Exam 7: Property Acquisitions and Cost Recovery Deductions

Jaboy Inc. was incorporated three years ago. In its first year, Jaboy capitalized $72,000 organizational and start-up costs for tax purposes. However, it expensed these costs for financial statement purposes. Which of the following statements is true?

The capitalized cost of tangible leasehold improvements is amortizable over the term of the lease.

Norwell Company purchased $1,413,200 of new business equipment on July 10, 2016. This was Norwell's only asset purchase for its 2016 taxable year. Compute Norwell's total tax depreciation deduction for this 7-year recovery property.

Deitle Inc. manufactures small appliances. This year, Deitle capitalized $3,679,000 indirect costs to inventory for book purposes and $3,865,000 indirect costs to inventory for tax purposes. The consequence of the different accounting methods is a $186,000:

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.

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?

Which of the following statements concerning deductible repair expenses is false?

Selkie Inc. paid a $2 million lump sum to purchase a business. According to the contract, the seller of the business is prohibited from engaging in a similar business for 18 months. Selkie allocated $300,000 of the purchase price to this covenant not to compete. Selkie may amortize the $300,000 over 15 years.

WR&Z Company, a calendar year taxpayer, paid $6,400,000 for a commercial office building and allocated $400,000 of the cost to the land and $6,000,000 of the cost to the building. WR&Z place the realty in service on May 11. Refer to the appropriate MACRS Table in Chapter 7 to compute WR&Z's first-year depreciation on the realty.

Broadus., a calendar year taxpayer, purchased a total of $128,300 tangible personalty in 2016. Broadus' taxable income without regard to a Section 179 deduction was $92,600. Which of the following statements is true?

The MACRS calculation ignores any salvage or residual value of an asset.

Lensa Inc. purchased machinery several years ago for $400,000. This year, book depreciation on the machinery was $40,000, MACRS depreciation was $35,720, and Lensa's marginal tax rate is 35%. Which of the following statements is true?

BriarHill Inc. purchased four items of tangible personalty in 2016 at a total cost of $2,579,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

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?

Elakin Inc., a calendar year taxpayer, paid $1,339,000 for new machinery (seven-year recovery property) placed in service on August 29, 2016. The machinery was Elakin's only asset purchase during 2016, and Elakin's taxable income before any Section 179 deduction was $14 million. a. Compute Elakin's 2016 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 would your answer to a. change if Elakin's taxable income before any Section 179 deduction was $281,400 instead of $14 million?

Kigin Company spent $240,000 to clean up hazardous waste that had contaminated land used in Kigin's business. 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.

Conant Company purchased only one item of tangible personalty in 2016. The cost of the item was $2,009,700. Conant can elect to expense $500,000 of this cost.

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.)

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?