation with respect to the realty for 2019 and 2020. b.Compute NRW's adjusted basis in the land and building on December 31,2020. c.How would your answer to a.change if the building was a manufacturing plant instead of an apartment complex?

MACRS depreciation for buildings is based on the straight-line method.

B&P Inc.,a calendar year corporation,purchased only one operating asset during 2019: $599,900 of used computer equipment (5-year recovery property)placed in service on March 18.Assuming that B&P makes a Section 179 election,compute B&P's adjusted tax basis in the property at the end of 2019.

Poole Company made a $100,000 cash expenditure this year.Which of the following statements is false?

Merkon Inc.must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent.The purchased asset would be 3-year recovery property that Merkon could use for four years,after which the asset would have no salvage value.Assuming a 21% tax rate,an 8% discount rate,and no Section 179 deduction or bonus depreciation,which of the following statements is true? Use Appendix A,Table 7-2.(Round discount factor(s)to 3 decimal places.)

Mallow Inc.,which has a 21% tax rate,purchased a new business asset.First-year book depreciation was $37,225,and first-year MACRS depreciation was $55,025.As a result of this book/tax difference,Mallow recorded a $3,738 deferred tax asset.

A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.

Molton Inc.made a $60,000 cash expenditure this year (year 0).Use Appendix A of your textbook provided to compute the after-tax cost if Molton must capitalize the expenditure and amortize it ratably over three years,beginning in year 0.Molton has a 21% marginal tax rate and uses a 7% discount rate.

Which of the following expenditures must be capitalized for tax purposes?

Puloso Company,a calendar year taxpayer,incurred the following start-up expenditures before the opening of its new health and fitness center. The Puloso Center opened its doors for business on March 21 of the current year.How much of the start-up expenditures can Puloso deduct this year?

Shelley purchased a residential apartment for $1,400,000 and placed it in service on September 5.Which of the following statements is false?

BriarHill Inc.purchased four items of tangible personalty in 2019 at a total cost of $3,579,000.BriarHill cannot elect to expense any of the cost of the property under Section 179.

Powell Inc.was incorporated and began operations on October 1 and adopted a calendar year for tax purposes.Powell paid $4,200 to the attorney who handled the corporate formation.Which of the following statements is true?

Conant Company purchased only one item of tangible personalty in 2019.The cost of the item was $2,589,700.Conant can elect to expense $1,020,000 of this cost.

L&P Inc.,which manufactures electrical components,purchased new equipment for use in its manufacturing process.The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules.