Exam 7: Property Acquisitions and Cost Recovery Deductions

Marz Inc. made a $75,000 cash expenditure this year (year 0). Use Appendix A of your textbook provided to compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Marz has a 21% marginal tax rate and uses a 7% discount rate.

D&R Company, a calendar year corporation, purchased $1,116,000 of equipment on August 3. This was D&R's only purchase of depreciable property for the year. If the equipment has a 7-year recovery period, refer to Table 7.2 and compute D&R's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.) Use Table 7-2.

Szabi Inc., a calendar year taxpayer, purchased two assets during 2020: a machine costing $680,000 and computer equipment costing $553,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.

This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return.

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. Use Table 7-2.

This year, Zulou Industries capitalized $552,000 indirect costs to inventory for book purposes and $591,600 indirect cost to inventory under unicap. Zulou's cost of goods sold for book purposes was $2,458,000, and its cost of goods sold for tax purposes was $2,707,000. If Zulou has no other book/tax differences, and its book income is $5,000,000, compute Zulou's taxable income.

Cosmo Inc. paid $15,000 plus $825 sales tax and $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.

Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250.

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.

NLT Inc. purchased only one item of tangible personalty in 2020. The cost of the item was $24,000. NLT's taxable income before any Section 179 deduction was $7,100. NLT can elect Section 179 for only $7,100 of the cost of the property.

Conant Company purchased only one item of tangible personalty in 2020. The cost of the item was $2,689,700. Conant can elect to expense $1,040,000 of this cost.

Elakin Inc., a calendar year taxpayer, paid $1,339,000 for new machinery (seven-year recovery property) placed in service on August 29, 2020. The machinery was Elakin's only asset purchase during 2020, and Elakin's taxable income before any Section 179 deduction was $14 million.Compute Elakin's 2020 cost recovery deduction with respect to the machinery.How would your answer change if the cost of the machinery was $2,150,000 instead of $1,339,000?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?

W&F Company, a calendar year taxpayer, purchased a total of $2,694,700 tangible personalty in 2020. How much of this cost can W&F elect to expense under Section 179?

Which of the following statements about tax basis is false?

The difference between the before-tax cost and after-tax cost of an asset equals the net present value of the tax savings from any cost recovery deductions with respect to the asset.

If a business expenditure creates or enhances an identifiable asset with a useful life substantially beyond the current year, the expenditure must be capitalized.

Kaskar Company, a calendar year taxpayer, paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building. Kaskar place the realty in service on September 29. Refer to the appropriate MACRS Table in Chapter 7 to compute Kaskar's first-year depreciation on the realty. Use Table 7-3.

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?

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.