Chapter 10 Test Bank

1. Award: 1.
00 point
Like financial accounting, most acquired business property must be capitalized for tax purposes.
 True
 False
References
True / False Difficulty: 1 Easy Learning Objective: 10-01 Describe the cost recovery
methods for recovering the cost of personal property,
real property, intangible assets, and natural resources.
2. Award: 1.00 point
Tax cost recovery methods include depreciation, amortization, and depletion.
 True
 False
References
True / False Difficulty: 1 Easy Learning Objective: 10-01 Describe the cost recovery
If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by the depreciation actually
taken rather than by the amount of the allowable depreciation.
 True
 False
References
True / False Difficulty: 2 Medium Learning Objective: 10-01 Describe the cost recovery
An asset's capitalized cost basis includes only the actual purchase price, whereas expenses to purchase, prepare the asset for use,
and begin using the asset are immediately expensed.
 True
 False
References
The basis for a personal-use asset converted to business use is the lesser of the asset's cost basis or fair market value on the date of
the transfer or conversion.
 True
 False
References
Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS).
 True
 False
References
True / False Difficulty: 1 Easy Learning Objective: 10-02 Determine the applicable cost
recovery (depreciation) life, method, and convention for
tangible personal and real property and the deduction
allowable under basic Modified Accelerated Cost
Recovery System (MACRS).
The 200 percent or double declining balance method is allowable for five- and seven-year property.
 True
 False
References
Taxpayers may use historical data to determine the recovery period for tax depreciation.
 True
 False
Taxpayers use the recovery periods outlined in Revenue Procedure 87-56.
References
Taxpayers use the half-year convention for all assets.
 True
 False
For personal property, taxpayers use either the half-year or mid-quarter convention.
References
True / False Difficulty: 2 Medium Learning Objective: 10-02 Determine the applicable cost
If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-quarter convention must be
used.
 True
 False
All real property is depreciated using the mid-month convention. The mid-quarter convention for personal property is not applicable
to real property.
References
The MACRS depreciation tables automatically switch to the straight-line method when the straight-line method yields a higher annual
depreciation amount than the declining balance method.
 True
 False
References
If tangible personal property is depreciated using the half-year convention and is disposed of during the first quarter of a subsequent
year, the taxpayer must use the mid-quarter convention for the year of disposition.
 True
 False
References
If a machine (seven-year property) being depreciated using the half-year convention is disposed of during the seventh year, a
taxpayer must multiply the appropriate depreciation percentage from the MACRS table by 50 percent to calculate the depreciation
expense properly.
 True
 False
References
Real property is depreciated using the straight-line method.
 True
 False
References
The mid-month convention applies to real property in the year of acquisition and disposition.
 True
 False
References
All taxpayers may use the §179 immediate expensing election on certain property.
 True
 False
References
True / False Difficulty: 1 Easy Learning Objective: 10-03 Calculate the deduction
allowable under the additional special cost recovery
rules (§179, bonus, and listed property).
The §179 immediate expensing election phases out based upon a taxpayer's taxable income.
 True
 False
The §179 phase-out is based upon the amount of property placed in service during the year.
References
The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service
during the year.
 True
 False
References
Property expensed under the §179 immediate expensing election is not included in the 40 percent test to determine whether the mid-
quarter convention must be used.
 True
 False
References
True / False Difficulty: 3 Hard Learning Objective: 10-03 Calculate the deduction
In general, a taxpayer should select longer-lived property for the §179 immediate expensing election.
 True
 False
References
Bonus depreciation is used as a stimulus tool by tax policy makers.
 True
 False
References
Used property is eligible for bonus depreciation.
 True
 False
References
True / False Difficulty: 2 Medium Learning Objective: 10-03 Calculate the deduction
Business assets that tend to be used for both business and personal purposes are referred to as listed property.
 True
 False
References
If the business-use percentage for listed property falls below 50 percent, the only adjustment is that all future depreciation must be
calculated under the straight-line method.
 True
 False
The property is subject to depreciation recapture for any excess depreciation over the straight-line method using the ADS recovery
period over the entire time.
References
Limits are placed on the depreciation of luxury automobiles.
 True
 False
References
To increase their depreciation deduction on automobiles, taxpayers should elect §179 expense.
 True
 False
References
The alternative depreciation system requires both a slower method of recovery and longer recovery periods.
 True
 False
References
The method for tax amortization is always the straight-line method.
 True
 False
References
True / False Difficulty: 1 Easy Learning Objective: 10-04 Calculate the deduction for
amortization.
All assets subject to amortization have the same recovery period.
 True
 False
References
amortization.
Goodwill and customer lists are examples of §197 amortizable assets.
 True
 False
References
True / False Difficulty: 2 Medium Learning Objective: 10-04 Calculate the deduction for
amortization.
Taxpayers may always expense a portion of start-up costs and organizational expenditures.
 True
 False
References
amortization.
Businesses may immediately expense research and experimentation expenditures, or they may elect to capitalize these costs and
amortize them using the straight-line method over a period of not less than 60 months.
 True
 False
After 2021, companies will no longer be able to immediately expense research and experimentation expenditures.
References
amortization.
The manner in which a business amortizes a patent or copyright is the same whether the business directly purchases the patent or
copyright or whether it self-creates the intangible.
 True
 False
References
amortization.
Depletion is the method taxpayers use to recover their capital investment in natural resources.
 True
 False
References
True / False Difficulty: 1 Easy Learning Objective: 10-05 Explain cost recovery of
natural resources and the allowable depletion methods.
In general, major integrated oil and gas producers may take the greater of cost or percentage depletion.
 True
 False
Depletion of timber and major integrated oil companies must be calculated using only the cost depletion method (no percentage
depletion is available).
References
True / False Difficulty: 2 Medium Learning Objective: 10-05 Explain cost recovery of
Cost depletion is available to all natural resource producers.
 True
 False
References
Businesses deduct percentage depletion when they sell the natural resource and they deduct cost depletion in the year they produce
or extract the natural resource.
