Deck 7: Accounting Periods and Methods and Depreciation

Question 1

Depreciation on property in the five-year MACRS class is claimed over a period of six tax years due to the half-year convention.

Answer 1

True

Question 2

Residential real estate purchased during 2014 is assigned a 27.5-year cost recovery period under the Modified Accelerated Cost Recovery System.

Answer 2

True

Question 3

Automobiles placed in service in 2014 generally have a 3-year cost recovery period under the Modified Accelerated Cost Recovery System (MACRS).

Answer 3

False

Question 4

In general, accrual basis taxpayers recognize income when it is earned, regardless of when it is received.

Question 5

Under MACRS, the same method of depreciation (accelerated or straight-line) must be used for all property in a given class placed in service during that year.

Question 6

Taxpayers may expense the cost of depreciable personal property placed in service during the year and used in a trade or business in an amount up to a maximum of $20,000 annually.

Question 7

In applying the statutory rates from the MACRS tables, the cost of the asset must first be reduced by the prior year's depreciation.

Question 8

All S corporations must use the accrual basis of accounting.

Question 9

Taxpayers must use the straight-line method of depreciation for all productive assets.

Question 10

Expenditures incurred to maintain an asset in good operating condition must be depreciated over the remaining useful life of the asset.

Question 11

The hybrid method of accounting involves the use of both the accrual and cash methods of accounting.

Question 12

Depreciation is the process of allocating the cost of assets to expense over a period of years.

Question 13

Depreciation refers to the physical deterioration or loss of value of an asset.

Question 14

Most partnerships, S corporations, and personal service corporations owned by individuals choose a September 30 year-end so that they may defer 3 months of income.

Question 15

If land declines in value, it may be depreciated for tax purposes.

Question 16

Maintenance costs for capital assets are deducted in the year the amount is paid or incurred.

Question 17

Generally, cash basis taxpayers must account for payments of prepaid interest using the accrual method.

Question 18

Under the cash basis of accounting, expenses are generally deducted in the year they are paid.

Question 19

If an asset's actual useful life is longer than the assigned recovery period, the MACRS tables cannot be used.

Question 20

"Annualizing" is a method by which the taxpayer can usually decrease the amount of tax he or she pays.

Question 21

Amy is a calendar year taxpayer reporting on the cash basis. Indicate which of the following income or expense items should not be included in her 2014 tax return.

A)On April 15, 2015, she makes a deductible contribution to an IRA for 2014.
B)She prepays half a year of interest in advance on her mortgage on the last day of 2014.
C)She pays all her outstanding invoices for standard business expenses in the last week of December.
D)She sends out a big bill to a customer on January 1, 2015, even though she did all of the work in December of 2014.

Question 22

Cork Oak Corporation purchased a heavy-duty truck (not considered a passenger automobile for purposes of the listed property and luxury automobile limitations) on May 1, 2014 for use in its business. The truck, with a cost basis of $24,000, has a 5-year estimated life. It also is 5-year recovery property. How much depreciation should be taken on the truck for the 2014 calendar tax year using the conventional (for financial accounting purposes) straight-line depreciation method?

A)$400
B)$2,400
C)$3,200
D)$4,800
E)None of the above

Question 23

If actual business use of an automobile is less than 100 percent, the annual automobile depreciation limitations must be reduced to reflect the actual business use only.

Question 24

Mark the correct answer. In cash basis accounting, for tax purposes:

A)Income is recognized when it is actually or constructively received and expenses are recognized when they are actually or constructively incurred, regardless of when paid.
B)Income is recognized when it is earned regardless of when received and expenses are recognized when they are actually or constructively incurred.
C)Income is generally recognized when it is actually or constructively received and expenses are generally recognized when they are paid.
D)The cash basis is not allowed for businesses reported on Schedule C.

Question 25

Which one of the following entities cannot use the cash method for tax purposes?

A)A large almond farm with $40 million in gross receipts.
B)A continuing education provider with $2 million in gross receipts and 20 employees.
C)A nationwide law firm with $5.4 million in gross receipts.
D)A small sole proprietorship with $150,000 in gross receipts.
E)All of the above may use the cash method.

