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Exam 8: Depreciation, Cost Recovery, Amortization, and Depletion

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Question 1

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Tan Company acquires a new machine (10-year property) on January 15, 2019, at a cost of $200,000.Tan also acquires another new machine (7-year property) on November 5, 2019, at a cost of $40,000.No election is made to use the straight-line method.The company does not make the § 179 election and elects to not take additional first- year depreciation.Determine the total deductions in calculating taxable income related to the machines for 2019.

A) $24,000
B) $25,716
C) $102,000
D) $132,858
E) None of these.

F) B) and C)
G) A) and E)

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Question 2

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During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000.For the current year, determine the amount of goodwill Orange may amortize.

A) $100,000
B) $33,333
C) $26,667
D) $16,667
E) -0-.

F) A) and B)
G) A) and C)

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Question 3

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If an automobile is placed in service in 2019, the limitation for cost recovery in 2021 will be based on the cost recovery limits for the year 2019.

Under the alternative depreciation system (ADS), the half-year convention must be used for personalty.

The basis of cost recovery property must be reduced by at least the cost recovery allowable.

James purchased a new business asset (three-year personalty) on July 23, 2019, at a cost of $40,000.James takes additional first-year depreciation but does not elect Section 179 expense on the asset.Determine the cost recovery deduction for 2019.

Grape Corporation purchased a machine in December of the current year.This was the only asset purchased during the current year.The machine was placed in service in January of the following year.No assets were purchased in the following year.Grape's cost recovery would begin:

The only asset Bill purchased during 2019 was a new seven-year class asset.The asset, which was listed property, was acquired on June 17 at a cost of $50,000.The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use.Bill always elects to expense the maximum amount under § 179 whenever it is applicable.The net income from the business before the § 179 deduction is $100,000.Determine Bill's maximum deduction with respect to the property for 2019.

For real property, the ADS convention is the mid-month convention.

Augie purchased one new asset during the year (five-year property) on November 10, 2019, at a cost of $660,000. She would like to use the § 179 election and will also take additional first-year depreciation.The income from the business before the cost recovery deduction and the § 179 deduction was $600,000.Determine the maximum cost recovery deduction available on this asset for 2019.

Hazel purchased a new business asset (five-year asset) on September 30, 2019, at a cost of $100,000.On October 4, 2019, she placed the asset in service.This was the only asset she placed in service in 2019.Hazel did not elect § 179 or additional first-year depreciation.On August 20, 2020, Hazel sold the asset.Determine the cost recovery for 2020 for the asset.

On March 1, 2019, Lana leases and places in service a passenger automobile.The lease will run for five years and the payments are $500 per month.During 2019, she uses her car 60% for business and 40% for personal activities.Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana's gross income attributable to the lease.

Audra acquires the following new five-year class property in 2019: $\begin{array} { l l r } \text { Asset } & \text { Acquisition Date } & \text { Cost } \\\text { A } & \text { January 10 } & \$ 106,000 \\\text { B } & \text { July 5 } & 70,000 \\\text { C } & \text { November 15 } & \underline { 1,950,000 } \\\text { Total } & & \underline { \underline { \$ 2,126,000} } \\\end{array}$ Audra elects § 179 treatment for Asset C.Her taxable income from her business would not create a limitation for purposes of the § 179 deduction.Audra does not claim any available additional first-year depreciation deduction.Determine her total cost recovery deduction (including the § 179 deduction) for the year.

Discuss the difference between the half-year convention and the mid-quarter convention.

When a business is being purchased, if possible, the purchaser should bargain for more of the purchase price being allocated to goodwill and covenants not to compete rather than depreciable assets.

The maximum cost recovery method for all personal property under MACRS is 150% declining balance.

Carlos purchased an apartment building on November 16, 2019, for $3,000,000.Determine the cost recovery for 2019.

On January 15, 2019, Vern purchased the rights to a mineral interest for $3,500,000.At that time, it was estimated that the recoverable units would be 500,000.During the year, 40,000 units were mined and 25,000 units were sold for $800,000.Vern incurred expenses during 2019 of $500,000.The percentage depletion rate is 22%.Determine Vern's depletion deduction for 2019.

A used $35,000 automobile that is used 100% for business is placed in service in 2019.If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured.

Under the MACRS straight-line election for personalty, only the half-year convention is applicable.