Exam 7: Property Acquisitions and Cost Recovery Deductions

Mallow Inc., which has a 21% 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 $3,738 deferred tax asset.

Powell Inc. was incorporated and began operations on October 1 and adopted a calendar year for tax purposes. Powell paid $4,200 to the attorney who handled the corporate formation. Which of the following statements is true?

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 this year?

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?

Laven Company, a calendar year taxpayer, purchased a total of $561,240 new depreciable personalty during 2020. Which of the following statements is true?

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center. Rent on commercial space \6 ,000 Utilities 1,490 Staff hiring and training 5,270 Television advertising 1,600 14,360 The Puloso Center opened its doors for business on March 21 of the current year. How much of the start-up expenditures can Puloso deduct this year?

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 21% tax rate, an 8% discount rate, and no Section 179 deduction or bonus depreciation, which of the following statements is true? Use Appendix A, Table 7-2. (Round discount factor(s) to 3 decimal places.)

B&P Inc., a calendar year corporation, purchased only one operating asset during 2020: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2020.

Pyle Inc., a calendar year taxpayer, generated over $10 million taxable income in 2020. Pyle made one asset purchase: new heating and air conditioning system for existing nonresidential real property at a cost of $1,322,000. The system has a 39-year recovery period and was placed in service on February 9. Assuming that Pyle made the Section 179 election with respect to the acquisition, compute Pyle's 2020 cost recovery deduction. Use Table 7-4.

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, 2020. Use Table 7-3 and Table 7-4. Compute NRW's MACRS depreciation with respect to the realty for 2020 and 2021.Compute NRW's adjusted basis in the land and building on December 31, 2021.How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?

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

Norwell Company purchased $1,413,200 of new business equipment on July 10, 2020. This was Norwell's only asset purchase for its 2020 taxable year. Compute Norwell's total tax depreciation deduction for this 7-year recovery property (assuming Norwell has sufficnet income for the Section 179 deduction).

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.) Use Table 7-2.

L&P Inc., which manufactures electrical components, purchased new equipment for use in its manufacturing process. The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules.

Mann Inc. paid $7,250 to a leasing agent to negotiate Mann's 36-month lease for 18,000 square feet of space in a new commercial building. For tax purposes, Mann must:

Which of the following capitalized cost is not amortizable for tax purposes?

Richland Company purchased an asset in 2017 for $50,000 and sold it in 2020. The asset was 7-year recovery property. Richland's 2020 MACRS depreciation on the asset was $6,245. Use Table 7-2.

On April 2, Reid Inc., a calendar year taxpayer, paid a $750,000 lump-sum price to purchase a business. The appraised FMVs of the balance sheet assets were: Accounts receivable \3 8,000 Inventory 415,000 Fixtures and equipment 147,000 \6 00,000 Which of the following statements is false?

Which of the following statements concerning business goodwill is false?

Song Company, a calendar year taxpayer, purchased a total of $2,674,400 tangible personalty in 2020. How much of this cost can Song elect to expense under Section 179?