 True
 False
References
Tax cost recovery methods do not include:
 Amortization.
 Capitalization.
 Depletion.
 Depreciation.
 All of the choices are tax cost recovery methods.
Amortization, depletion, and depreciation are cost recovery methods as a result of asset capitalization.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 10-01 Describe the cost recovery
Which of the following business assets is not depreciated?
 Automobile
 Building
 Patent
 Machinery
 All of the assets are depreciated.
Patents are amortized rather than depreciated.
References
An office desk is an example of:
 Personal property.
 Personal-use property.
 Real property.
 Business property.
 Personal property and business property.
An office desk is both business property and personal property. It is not personal-use or real property.
References
An example of an asset that is both personal-use and personal property is:
 A computer used solely to email company employees regarding company activities.
 A storage building used by the CEO to store personal records.
 A computer used solely to monitor the CEOs investments and to complete her Form 1040.
 A company airplane used by the CEO for business travel.
 All of the assets are personal-use and personal property.
A computer is personal property, and when used by the CEO for nonbusiness activities, is also personal-use property.
References
Which of the following is not usually included in an asset's tax basis?
 Purchase price
 Sales tax
 Shipping
 Installation costs
 All of the choices are included in an asset's tax basis.
The purchase price, sales tax, shipping, and installation costs are all included in an asset's tax basis.
References
Which of the following would be considered an improvement rather than routine maintenance?
 Oil change
 Engine overhaul
 Wiper blade replacement
 Air filter change
The engine overhaul is an improvement because it restores a major component of an asset, while the other items are routine
maintenance.
References
Tax depreciation is currently calculated under what system?
 Sum-of-the-years'-digits
 Accelerated cost recovery system
 Modified Accelerated Cost Recovery System
 Straight-line system
 None of the choices are correct.
The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 10-02 Determine the applicable cost
Which is not an allowable method under MACRS?
 150 percent declining balance
 Straight-line
 Sum-of-the-years'-digits
 All of the choices are allowable methods under MACRS.
The sum-of-the-years'-digits method is not an allowable method under MACRS.
References
Which of the allowable methods allows the most accelerated depreciation?
 200 percent declining balance
 Straight-line
 Sum-of-the-years'-digits
 None of the methods would allow accelerated depreciation.
The 200 percent declining balance method allows the most depreciation expense in earlier periods.
References
How is the recovery period of an asset determined?
 Estimated useful life
 Treasury regulation
 Revenue Procedure 87-56
 Revenue Ruling 97-56
Revenue Procedure 87-56 helps taxpayers to determine the recovery period for assets.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 10-02 Determine the applicable cost
Which of the following depreciation conventions is not used under MACRS?
 Full-month
 Half-year
 Mid-month
 Mid-quarter
 All of the choices are used under MACRS.
The full-month convention is used for tax amortization, which does not fall under MACRS depreciation.
References
Which depreciation convention is the general rule for tangible personal property?
 Full-month
 Half-year
 Mid-month
 Mid-quarter
 None of the choices are conventions for tangible personal property.
The half-year convention is the general rule for tangible personal property, while the mid-quarter convention is the exception.
References
The MACRS recovery period for automobiles and computers is:
 Three years.
 Five years.
 Seven years.
 10 years.
These assets' recovery period is five years.
References
Lax LLC purchased only one asset during the current year (a full 12-month tax year). On August 26 Lax placed in service computer
equipment (five-year property) with a basis of $20,000. Calculate the maximum depreciation expense for the current year (ignoring
§179 and bonus depreciation). (Use MACRS Table 1.)
 $2,000
 $2,858
 $3,000
 $4,000
The asset's recovery period is five years and the half-year convention applies. The calculation is $20,000 × 0.20 = $4,000.
References
Lax LLC purchased only one asset during the current year (a full 12-month tax year). On August 26 Lax placed in service computer
equipment (five-year property) with a basis of $24,000. Calculate the maximum depreciation expense for the current year (ignoring
§179 and bonus depreciation). (Use MACRS Table 1.)
 $2,800
 $3,658
 $3,800
 $4,800
The asset's recovery period is five years and the half-year convention applies. The calculation is $24,000 × 0.20 = $4,800.
References
Sairra LLC purchased only one asset during the current year (a full 12-month tax year). On April 16 Sairra placed in service furniture
(seven-year property) with a basis of $25,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and
bonus depreciation). (Use MACRS Table 1.) (Round final answer to the nearest whole number.)
 $1,786
 $3,573
 $4,463
 $5,000
The asset's recovery period is seven years and the half-year convention applies. The calculation is $25,000 × 0.1429 = $3,573.
References
Sairra LLC purchased only one asset during the current year (a full 12-month tax year). On April 16 Sairra placed in service furniture
(seven-year property) with a basis of $42,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and
bonus depreciation). (Use MACRS Table 1.) (Round final answer to the nearest whole number.)
 $3,001
 $6,002
 $6,892
 $8,400
References
Beth's business purchased only one asset during the current year (a full 12-month tax year). On December 1 Beth placed in service
machinery (seven-year property) with a basis of $50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus
depreciation). (Use MACRS Table 2.)
 $1,785
 $2,500
 $7,145
 $10,000
The asset's recovery period is seven years, and the mid-quarter convention applies because the property was placed in service
during the fourth quarter. The calculation is $50,000 × 0.0357 = $1,785.
References
Beth's business purchased only one asset during the current year (a full 12-month tax year). On December 1 Beth placed in service
machinery (seven-year property) with a basis of $66,000. Calculate the maximum depreciation expense (ignoring §179 and bonus
depreciation). (Use MACRS Table 2.) (Round final answer to the nearest whole number.)
 $2,356
 $3,300
 $9,429
 $13,200
The asset's recovery period is seven years, and the mid-quarter convention applies because the property was placed in service
during the fourth quarter. The calculation is $66,000 × 0.0357 = $2,356.
References
Deirdre's business purchased two assets during the current year (a full 12-month tax year). On January 20 Deirdre placed in service
computer equipment (five-year property) with a basis of $15,000 and on September 1 placed in service machinery (seven-year
property) with a basis of $15,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS
Half-Year Convention Table.) (Round final answer to the nearest whole number.)
