Exam 7: Property Acquisitions and Cost Recovery Deductions

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 this year?

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. Use Table 7-4.

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.) Use Table 7-2.

Belsap Inc., a calendar year taxpayer, purchased a total of $590,000 depreciable personalty during May 2020. Which of the following statements is true?

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?

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).

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

Ingol, Inc. was organized on June 1 and began business on September 13. Ingol elected a calendar year for tax purposes. The corporation incurred $60,300 of legal and other professional fees attributable to its formation. How much of these costs can Ingol deduct on its first tax return?

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. Accounts receivable \3 8,900 Inventory 450,000 Tangible personality 225,000 Realty: Building 500,000 Land 50,000 \1 ,263,900 Compute the cost basis of the goodwill acquired by Sessi Inc. on the purchase of this business.Compute Sessi's goodwill amortization deduction for the year of purchase.Use a 21 percent tax rate to compute Sessi's deferred tax liability resulting from the amortization deduction.

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.

In an inflationary economy, the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.

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 expense of adapting an existing asset to a new or different use must be capitalized to the cost of the asset for tax purposes.

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

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

In 2019, Rydin Company purchased one asset costing $48,400 and elected to expense the entire cost. However, Rydin could only deduct $21,000 of the Section 179 expense because of the taxable income limitation. In 2020, Rydin purchased tangible personalty costing $1,090,000. Rydin's taxable income without regard to any Section 179 deduction was $1,912,400. Compute Rydin's 2020 Section 179 deduction.

Cosmo Inc. purchased an asset costing $67,500 by paying $13,500 cash at the 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.

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?

Which of the following statements about amortization deductions is false?

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