Exam 7: Property Acquisitions and Cost Recovery Deductions

Richland Company purchased an asset in 2009 for $50,000 and sold it in 2012. The asset was 7-year recovery property. Richland's 2012 MACRS depreciation on the asset was $6,245.

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?

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.

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?

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?

The MACRS calculation is based on the estimated useful life of the depreciable asset.

A book/tax difference resulting from application of the unicap rules to manufactured inventory reverses in the year in which the inventory is sold.

KJD Inc., a calendar year corporation, purchased $923,000 of equipment on November 13. This was KJD's only purchase of tangible personalty this year. KJD must use a midquarter convention to compute MACRS depreciation on the equipment.

Molton Inc. made a $60,000 cash expenditure this year (year 0). 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 35% marginal tax rate and uses a 7% discount rate.

Pyle Inc., a calendar year taxpayer, generated over $10 million taxable income in 2011. Pyle made one asset purchase: new transportation equipment costing $322,000. The equipment has a 5-year recovery period and was placed in service on February 9. Assuming that Pyle made the Section 179 election with respect to the equipment, compute Pyle's 2011 cost recovery deduction.

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?

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 35% tax rate, an 8% discount rate, and no 50% bonus depreciation, which of the following statements is true?

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.

Mr. and Mrs. Carleton founded Carleton Industries in 1993. This year, an independent appraiser placed a $25 million value on Carleton's business; $5 million of the value was attributable to unrecorded goodwill. Which of the following statements is true?

A firm must capitalize start-up expenditures of a new business in excess of $5,000 but may deduct expansion costs of an existing business.

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

W&F Company, a calendar year taxpayer, purchased a total of $603,700 tangible personalty in 2012. How much of this cost can W&F elect to expense under Section 179?

Elakin Inc., a calendar year taxpayer, paid $339,000 for machinery (seven-year recovery property) placed in service on August 29, 2012. The machinery was Elakin's only asset purchase during 2012, and Elakin's taxable income before any Section 179 deduction was $14 million. a. Compute Elakin's 2012 cost recovery deduction with respect to the machinery. b. How would your answer change if the cost of the machinery was $650,000 instead of $339,000? c. How would your answer to a. change if Elakin's taxable income before any Section 179 deduction was $81,400 instead of $14 million?

Which of the following statements about the uniform capitalization (unicap) rules is false?

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.