 $1,286
 $5,144
 $5,786
 $6,000
The half-year convention applies. The calculations are $15,000 × 0.20 = $3,000 and $15,000 × 0.1429 = $2,144. The total is $5,144
($3,000 + $2,144).
References
Suvi, Incorporated purchased two assets during the current year (a full 12-month tax year). On August 10 Suvi placed in service
computer equipment (five-year property) with a basis of $20,000 and on November 18 placed in service machinery (seven-year
Table 1.) (Round final answer to the nearest whole number.)
 $857
 $3,357
 $5,429
 $6,000
The half-year convention applies. The calculations are $20,000 × 0.20 = $4,000 and $10,000 × 0.1429 = $1,429. The total is $5,429
($4,000 + $1,429).
References
Wheeler LLC purchased two assets during the current year (a full 12-month tax year). On November 16 Wheeler placed in service
computer equipment (five-year property) with a basis of $15,000 and on April 20 placed in service furniture (seven-year property) with
a basis of $11,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)
(Round final answer to the nearest whole number.)
 $1,285
 $2,714
 $4,572
 $5,200
The mid-quarter convention applies because more than 40 percent of the years' assets were placed in service in the fourth quarter of
the tax year. The computer is fourth-quarter property and the furniture is second-quarter property. The calculations are $15,000 × 0.05
= $750 and $11,000 × 0.1785 = $1,964. The total is $2,714 ($750 + $1,964).
References
Wheeler LLC purchased two assets during the current year (a full 12-month tax year). On November 16 Wheeler placed in service
computer equipment (five-year property) with a basis of $23,500 and on April 20 placed in service furniture (seven-year property) with
a basis of $16,100. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)
(Round final answer to the nearest whole number.)
 $2,620
 $4,049
 $5,907
 $6,535
The mid-quarter convention applies because more than 40 percent of the years' assets were placed in service in the fourth quarter of
the tax year. The computer is fourth-quarter property and the furniture is second-quarter property. The calculations are $23,500 ×
0.05 = $1175 and $16,100 × 0.1785 = $2,874. The total is $4,049 ($1,175 + $2,874).
References
Tasha LLC purchased furniture (seven-year property) on April 20 for $20,000 and used the half-year convention to depreciate it.
Tasha did not take §179 or bonus depreciation in the year it acquired the furniture. During the current year, which is the fourth year
Tasha LLC owned the property, the property was disposed of on December 15. Calculate the maximum depreciation expense. (Use
MACRS Table 1) (Round final answer to the nearest whole number.)
 $898
 $2,095
 $1,249
 $2,498
The half-year convention applies. The calculations are $20,000 × 0.1249 = $2,498 × 1/2 = $1,249.
References
Multiple Choice Difficulty: 3 Hard Learning Objective: 10-02 Determine the applicable cost
Anne LLC purchased computer equipment (five-year property) on August 29 for $30,000 and used the half-year convention to
depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current
year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum
depreciation expense. (Use MACRS Table 1.)
 $432
 $1,728
 $1,874
 $3,456
The calculations are $30,000 × 0.1152 = $3,456 × 0.5 = $1,728, since the property is considered to be owned for half the year in the
year of disposition.
References
Anne LLC purchased computer equipment (five-year property) on August 29 for $36,000 and used the half-year convention to
depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current
year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum
depreciation expense. (Use MACRS Table 1.) (Round final answer to the nearest whole number.)
 $518
 $2,074
 $2,248
 $4,147
The calculations are $36,000 × 0.1152 = $4,147 × 0.5 = $2,074, since the property is considered to be owned for half the year in the
year of disposition.
References
Poplock LLC purchased a warehouse and land during the current year for $350,000. The purchase price was allocated as follows:
$275,000 to the building and $75,000 to the land. The property was placed in service on August 12. Calculate Poplock's maximum
depreciation for this first year. (Use MACRS Table 5.) (Round final answer to the nearest whole number.)
 $2,648
 $3,371
 $3,751
 $4,774
The mid-month convention applies. Nonresidential property has a 39-year recovery period. The depreciation is $2,648 ($275,000 ×
0.963%).
References
Tom Tom LLC purchased a rental house and land during the current year for $150,000. The purchase price was allocated as follows:
$100,000 to the building and $50,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum
depreciation for this first year. (Use MACRS Table 3.)
 $1,605
 $2,273
 $2,408
 $3,410
The mid-month convention applies. Residential property has a 27.5-year recovery period. The depreciation is $2,273 ($100,000 ×
2.273%).
References
Tom Tom LLC purchased a rental house and land during the current year for $158,000. The purchase price was allocated as follows:
$104,000 to the building and $54,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum
depreciation for this first year. (Use MACRS Table 3.) (Round final answer to the nearest whole number.)
 $1,669
 $2,364
 $2,536
 $3,591
The mid-month convention applies. Residential property has a 27.5-year recovery period. The depreciation is $2,364 ($104,000 ×
2.273%).
References
Simmons LLC purchased an office building and land several years ago for $250,000. The purchase price was allocated as follows:
$200,000 to the building and $50,000 to the land. The property was placed in service on October 2. If the property is disposed of on
February 27 during the 10th year, calculate Simmons's maximum depreciation in the 10th year. (Use MACRS Table 5.)
 $641
 $909
 $5,128
 $7,346
The mid-month convention applies. Nonresidential property has a 39-year recovery period. The depreciation is $641 ($200,000 ×
2.564% × 1.5/12).
References
Which of the following assets is eligible for §179 expensing?
 Used office machinery
 Qualified improvement property
 A new delivery truck
 Used office furniture
 All of the choices are correct.
All of the assets are eligible. Tangible personal property is eligible for §179 expensing whether it is new or used. Qualified
improvement property is also eligible for §179 expensing.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 10-03 Calculate the deduction
Lenter LLC placed in service on April 29, 2020, machinery and equipment (seven-year property) with a basis of $1,600,000. Assume
that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction including §179 expensing
(but ignoring bonus expensing). (Use MACRS Table 1.)