Question 26

If an automobile is purchased for 100 percent use in the taxpayer's business, the annual automobile depreciation limitations do not apply.

Question 27

Becky is a cash basis taxpayer with the following transactions during her calendar tax year: What is the amount of Becky's taxable income from her business for this tax year?

A)$7,000 loss
B)$11,000
C)$27,500
D)$29,000
E)None of the above

Question 28

The election to expense is not permitted where listed property does not meet the qualified business use test.

Question 29

Sales of property at a gain may be restricted under the related party rules of the Internal Revenue Code.

Question 30

Vernon is a cash basis taxpayer with a calendar tax year. On October 1, 2014, Vernon entered into a lease to rent a building for use in his business at $3,000 a month. On that day Vernon paid 18 months rent on the building, a total of $54,000 ($3,000 × 18 months). How much may Vernon deduct for rent expense on his 2014 tax return?

A)$0
B)$12,000
C)$36,000
D)$54,000
E)None of the above

Question 31

The tax law imposes restrictions on the depreciation of "listed" property such as automobiles and computers.

Question 32

The annual automobile depreciation limitations apply only to the first four years of the asset's recovery period.

Question 33

From the records of Tom, a cash basis sole proprietor, the following information was available: What amount should Tom report as net earnings from self-employment?

A)$10,900
B)$11,200
C)$11,400
D)$14,400
E)None of the above

Question 34

Choose the incorrect statement.

A)Books and records may be kept on a different year-end basis than the year-end used for tax purposes.
B)The choice to file on a fiscal year-end basis must be made with an initial tax return.
C)Almost all individuals file tax returns using a calendar year accounting period.
D)An individual may request IRS approval to change to a fiscal year-end basis if certain conditions are met.

Question 35

Kate is an accrual basis, calendar-year taxpayer. On November 1, 2014, Kate leased out a building for $4,500 a month. On that day Kate received 7 months rental income on the building, a total of $31,500 ($4,500 × 7 months). How much income must Kate include on her 2014 tax return as a result of this transaction?

A)$4,500
B)$9,000
C)$31,500
D)$54,000
E)None of the above

Question 36

If listed property is used more than 50 percent in a qualified business use, depreciation must be calculated using the straight-line method.

Question 37

Which of the following is not an acceptable method of accounting under the tax law?

A)The accrual method
B)The cash method
C)The hybrid method
D)All of the above are acceptable
E)None of the above

Question 38

William, a cash-basis sole proprietor, had the following receipts and disbursements for 2014: For 2014, what amount should William report as net earnings from self-employment?

A)$13,400
B)$14,000
C)$19,400
D)$20,000
E)None of the above

Question 39

Goodwill is considered to be a Section 197 asset amortized over 15 years for tax purposes.

Question 40

The Dot Corporation has changed its year-end from a calendar year-end to August 31. The income for its short period from January 1 to August 31 is $48,000. The tax for this short period is:

A)$4,800
B)$7,200
C)$8,667
D)$12,000

Question 41

Which one of the following may not be depreciated using an accelerated method?

A)A farming tractor
B)A computer used strictly for the farming business
C)A corn-husking machine
D)A farm truck that is operated for personal use more than 50 percent of the time
E)All of the above items may be depreciated using an accelerated method

Question 42

Which of the following statements with respect to the depreciation of real property under MACRS is correct?

A)Real property is depreciated using a mid-quarter convention.
B)Only one-half year of depreciation is allowed in the year of acquisition of real property, regardless of the actual date the property is placed in service.
C)Assuming the property is not disposed of during the year, the depreciation deduction for the second year of use of the real property will be greater than the depreciation deduction in the first year.
D)In some cases, where a significant amount of property is acquired during the last quarter of the taxpayer's tax year, the taxpayer may be required to use a mid-quarter convention in calculating depreciation on real property.
E)None of the above.

Question 43

Mark the correct statement.

A)Residential real property is depreciated over 39 years.
B)Nonresidential real property is depreciated over 27.5 years.
C)Nonresidential real property is depreciated over 39 years.
D)Depreciation on real property starts at the beginning of the year in which the property is placed in service.

