Exam 7: Property Acquisitions and Cost Recovery Deductions

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?

Dorian, a calendar year corporation, purchased $1,568,000 of equipment on May 3. This was Dorian's only purchase of depreciable property for the year. If the equipment has a 10-year recovery period, refer to Table 7.2 and compute Dorian's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

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.

Firms are allowed to deduct percentage depletion with respect to a productive asset even if the adjusted tax basis of the asset is zero.

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

Mallow Inc., which has a 35% 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 $6,230 deferred tax asset.

NLT Inc. purchased only one item of tangible personalty in 2012. The cost of the item was $124,000. NLT's taxable income before any Section 179 deduction was $77,100. NLT can elect Section 179 for only $77,100 of the cost of the property.

Durna Inc., a calendar year taxpayer, made two asset purchases this year. The first purchase was a machine costing $874,000, and the second purchase was equipment costing $660,000. Both assets are 7-year recovery property. Durna placed the machine in service on March 27 and the equipment in service on December 14. How many months of MACRS depreciation is Durna allowed for each asset?

Belsap Inc., a calendar year taxpayer, purchased a total of $519,000 depreciable personalty during May 2012. Which of the following statements is true?

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).

Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.

Mann Inc., a calendar year taxpayer, incurred $49,640 start-up expenditures during the preoperating phase of a new business venture. The business started operations in November. Mann expensed the $49,640 on its current-year financial statements. Which of the following statements is true?

Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true?

A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.

Conant Company purchased only one item of tangible personalty in 2012. The cost of the item was $595,700. Conant can elect to expense $139,000 of this cost.

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.

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

Which of the following statements about the depletion deduction is false?

Tregor Inc., which manufactures plastic components, rents equipment on a monthly basis for use in its manufacturing process. The monthly rent is a deductible expense when incurred.

Which of the following statements about MACRS is false?