 $228,640
 $1,040,000
 $1,120,024
 $1,268,640
The $1,040,000 §179 expense is not limited. The half-year convention applies. The expense is $1,120,024, which is depreciation of
$560,000 × 0.1429 = $80,024 plus $1,040,000 of §179 expense.
References
Littman LLC placed in service on July 29, 2020, machinery and equipment (seven-year property) with a basis of $600,000. Littman's
income for the current year before any depreciation deduction was $100,000. Which of the following statements is true to maximize
Littman's total depreciation deduction for 2020? (Use MACRS Table 1.)
 Littman should take §179 expense equal to the maximum $1,040,000.
 Littman should take no §179 expense.
 Littman's §179 expense will be greater than $100,000.
 Littman's §179 expense will be less than $100,000.
The $1,040,000 maximum §179 expense is limited by the amount of property placed in service and to income after regular MACRS
depreciation but before §179 expense. The $100,000 income amount is before any cost recovery. Thus, to maximize its cost recovery,
Littman should first elect $16,637 of §179 expense. Littman's regular MACRS amount will be $83,363 for a total of $100,000 of cost
recovery.
References
Multiple Choice Difficulty: 3 Hard Learning Objective: 10-03 Calculate the deduction
Crouch LLC placed in service on May 19, 2020, machinery and equipment (seven-year property) with a basis of $3,200,000. Assume
that Crouch has sufficient income to avoid any limitations. Calculate the maximum depreciation deduction including §179 expensing
(but ignoring bonus depreciation). (Use MACRS Table 1.)
 $457,280
 $430,000
 $825,833
 $1,040,000
The $1,040,000 §179 expense is reduced to $430,000 because of the property placed in service limitation ($3,200,000 − $2,590,000
threshold). The half-year convention applies. The expense is $825,833, which is depreciation of $2,770,000 × 0.1429 = $395,833 plus
$430,000 of §179 expense.
References
Clay LLC placed in service machinery and equipment (seven-year property) with a basis of $3,450,000 on June 6, 2020. Assume that
Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignoring
any possible bonus depreciation). (Use MACRS Table 1.) (Round final answer to the nearest whole number.)
 $1,040,000
 $344,389
 $467,283
 $647,283
$180,000 of §179 expense.
References
Clay LLC placed in service machinery and equipment (seven-year property) with a basis of $3,471,500 on June 6, 2020. Assume that
Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignoring
any possible bonus depreciation). (Use MACRS Table 1.) (Round final answer to the nearest whole number.)
 $1,040,000
 $496,077
 $473,428
 $631,928
$158,500 of §179 expense.
References
Bonnie Jo purchased a used camera (five-year property) for use in her sole proprietorship. The basis of the camera was $2,400.
Bonnie Jo used the camera in her business 60 percent of the time and used it for personal purposes the rest of the time during the
first year. Calculate Bonnie Jo's depreciation deduction during the first year, assuming the sole proprietorship had a loss during the
year. (Bonnie did not place the property in service in the last quarter.) (Use MACRS Table 1.)
 $240
 $288
 $480
 $2,400
The asset's recovery period is five years and the half-year convention applies. The calculation is $2,400 × 0.20 × 60% = $288.
References
Bonnie Jo purchased a used camera (five-year property) for use in her sole proprietorship. The basis of the camera was $3,900.
Bonnie Jo used the camera in her business 60 percent of the time and used it for personal purposes the rest of the time during the
first year. Calculate Bonnie Jo's depreciation deduction during the first year, assuming the sole proprietorship had a loss during the
year. (Bonnie did not place the property in service in the last quarter.) (Use MACRS Table 1.)
 $390
 $468
 $780
 $3,900
The asset's recovery period is five years and the half-year convention applies. The calculation is $3,900 × 0.2 × 60% = $468.
References
Billie Bob purchased a used camera (five-year property) for use in his sole proprietorship in the prior year. The basis of the camera
was $2,400. Billie Bob used the camera in his business 60 percent of the time during the first year. During the second year, Billie Bob
used the camera 40 percent for business use. Calculate Billie Bob's depreciation deduction during the second year, assuming the
sole proprietorship had a loss during the year. (Billie Bob did not place the asset in service in the last quarter.) (Use MACRS Table 1.)
 $0
 $48
 $192
 $336
Because the listed property's business use drops below 50 percent, the straight-line method must be used and all prior years' excess
depreciation must be recaptured. The asset's recovery period is five years and the half-year convention applies. The calculation for
the current year's depreciation before adjusting for the prior year is $2,400 × 0.20 × 40% = $192. But he must recapture prior
depreciation of $144 ($2,400 × 0.20 × 60% = $288 taken less $144 (straight-line, ½ year)) that would have been taken. Therefore, the
current-year depreciation deduction is $192 − $144 = $48.
References
Which of the following assets is not eligible for bonus depreciation?
 Qualified improvement property
 All of the choices are correct.
New and used personal property is eligible for bonus depreciation as long as the property has not been used by the taxpayer before.
Qualified improvement property is not currently eligible.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 10-03 Calculate the deduction
Which of the following assets is not eligible for bonus depreciation?
 Qualified improvement property
 None of the choices are correct.
New and used personal property is eligible for bonus depreciation as long as the property has not been used by the taxpayer before.
Qualified improvement property is also eligible under the CARES Act.
References
Potomac LLC purchased an automobile for $30,000 on August 5, 2020. What is Potomac's depreciation deduction for 2020? (Ignore
any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)
 $10,100
 $4,287
 $6,000
 $30,000
A luxury auto's maximum depreciation in the first year is the lesser of $10,100 or its MACRS amount of $6,000 ($30,000 × 20 percent)
for 2020.
References
Potomac LLC purchased an automobile for $30,700 on August 5, 2020. What is Potomac's depreciation deduction for 2020? (Ignore
any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)
 $10,100
 $4,387
 $6,140
 $30,700
A luxury auto's maximum depreciation in the first year is the lesser of $10,100 or its MACRS amount of $6,140 ($30,700 × 20 percent)
for 2020.