Question 44

On January 1, 2014, Sandy, a sole proprietor, purchased for use in her business a used production machine (7-year property) at a cost of $4,000. Sandy does not purchase any other property during 2014 and has net income from her business of $80,000. If the standard recovery period table would allow $572 of depreciation expense on the $4,000 of equipment purchased in 2014, what is Sandy's maximum depreciation deduction including the Section 179 election to expense (but not bonus depreciation) for 2014?

A)$572
B)$4,000
C)$4,572
D)$25,000
E)None of the above

Question 45

An asset other than a passenger automobile is placed in service on May 15, 2014 and has a depreciable basis of $36,000. The asset is in the 7-year recovery class. What is the maximum depreciation deduction that may be claimed for 2014, excluding the election to expense and bonus depreciation?

A)$2,572
B)$5,144
C)$25,000
D)$36,000
E)None of the above

Question 46

Which one of the following is true about Modified Accelerated Cost Recovery System (MACRS)?

A)A building is depreciated using 200 percent declining balance depreciation.
B)Buildings and autos both have the same depreciation life.
C)A light duty business truck is depreciated using accelerated depreciation.
D)All of the above are false.

Question 47

ABC Corp bought a production machine on January 1, 2012 for $31,250. The company elected out of Section 179 expensing and elected out of claiming bonus depreciation in 2012, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property. What is the 2014 depreciation (year 3) deduction for the machine?

A)$6,000
B)$6,250
C)$10,000
D)$12,500
E)None of the above is correct

Question 48

Taxpayers choosing the election to expense:

A)May depreciate the amount of the asset cost that exceeds the amount allowed under the election to expense.
B)Will have the maximum that can be expensed under the election reduced by $0.50 for each dollar by which the cost of the asset acquired exceeds a specified limit.
C)May not carry over any amounts elected which are not allowed because of taxable income limitations.
D)May expense a $125,000 automobile so long as it is used 100 percent for business.

Question 49

Mark the correct answer. In calculating depreciation:

A)Straight-line depreciation is higher than double declining balance depreciation in the early years.
B)Straight-line depreciation is higher than double declining balance depreciation in the later years.
C)Double declining balance is a method of straight-line depreciation.
D)MACRS depreciation requires that salvage value be taken into account.

Question 50

Jenny constructed a building for use as a residential rental property. The cost of the building was $164,975, and it was placed in service on August 1, 1990. The building has a 27.5-year MACRS life. What is the amount of depreciation on the building for 2014 for tax purposes?

A)$2,250
B)$3,000
C)$6,000
D)$6,547
E)None of the above

Question 51

What is the maximum depreciation expense deduction for Year 2 (2015) for a passenger automobile, used 100 percent for qualified business use, placed in service on June 15, 2014 and costing $14,000 (the election to expense is not made and no bonus depreciation was taken)?

A)$2,800
B)$3,160
C)$4,480
D)$5,100
E)None of the above

Question 52

Jasper is a self-employed businessman. On March 5, 2014 he purchases a personal computer for use at his home. He uses the computer for personal purposes 50 percent of the time and for business use the remainder of the time. The computer cost $2,300. Jasper wants to claim the maximum amount of depreciation possible for 2014, including the election to expense, if it is available. What is the amount of depreciation that Jasper should claim on the computer for 2014?

A)$2,300
B)$1,150
C)$460
D)$230
E)Some amount less than the above amounts

Question 53

During 2014, Travis purchases $13,000 of used manufacturing equipment (7-year property) for use in his business, his only asset purchase that year. Travis has taxable income from his business of $500,000. What is the maximum amount that Travis may deduct under the election to expense?

A)$0
B)$13,000
C)$25,000
D)$500,000
E)None of the above

Question 54

On January 1, 2014, Roxburgia Company places a commercial storage building in service. The costs allocated to construction of the building total $300,000 and land is accounted for separately. Which of the following is a true statement with respect to the depreciation of the building?

A)The period over which the building must be depreciated is shorter than the period over which a residential building must be depreciated.
B)Since the building was placed in service on the first day of the year, the depreciation expense for each year the building is used, except for the year of disposition, will be the same amount.
C)Since the land is accounted for separately, the amount of depreciation expense for the building cannot be determined from the information given.
D)The depreciation expense for Year 2 would be the same regardless of whether the building is placed in service on January 1, 2014 or February 1, 2014.
E)All of the above.

