Exam 7: Property Acquisitions and Cost Recovery Deductions

Kemp Inc., a calendar year taxpayer, generated over $10 million taxable income in 2012. Kemp made one asset purchase: manufacturing equipment costing $543,600. The equipment has a 7-year recovery period and was placed in service on June 14. Assuming that Kemp made the Section 179 election with respect to the equipment, compute Kemp's 2012 cost recovery deduction.

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.

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?

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2011. Which of the following statements is true?

Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price. Compute Pettit's book basis and tax basis in the equipment.

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.)

Norwell Company purchased $1,413,200 of new business equipment on July 10, 2011. This was Norwell's only asset purchase for its 2011 taxable year. Compute Norwell's total tax depreciation deduction for this 7-year recovery property.

On May 1, Sessi Inc., a calendar year corporation, purchased a business for a $2 million lump-sum price. The business' balance sheet assets had the following appraised FMV. a. Compute the cost basis of the goodwill acquired by Sessi Inc. on the purchase of this business. b. Compute Sessi's goodwill amortization deduction for the year of purchase. c. Use a 35 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.

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

Driller Inc. has $498,200 of unrecovered capitalized costs in Well #83. This year, cost depletion on the well is $356,000. 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, 2011. a. Compute NRW's MACRS depreciation with respect to the realty for 2011 and 2012. b. Compute NRW's adjusted basis in the land and building on December 31, 2012. c. How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?

Research and experimental expenditures are deductible unless they result in the development of a patented formula or process.

Which of the following statements concerning MACRS depreciation is true?

Szabi Inc., a calendar year taxpayer, purchased two assets during 2012: a machine costing $80,000 and computer equipment costing $103,500. The machine is 7-year recovery property and the computer equipment is 5-year recovery property. Which of the following statements is true?

Gowda Inc., a calendar year taxpayer, purchased $1,496,000 of equipment on March 23. This was Gowda'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 Gowda's first and second-year MACRS depreciation. (Disregard the Section 179 deduction and bonus depreciation in making your calculation.)

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.

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?

Which of the following statements about the computation of cost of goods sold is true?

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.