References
Arlington LLC purchased an automobile for $55,000 on July 5, 2020. What is Arlington's depreciation deduction for 2020 if its
business-use percentage is 75 percent? (Ignore any possible bonus depreciation.) (Use Exhibit 10-10.)
 $4,250
 $5,500
 $7,575
 $8,250
A luxury auto's maximum depreciation in the first year is the lesser of $10,100 or its MACRS amount of $11,000 ($55,000 × 20%). That
amount is then multiplied by the business-use percentage to obtain $7,575 ($10,100 × 75%).
References
Arlington LLC purchased an automobile for $66,000 on July 5, 2020. What is Arlington's depreciation deduction for 2020 if its
business-use percentage is 65 percent? (Ignore any possible bonus depreciation.) (Use Exhibit 10-10.)
 $5,075
 $6,600
 $6,565
 $9,900
A luxury auto's maximum depreciation in the first year is the lesser of $10,100 or its MACRS amount of $13,200 ($66,000 × 20%). That
amount is then multiplied by the business-use percentage to obtain $6,565 ($10,100 × 65%).
References
Taylor LLC purchased an automobile for $55,000 on July 5, 2020. What is Taylor's maximum depreciation deduction for 2020
(including bonus depreciation) if its business use percentage is 100 percent?
 $10,100
 $11,000
 $18,100
 $55,000
A luxury auto's maximum depreciation in the first year is the lesser of $10,100 or its MACRS amount of $11,000 ($55,000 × 20%).
However, the limitation is increased by $8,000 when bonus depreciation is taken. Taylor's maximum depreciation on the automobile
is $18,100 ($10,100 limitation + $8,000 bonus).
References
Assume that Bethany acquires a competitor's assets on March 31st. The purchase price was $150,000. Of that amount, $125,000 is
allocated to tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset). What is Bethany's amortization deduction
for the current year? (Round final answer to the nearest whole number.)
 $0
 $1,250
 $1,319
 $1,389
The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $1,389 ($25,000/180) × 10.
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 10-04 Calculate the deduction for
amortization.
Assume that Brittany acquires a competitor's assets on September 30th of Year 1 for $350,000. Of that amount, $300,000 is allocated
to tangible assets and $50,000 is allocated equally to two §197 intangible assets (goodwill and a one-year noncompete agreement).
Given that the noncompete agreement expires on September 30th of Year 2, what is Brittany's amortization deduction for the second
year? (Round final answer to the nearest whole number.)
 $0
 $1,667
 $2,917
 $3,333
The full-month convention applies. If a §197 asset is disposed of before it is fully recovered, the remaining basis is added to the
remaining §197 assets acquired at the same time. §197 assets have a recovery period of 180 months. The amortization is $3,333
($50,000/180) × 12. The result is as if the asset never expired.
References
amortization.
Jasmine started a new business in the current year. She incurred $10,000 of start-up costs. How much of the start-up costs can be
immediately deducted (excluding amounts amortized over 180 months) for the year?
 $0
 $2,500
 $5,000
 $10,000
$5,000 of start-up expenses can be immediately deducted. The $5,000 maximum phases out dollar for dollar if more than $50,000 of
start-up costs are incurred.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 10-04 Calculate the deduction for
amortization.
Jasmine started a new business in the current year. She incurred $15,000 of start-up costs. How much of the start-up costs can be
immediately deducted (excluding amounts amortized over 180 months) for the year?
 $0
 $2,500
 $5,000
 $15,000
$5,000 of start-up expenses can be immediately deducted. The $5,000 maximum phases out dollar for dollar if more than $50,000 of
start-up costs are incurred.
References
amortization.
Racine started a new business in the current year. She incurred $52,000 of start-up costs. If her business started on November 23rd
of the current year, what is the total amount she may deduct with respect to the start-up costs for her initial year, rounded to the
nearest whole number?
 $2,555
 $3,544
 $5,522
 $52,000
The maximum immediate deduction of $5,000 phases out dollar for dollar if more than $50,000 of start-up costs are incurred. Thus,
the immediate deduction is $3,000 ($5,000 − ($52,000 − $50,000)). The remaining amount is amortized over 180 months and results
in an additional deduction of $544 [($49,000/180) × 2 months] for the year.
References
amortization.
Daschle LLC completed some research and development during June of the current year. The related costs were $60,000. If Daschle
wants to capitalize and amortize the costs as quickly as possible, what is the total amortization amount Daschle may deduct during
the current year?
 $0
 $6,500
 $7,000
 $12,000
The amortization when capitalization is elected is $7,000 [($60,000/60) × 7 months]. The amortization period on capitalized research
and development is not less than 60 months—and 60 months is the most often elected.
References
amortization.
Daschle LLC completed some research and development during June of the current year. The related costs were $75,000. If Daschle
wants to capitalize and amortize the costs as quickly as possible, what is the total amortization amount Daschle may deduct during
the current year?
 $0
 $8,125
 $8,750
 $15,000
The amortization when capitalization is elected is $8,750 [($75,000 / 60) × 7 months]. The amortization period on capitalized research
and development is not less than 60 months—and 60 months is the most often elected.
References
amortization.
Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15th and the purchase price
was $75,000. If the copyright has a remaining life of 75 months, what is the total amortization amount Jorge may deduct during the
current year? (Assume this is not an asset acquisition to which §197 applies.)
 $0
 $5,500
 $6,000
 $12,000
The amortization is $6,000 ($75,000/75) × 6. The amortization period on a purchased copyright is the asset's remaining useful life.
References
amortization.
Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15th and the purchase price
was $93,000. If the copyright has a remaining life of 75 months, what is the total amortization amount Jorge may deduct during the
current year? (Assume this is not an asset acquisition to which §197 applies.)
 $0
 $6,820
 $7,440
 $14,880
The amortization is $7,440 ($93,000 / 75) × 6. The amortization period on a purchased copyright is the asset's remaining useful life.