Question 55

What is the minimum number of years over which computers may be depreciated under MACRS?

A)3 years
B)5 years
C)7 years
D)10 years
E)15 years

Question 56

On June 1, 2014, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its business. The automobile is in the 5 year cost recovery class and has a basis for depreciation of $30,000. Assuming that the corporation elects the accelerated method of cost recovery for the asset and does not elect to expense any of its cost or take bonus depreciation, what is the total tax depreciation deduction for the 2014 calendar tax year (Year 1)?

A)$3,060
B)$3,160
C)$4,287
D)$6,000
E)None of the above

Question 57

John purchases residential rental property on September 30, 2014 for a cost of $290,000. Of this amount, $140,000 is allocable to the cost of the home and the remaining $150,000 is allocable to the cost of the land. What is John's maximum depreciation deduction for 2014?

A)$5,090
B)$1,485
C)$1,061
D)$370
E)None of the above

Question 58

Aaron has a successful business with $50,000 of income in 2014. He purchased a new 7-year MACRS property with a cost of $7,000. For tax purposes, what is the largest write-off Aaron can obtain in 2014 for the new asset?

A)$500
B)$1,000
C)$3,500
D)$7,000

Question 59

Steve Corp bought a $600,000 apartment building in June of 2013. Of the purchase price, $104,950 is allocated to the value of the land. What is the maximum amount of depreciation that the company can claim in 2014 (year 2) for the building?

A)$9,752
B)$18,000
C)$25,000 under the election to expense business property
D)$21,816
E)You cannot depreciate property costing over $500,000

Question 60

Which of the following is true about the MACRS depreciation system?

A)No salvage value is used before depreciation percentages are applied to depreciable real estate.
B)Residential rental buildings are depreciated straight-line over 20 years .
C)Commercial real estate buildings are depreciated over 39 years using accelerated depreciation.
D)No matter when equipment is purchased during the month, it is considered to have been purchased mid-month for MACRS depreciation purposes.

Question 61

On June 2, 2014, Scott purchased a commercial building. The cost basis assigned to the building is $600,000. Scott also owns a residential apartment building he purchased on June 15, 2013 with a cost basis of $400,000.
a.​Calculate Scott's total depreciation deduction for the buildings for 2014, using the Modified Accelerated Cost Recovery System.
b.​Calculate Scott's total depreciation deduction for the buildings for 2015, using the Modified Accelerated Cost Recovery System.

Question 62

Mary sells to her father, Robert, her shares in AA Corp for $55,000. The shares cost Mary $80,000. How much loss may Mary claim from the sale?

A)$0
B)$25,000
C)$55,000
D)$80,000
E)None of the above is correct

Question 63

Which one of the following is a Section 197 intangible?

A)Computer software available for purchase by the general public
B)A building
C)A stock investment
D)An interest-earning certificate of deposit
E)Goodwill

Question 64

Countryside Acres Apartment Complex had the following transactions during the year:
Using the accrual method, calculate the net income:
​

Question 65

Section 197 intangibles:

A)Are amortized over a 15-year period.
B)Include goodwill, going-concern value, and information bases.
C)Were defined in the Revenue Reconciliation Act of 1993.
D)Are not amortized over the actual estimated useful life of the intangible asset.
E)All of the above are true.

Question 66

Explain the use of the half-year convention for MACRS depreciation for assets other than real estate and the exception to the half-year convention rule.

Question 67

Which of the following is true with respect to the related party rules?

A)Bill sells stock to his sister for a $3,000 loss. Bill can deduct the loss on his tax return.
B)A taxpayer's uncle is a related party for purposes of Section 267.
C)A disallowed loss on a related party transaction can be used to offset any future gain when the property is sold to an unrelated party.
D)Under the constructive ownership rules of Section 267, a shareholder owns 10 percent of the stock owned by a corporation in which he or she is a shareholder.
E)None of the above are true.

