Exam 7: Property Acquisitions and Cost Recovery Deductions

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

This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return. 

The after-tax cost of an expenditure is minimized when the expenditure is deductible in the current year.  

Follen Company is a calendar year taxpayer. On September 1, Follen signed a 24-month lease on 3,800 square feet of commercial office space. Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease. It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements. The rewiring qualifies as five-year recovery property. Compute Follen's first-year cost recovery deductions relating to the lease space. 

Shelley purchased a residential apartment for $1,400,000 and placed it in service on September 5. Which of the following statements is false? 

Creighton, a calendar year corporation, reported $5,571,000 net income before tax on its financial statements prepared in accordance with GAAP. The corporate records reveal the following information. • Creighton's depreciation expense per books was $40,980, and its MACRS depreciation deduction was $77,270. • Creighton capitalized $32,670 indirect expenses to manufactured inventory for book purposes and $48,020 indirect expenses to manufactured inventory under the unicap tax rules. • Creighton's cost of goods sold for book purposes was $1,093,800, and its cost of goods sold for tax purposes was $1,107,200. • Creighton purchased a competitor's business on May 1 and allocated $468,000 to the business' goodwill. Compute Creighton's taxable income.

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 $\quad$$\quad$ $\quad$ $6,000 Utilities $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 1,490 Staff hiring and training $\quad$$\quad$$\quad$$\quad$$\quad$ 5,270 Television advertising $\quad$$\quad$$\quad$$\quad$$\quad$ 1,600 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 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?

Research and experimental expenditures are not deductible if they result in the development of a patented formula or process.  

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.  

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? 

Uqua Inc. purchased a depreciable asset for $189,000. First-year depreciation for book purposes was $22,000, and first-year MACRS depreciation was $37,800. If Uqua's marginal tax rate is 21%, the excess tax depreciation results in a $3,318: 

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? 

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? 

MACRS depreciation for buildings is based on the straight-line method.  

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.