References
amortization.
Gessner LLC patented a process it developed in the current year. The patent is expected to create benefits for Gessner over a 10-year
period. The patent was issued on April 15th and the legal costs associated with the patent were $43,000. In addition, Gessner had
unamortized research expenditures of $15,000 related to the process. What is the total amortization amount Gessner may deduct
during the current year?
 $2,417
 $2,174
 $4,108
 $4,350
The amortization is $4,350 ($58,000/120) × 9 months. The amortization period is the shorter of the patent's legal (20 years for utility
patents) or useful life (10 years).
References
amortization.
Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $300,000 for extraction
rights. A geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During the current year, Santa Fe extracted 1,500
pounds of turquoise, which it sold for $200,000. What is Santa Fe's cost depletion deduction for the current year?
 $60,000
 $90,000
 $110,000
 $300,000
The depletion deduction is $90,000 ($300,000/5,000) × 1,500.
References
Multiple Choice Difficulty: 1 Easy Learning Objective: 10-05 Explain cost recovery of
rights. A geologist estimates that Santa Fe will recover 6,750 pounds of turquoise. During the current year, Santa Fe extracted 2,025
pounds of turquoise, which it sold for $292,000. What is Santa Fe's cost depletion deduction for the current year?
 $90,450
 $135,675
 $164,810
 $452,250
The depletion deduction is $135,675 ($452,250 / 6,750) × 2,025.
References
rights. A geologist estimated that Santa Fe will recover 5,000 pounds of turquoise. During the past several years, 4,000 pounds were
extracted. During the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold for $250,000. What is Santa Fe's cost
depletion deduction for the current year?
 $60,000
 $90,000
 $190,000
 $160,000
The depletion deduction is $60,000 [($300,000/5,000) × 1,000]. Cost depletion is limited to the taxpayer's basis. As a result, even
though 1,500 pounds were extracted, only 1,000 pounds can be expensed under cost depletion.
References
Lucky Strike Mine (LLC) purchased a silver deposit for $1,500,000. It estimated it would extract 500,000 ounces of silver from the
deposit. Lucky Strike mined the silver and sold it, reporting gross receipts of $1.8 million, $2.5 million, and $2 million for Years 1
through 3, respectively. During Years 1 through 3, Lucky Strike reported net income (loss) from the silver deposit activity in the amount
of ($100,000), $400,000, and $100,000, respectively. In Years 1 through 3, Lucky Strike actually extracted 300,000 ounces of silver as
follows:
Ounces extracted per year

Year 1 Year 2 Year 3
50,000 150,000 100,000
What is Lucky Strike's depletion deduction for Year 2 if the applicable percentage depletion for silver is 15 percent?
 $200,000
 $375,000
 $400,000
 $450,000
The depletion deduction is $450,000, the greater of cost or percentage depletion. Cost depletion is $450,000 [($1,500,000 ÷
500,000) × 150,000]. Percentage depletion is $200,000; the lesser of the statutory percentage $375,000 ($2,500,000 × 0.15) or
$200,000 [($400,000 × 50%) = 50 percent of net income].
References
Multiple Choice Difficulty: 2 Medium Learning Objective: 10-05 Explain cost recovery of
Janey purchased machinery on April 8th of the current year. The relevant costs for the year are as follows: machinery for $10,000,
$800 shipping, $50 for delivery insurance, $500 for installation, $750 for sales tax, $150 for the annual tune-up, and $200 of property
taxes (an annual tax on business property). What is Janey's tax basis for the machinery?
$12,100.
An asset's basis consists of all of the costs to purchase and install the asset and place it in service. The annual tune-up is routine
maintenance and the annual property tax is a general business expense. ($10,000 + $800 + $50 + $500 + $750)
References
Essay Difficulty: 1 Easy Learning Objective: 10-01 Describe the cost recovery
Jaussi 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, Jaussi converted it to business use. What is Jaussi's tax basis for the
computer?
$800.
When personal property is converted to business use, the basis is the lesser of the cost basis of the property or the fair market value
on the date of the conversion.
References
Essay Difficulty: 1 Easy Learning Objective: 10-01 Describe the cost recovery
Flax LLC purchased only one asset this year. On January 16 Flax placed in service a computer (five-year property) with a basis of
$14,000. Calculate the maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)
$2,800.
The asset's recovery period is five years and the half-year convention applies since less than 40 percent of the property was placed in
service during the fourth quarter. The calculation is $14,000 × 0.20 = $2,800.
References
Essay Difficulty: 1 Easy Learning Objective: 10-02 Determine the applicable cost
Roth LLC purchased only one asset during the current year. On August 1st Roth placed in service office equipment (seven-year
Half-Year Convention Table .) (Round final answer to the nearest whole number.)
$6,073.
References
Roth LLC purchased only one asset during the current year. On August 1st Roth placed in service office equipment (seven-year
Half-Year Convention Table. ) (Round final answer to the nearest whole number.)
$7,359.
References
Eddie purchased only one asset during the current year. On May 1st Eddie placed in service furniture (seven-year property) with a
basis of $26,500. Calculate the maximum depreciation deduction, rounded to the nearest whole number (ignoring §179 and bonus
depreciation). (Use MACRS Table 1.)
$3,787.
The asset's recovery period is seven years and the half-year convention applies since less than 40 percent of the property was
placed in service during the fourth quarter. The calculation is $26,500 × 0.1429 = $3,787.
References
Amit purchased two assets during the current year. On April 16th Amit placed in service computer equipment (five-year property) with
a basis of $5,000 and on September 9th placed in service furniture (seven-year property) with a basis of $20,000. Calculate the
maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)
$3,858.
The half-year convention applies since less than 40 percent of the property was placed in service during the fourth quarter. The
calculations are $5,000 × 0.20 = $1,000 and $20,000 × 0.1429 = $2,858. The total is $3,858 ($1,000 + $2,858).