Question 68

Quince Corporation changes its year-end from a fiscal year-end to a calendar year-end. The corporation has taxable income of $39,000 for its 3-month short period beginning October 1, 2014 and ending December 31, 2014. Calculate the corporation's tax for the short period.

Question 69

Betty purchases a used $12,000 car in 2014, to use exclusively in her business.
a. What will the standard MACRS depreciation schedule be for the 6 years the auto is depreciated?Year 1:Year 2:Year 3:Year 4:Year 5:Year 6:
b. If Betty holds the car until it is fully depreciated, and uses straight-line depreciation, how many years will this take?

Question 70

On August 1, 2014, David purchased manufacturing equipment for use in his business. The equipment cost $14,000 and has an estimated useful life and MACRS class life of 7 years. No election to expense or use bonus depreciation is made.
a.​Calculate the amount of depreciation on the manufacturing equipment for 2014 using conventional (financial accounting, not MACRS) straight-line depreciation.
b.​Calculate the amount of depreciation on the manufacturing equipment for 2014 using the straight-line MACRS optional method.
c.​Calculate the amount of depreciation on the manufacturing equipment for 2014 using the accelerated MACRS method.

Question 71

If a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party,

A)An amended return may be filed to claim the loss previously disallowed.
B)The unrelated party may claim the loss previously disallowed.
C)The disallowed loss may be used to offset gain on the subsequent sale.
D)The disallowed loss may be used if there is a further loss on the subsequent sale.
E)The disallowed loss is lost forever.

Question 72

On January 1, 2014, Ted purchased a small software company for $200,000. He paid $110,000 for the fixed assets of the company and $90,000 for goodwill. How much amortization may Ted deduct on his 2014 tax return for the purchased goodwill?

A)$0
B)$3,000
C)$5,750
D)$6,000
E)$90,000

Question 73

Jerry and Julie are brother and sister. Jerry sold stock to Julie for $5,000, its fair market value. The stock cost Jerry $10,000 5 years ago. Also, Jerry sold Carol (an unrelated party) stock for $2,000 that cost $10,000 3 years ago. What is Jerry's recognized loss before the $3,000 capital loss limitation?

A)$0
B)$8,000
C)$5,000
D)$13,000
E)$14,000

Question 74

On September 21, 2014, Jay purchased a commercial building. The cost basis assigned to the building is $700,000. Jay also owns a residential apartment building he purchased on June 15, 2013 with a cost basis of $500,000.
a.Calculate Jay's total depreciation deduction for the buildings for 2014, using MACRS.
b.Calculate Jay's total depreciation deduction for the apartment building for 2015, using MACRS.

Question 75

Calculate the following amounts:
a. The first year of depreciation on a residential rental building costing $100,000, purchased on November 30.
b. The first year of depreciation on an auto used 100 percent in business, costing $30,000, purchased in May, 2014. (No bonus depreciation deducted).
c. The second year of depreciation on a computer used exclusively for business, costing $7,000, purchased May 2013.
d. The third year of depreciation on business furniture costing $1,000, purchased in July 2012, using the half-year convention and accelerated depreciation.

Question 76

​Polly is a cash basis taxpayer with the following transactions during the year:
Calculate Polly's income from her business for this calendar year.

Question 77

On June 1, 2014, Cork Oak Corporation purchased a passenger automobile for 100 percent use in its business. The auto, with a cost basis of $22,000, has a 5-year estimated life. It also is 5-year recovery property. How much depreciation should be taken for 2014, assuming Cork Oak Corporation uses the accelerated depreciation method under MACRS but does not choose to make the election to expense or take bonus depreciation?

A)$2,100
B)$3,160
C)$4,400
D)$4,900
E)None of the above

Question 78

If a taxpayer purchases land worth $200,000 with an office building valued at $100,000 on it, how are the two depreciated for tax purposes?
Land:
Office building:

Question 79

Mark the correct answer. Section 197 intangibles:

A)Are amortized based on current fair market value rather than their actual cost.
B)Must be amortized over a 15 year life, regardless of their actual life.
C)Include intangible assets created and not purchased by the taxpayer.
D)Do not include purchased goodwill or going-concern value.

Question 80

To be depreciated, must an asset actually lose value each year?