Exam 7: Property Acquisitions and Cost Recovery Deductions

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?

Repair costs incurred to keep a tangible asset in good working order must be capitalized to the cost of the asset.

Which of the following statements about tax basis is false?

Puloso Company, a calendar year taxpayer, incurred the following start-up expenditures before the opening of its new health and fitness center. The Puloso Center opened its doors for business on March 21, 2013. How much of the start-up expenditures can Puloso deduct in 2013?

Mann Inc., a calendar year taxpayer, incurred $49,640 start-up expenditures during the preoperating phase of a new business venture. The business started operations in November. Mann expensed the $49,640 on its current-year financial statements. Which of the following statements is true?

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

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

Marz Inc. made a $75,000 cash expenditure this year (year 0). Compute the after-tax cost if Marz must capitalize the expenditure and amortize it ratably over three years, beginning in year 0. Marz has a 30% marginal tax rate and uses a 7% discount rate.

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:

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?

BriarHill Inc. purchased four items of tangible personalty in 2013 at a total cost of $2,798,000. BriarHill cannot elect to expense any of the cost of the property under Section 179.

A basic premise of federal income tax law is that an expense is deductible unless the Internal Revenue Code specifically prohibits the deduction.

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

W&F Company, a calendar year taxpayer, purchased a total of $2,104,700 tangible personalty in 2013. How much of this cost can W&F elect to expense under Section 179?

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.)

Hoopin Oil Inc. was allowed to deduct $5.3 million of intangible drilling and development costs on this year's tax return. Which of the following statements is false?

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.)

Elcox Inc. spent $2.3 million on a new advertising campaign this year. Which of the following statements is true?

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

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.