References
Essay Difficulty: 2 Medium Learning Objective: 10-02 Determine the applicable cost
Yasmin purchased two assets during the current year. On May 26th Yasmin placed in service computer equipment (five-year property)
with a basis of $10,000 and on December 9th placed in service machinery (seven-year property) with a basis of $10,000. Calculate the
maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)
$2,857.
The mid-quarter convention applies since more than 40 percent of the property was placed in service during the fourth quarter. The
calculations are $10,000 × 0.25 = $2,500 and $10,000 × 0.0357 = $357. The total is $2,857 ($2,500 + $357).
References
Yasmin purchased two assets during the current year. On May 26th Yasmin placed in service computer equipment (five-year property)
with a basis of $20,000 and on December 9th placed in service machinery (seven-year property) with a basis of $20,000. Calculate
the maximum depreciation deduction (ignoring §179 and bonus depreciation). (Use MACRS Table 2.) (Round final answer to the
nearest whole number.)
$5,714.
The mid-quarter convention applies since more than 40 percent of the property was placed in service during the fourth quarter. The
calculations are $20,000 × 0.25 = $5,000 and $20,000 × 0.0357 = $714. The total is $5,714 ($5,000 + $714).
References
Bonnie Jo used two assets during the current year. The first was computer equipment with an original basis of $15,000, currently in
the second year of depreciation and depreciated under the half-year convention. This asset was disposed of on October 1st of the
current year. The second was furniture with an original basis of $24,000, placed in service during the first quarter, currently in the
fourth year of depreciation, and depreciated under the mid-quarter convention. What is Bonnie Jo's depreciation deduction for the
current year? (Round final answer to the nearest whole number.) (Use MACRS Table 1 and Table 2.)
$5,023.
The depreciation deduction for the current year is $5,023. The calculations are $15,000 × 0.32 × ½ year = $2,400 and $24,000 ×
0.1093 = $2,623. The total is $5,023 ($2,400 + $2,623).
References
Kristine sold two assets on March 20th of the current year. The first was machinery with an original basis of $51,000, currently in the
fourth year of depreciation, and depreciated under the half-year convention. The second was furniture with an original basis of
$16,000, placed in service during the fourth quarter, currently in the third year of depreciation, and depreciated under the mid-quarter
convention. What is Kristine's depreciation deduction for the current year if the depreciation recovery period is seven years? (Use
MACRS Table 1 and Table 2 and Exhibit 10-6.) (Round final answer to the nearest whole number.)
$3,579.
The depreciation on those assets are $51,000 × 0.1249 × ½ year = $3,185 and $16,000 × 0.1968 × 1.5/12 = $394. The total is $3,579
($3,185 + $394).
References
Kristine sold two assets on March 20th of the current year. The first was machinery with an original basis of $58,000, currently in the
fourth year of depreciation, and depreciated under the half-year convention. The second was furniture with an original basis of
$23,000, placed in service during the fourth quarter, currently in the third year of depreciation, and depreciated under the mid-quarter
convention. What is Kristine's depreciation deduction for the current year if the depreciation recovery period is seven years? (Use
MACRS Table 1 and Table 2 and Exhibit 10-6.) (Round final answer to the nearest whole number.)
$4,188.
The depreciation on those assets are $58,000 × 0.1249 × ½ year = $3,622 and $23,000 × 0.1968 × 1.5 / 12 = $566. The total is $4,188
($3,622 + $566).
References
Timothy purchased a new computer for his consulting practice on October 15th of the current year. The basis of the computer was
$4,000. During the Thanksgiving holiday, he decided the computer didn't meet his business needs and gave it to his college-aged
son in another state. The computer was never used for business purposes again. Timothy had $50,000 of taxable income before
depreciation. What is Timothy's total cost recovery deduction with respect to the computer during the current year?
$0.
No depreciation deduction or §179 expense may be taken on an asset that is acquired and disposed of during the same taxable year.
References
During August of the prior year, Julio purchased an apartment building that he used as a rental property. The basis was $1,400,000.
Calculate the maximum depreciation deduction during the current year. (Use MACRS Table 3.)
$50,904.
The asset's recovery period is 27.5 years and the mid-month convention applies for real property. The calculation is $1,400,000 ×
0.03636 = $50,904.
References
During April of the current year, Ronen purchased a warehouse that he used for business purposes. The basis was $1,600,000.
Calculate the maximum depreciation deduction during the current year. (Use MACRS Table 5.)
$29,104.
The asset's recovery period is 39 years and the mid-month convention applies for real property. The calculation is $1,600,000 ×
0.01819 = $29,104.
References
During April of the current year, Ronen purchased a warehouse that he used for business purposes. The basis was $1,610,000.
Calculate the maximum depreciation deduction during the current year. (Use MACRS Table 5.) (Round final answer to the nearest
whole number.)
$29,286.
0.01819 = $29,286.
References
An office building was purchased several years ago on December 9th for $2,500,000. The purchase price was allocated as follows:
building $1,900,000, landscaping $100,000, and land $500,000. During the current year, the 10th year, the building was sold on March
10th. Calculate the maximum depreciation deduction for the real property during the current year, rounded to the nearest whole
number. (Use MACRS Table 5.)
$10,149.
0.02564 × (2.5 ÷ 12) = $10,149. Depreciation is allowed for 2.5 months in the year of disposal. The land improvements are not
considered to be real property. The land is nondepreciable.
References
Olney LLC only purchased one asset this year. Olney LLC placed in service on July 19, 2020, machinery and equipment (seven-year
property) with a basis of $1,330,000. Assume that Olney has sufficient income to avoid any limitations. Calculate the maximum
depreciation deduction, including §179 expensing (but ignoring bonus depreciation). (Use MACRS Table 1.)
$1,081,441.
The $1,040,000 §179 expense is not limited. The half-year convention applies. The expense is $1,081,441, which is depreciation of
$290,000 × 0.1429 = $41,441 plus $1,040,000 of §179 expense.
