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Taxation Chapter 9

Which is not an allowable method under MACRS?
A. 150 percent declining balance
B. 200 percent declining balance
C. Straight line
D. Sum of the years digits
E. All of these are allowable methods under MACRS
D. Sum of years digits
Which of the following depreciation conventions are not used under MACRS?
A. Full-month
B. Half-year
C. Mid-month
D. Mid-quarter
E. All of these are used under MACRS
A. Full-month
(True or False) When a business mistakenly claims too little depreciation for the prior year, the business may elect to increase future depreciation to make up the difference allowable depreciation.
False
(True or False) An asset’s capitalized cost basis includes the actual purchase price and all other expenses associated with placing the asset in service.
True
(True or False) Depreciation is currently computed under the Accelerated Cost Recovery System (ACRS).
False
(True or False) If taxpayer places only one asset (machinery) in service during the fourth quarter of the year, the mid-quarter convention must be used.
True
(True or False) The same depreciation convention is used for an asset in the year of acquisition also applies for the asset in the year of disposition.
True
(True or False) When applicable, all taxpayers may use bonus depreciation for qualifying property.
True
(True or False) The convention for tax amortization is always the half-year convention.
False
(True or False) Natural resources may be recovered using the greater of cost or percentage depletion method.
True
Which of the following is not depreciated?
A. Machinery
B. Coal deposit
C. Computer
D. Building
B. Coal deposit
Which convention is the general rule for intangible property?
A. Full-month
B. Half-year
C. Mid-month
D. Mid-quarter
A. Full-month
Dax purchased only one asset during the current year. It placed in service equipment (7-year property) on September 10 with a basis of $40,000. Calculate the maximum depreciation expense.
$5,716

DDB Method; 1/2 year conversion, 7-yr recovery period. 14.29 percent.

$40,000 x 14.29 percent = $5,716

Frazier LLC placed in service on June 19, 2013 computer equipment (5-yr property) with basis $2,050,000. Assume that Frazier has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing):
$770,000

$500,000 section 179 is reduced to $450,000 because of the property placed in service limitation ($2,050,000 – $2,000,000 = $50,000)

$500,000 – $50,000 = $450,000

1/2 conversion; Expense is $330,000
$1,600,000 x .2 = $320,000 + $450,000 = $770,000

Bonnie purchased a computer (5 year property) for use in her sole proprietorship. The basis of the computer was $3,000. Bonnie used the computer in her business 80% of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie’s depreciation expense during the first year. Calculate Bonnie’s depreciation expense during the first year assuming the sole proprietorship had a loss during the year:
$480

Asset recovery period is 5 years; 1/2 year convention applies;
$3,000 x .2 x 80% = $480

Griff LLC purchased an office building and land building during the current year for $500,000. The purchase price allocated as follows: $350,000 to the building and $150,000 to the land. The property was placed in service on August 22. Calculate Griff’s maximum depreciation:
$3,371

Mid-month convention applies; Non-residential property has a 39 year recovery period.

$350,000 x .963% (.00963) = $3,371

Bob purchased machinery on April 8th on the current year. The relevant costs for the year are as follows; machinery for $10,000, $800 shipping, $50 for delivery insurance, $500 installation, $750 for sales tax, $150 for the annual tune up, and $200 of property taxes (an annual tax on business property). What is Bob’s tax basis for the machinery?
$12,100

$10,000 + $800 + $50 + $500 + $750 = $12,100

Bob purchased a computer several years ago for $2,200 and used it for personal purposes. On November 10th of the current year, when the fair market value of the computer was $800, Bob converted it to business use. What is Bob’s tax basis for the computer?
$800

The fair market value of the computer is the tax basis

Bob, LLC purchased only one asset during the current year. It placed in service computer equipment (5-year property) on November 1st with basis of $42,500. Calculate the maximum depreciation expense (ignoring section 179 and bonus depreciation).
$2,125

$42,500 x 40% x 12.5% = $2,125

Lax, LLC purchased only one asset during the current year. It placed in service computer equipment (5-year property) on August 26 with basis of $20,000. Calculate the maximum depreciation expense for the current year (ignoring section 179 and bonus expensing):
$4,000

Half-year conversion;
$20,000 x .2 = $4,000

Which of the following is not usually included in the asset’s tax basis?
A. Purchase price
B. Sales tax
C. Shipping
D. Installation cost
E. All of these are included in an asset’s tax basis
E. All of these are included in an asset’s tax basis
(True or False) Cost depletion is available to all natural resource producers.
True
(True or False) Real property is always depreciated using the straight-line method.
True
Wheeler LLC purchased two assets during the current year. It placed in service computer equipment (5-year property) on November 16 with basis of $15,000 and furniture (7-year property) on April 20 with a basis of $11,000. Calculate the maximum depreciation expense, rounding to a whole number (ignoring section 179 and bonus expensing):
$2,714

Computer Equipment:
5-year property; Mid-quarter convention
$15,000 x 40% x 12.5% = $750

Furniture:
7-year property; Mid-quarter Recovery; Second quarter
$11,000 x 17.85% = $1963.5

$750 + $1963.5 = $2713.5

Which depreciation convention is the general rule for tangible personal property?
A. Full-month
B. Half-year
C. Mid-month
D. Mid-quarter
E. None
B. Half-year
Tax depreciation is currently calculated under what system?
Modified accelerated cost recovery system
Beth’s business purchased only one asset during the current year. It placed in service machinery (7-year property) on December 1 with a basis of $50,000. Calculate the maximum depreciation expense (ignoring section 179 and bonus expensing):
$1,785

$50,000 x 3.57% = $1,785

How is the recovery period of an asset determined?
Revenue Procedure 87-56
The MACRS recovery period for automobiles and computers is:
5 years

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