References
Essay Difficulty: 2 Medium Learning Objective: 10-03 Calculate the deduction

Columbia LLC only purchased one asset this year. Columbia LLC placed in service on July 9, 2020, machinery and equipment (seven-
year property) with a basis of $2,750,000. Assume that Columbia has sufficient income to avoid any limitations. Calculate the
maximum depreciation deduction, including §179 expensing (but ignoring bonus depreciation) for the year. (Use MACRS Table 1.)
$1,147,223.
The $1,040,000 §179 expense is limited to $880,000 because of the property placed in service limitation ($1,040,000 − ($2,750,000 −
$2,590,000)). The half-year convention applies. The expense is $1,147,223, which is depreciation of $1,870,000 × 0.1429 = $267,223
plus $880,000 of §179 expense.
References

Northern LLC only purchased one asset this year. In 2020, Northern LLC placed in service on September 6th machinery and
equipment (seven-year property) with a basis of $3,150,000. Assume that Northern has sufficient income to avoid any limitations.
Calculate the maximum depreciation expense including §179 expensing (ignore any potential bonus expensing). (Use MACRS Table 1.)
$861,543.
The $1,040,000 §179 expense is reduced to $480,000 because of the property placed in service limitation ($1,040,000 − ($3,150,000
− $2,590,000)). The half-year convention applies. The expense is $861,543, which is depreciation of $2,670,000 × 0.1429 = $381,543
References
Essay Difficulty: 3 Hard Learning Objective: 10-03 Calculate the deduction

Northern LLC only purchased one asset this year. In 2020, Northern LLC placed in service on September 6th machinery and
equipment (seven-year property) with a basis of $3,220,000. Assume that Northern has sufficient income to avoid any limitations.
Calculate the maximum depreciation expense including §179 expensing (ignore any potential bonus expensing). (Use MACRS Table 1.)
$811,549.
The $1,040,000 §179 expense is reduced to $410,000 because of the property placed in service limitation ($1,040,000 − ($3,220,000
− $2,590,000)). The half-year convention applies. The expense is $811,549, which is depreciation of $2,810,000 × 0.1429 = $401,549
References

Reid acquired two assets in 2020: on August 6th he acquired computer equipment (five-year property) with a basis of $1,040,000
and on November 9th he acquired machinery (seven-year property) with a basis of $1,040,000. Assume that Reid has sufficient
income to avoid any limitations. Calculate the maximum depreciation deduction, including §179 expensing (but not bonus
depreciation). (Use MACRS Table 1, Table 2.)
$1,248,000.
The $1,040,000 §179 expense should be used for the asset with the lowest first-year depreciation percentage; therefore, Reid
expenses the machinery using §179 of $1,040,000. The mid-quarter convention will no longer apply once the machinery is expensed
because the determination of the convention occurs after the basis reduction from the §179 expensing. Reid then uses the half-year
convention to depreciate the computer equipment. The cost recovery for the equipment is $208,000 ($1,040,000 × 0.20), resulting in
a total depreciation deduction of $1,248,000 ($1,040,000 machinery + $208,000 computer equipment). Choosing to use the §179
immediate expensing option on the seven-year property results in accelerated depreciation compared to choosing the five-year
property.
References

Phyllis purchased $8,000 of specialized audio equipment that she uses in her business regularly. Occasionally, she uses the
equipment for personal use. During the first year, Phyllis used the equipment for business use 70 percent of the time; however, during
the current (second) year, the business use fell to 40 percent. Assume that the equipment is seven-year MACRS property and is under
the half-year convention. Assume the ADS recovery period is 10 years. What is the depreciation allowance for the current year? (Use
MACRS Table 1.) (Round final answer to the nearest whole number.)
Phyllis must recapture $200 into income this year.
Because the business use fell below 50 percent for the listed property, the depreciation for all years must be recalculated under the
straight-line method over the ADS recovery period. During the first year depreciation was $800 ($8,000 × 0.1429 × 70%). Using the
straight-line method over the ADS recovery period the depreciation for Year 1 would be $280 ($8,000/10 years × 70% × ½ year).
Depreciation for Year 2 would be $320 ($8,000/10 years × 40%). Because the actual depreciation taken in Year 1 exceeds the sum of
the depreciation for Years 1 and 2 under the ADS method, Phyllis must recapture $200 into income during the current year.
References

Alexandra purchased a $55,000 automobile during 2020. The business use was 70 percent. What is the allowable depreciation for
the current year? (Ignore any possible bonus depreciation.) (Use Exhibit 10-10.)
$7,070.
The maximum depreciation for a luxury automobile during 2020 is the lesser of the automobile limitation of $10,100 or MACRS
depreciation of $11,000 ($55,000 × 0.20). The lower amount of $10,100 is then reduced for the business percentage use of 70
percent. Depreciation is $7,070 ($10,100 × 70%).
References
Essay Difficulty: 1 Easy Learning Objective: 10-03 Calculate the deduction

Alexandra purchased a $56,100 automobile during 2020. The business use was 60 percent. What is the allowable depreciation for
the current year? (Ignore any possible bonus depreciation.) (Use Exhibit 10-10.)
$6,060.
The maximum depreciation for a luxury automobile during 2020 is the lesser of the automobile limitation of $10,100 or MACRS
depreciation of $11,220 ($56,100 × 0.20). The lower amount of $10,100 is then reduced for the business percentage use of 60 percent.
Depreciation is $6,060 ($10,100 × 60%).
References
Essay Difficulty: 1 Easy Learning Objective: 10-03 Calculate the deduction

Boxer LLC has acquired various types of assets recently used 100 percent in its trade or business. Below is a list of assets acquired
during 2019 and 2020:
Asset Cost Basis Convention Date Placed in Service

Machinery $ 25,000 Half-year January 24, 2019
Warehouse 800,000 Mid-month August 1, 2019
Furniture 100,000 October 5, 2020
Computer equipment 65,000 October 10, 2020
Office equipment 34,000 September 28, 2020
Automobile 65,000 July 15, 2020
Office building 800,000 September 24, 2020
Boxer did not elect §179 expense and elected out of bonus depreciation in 2019, but would like to take advantage of the §179
expense and bonus depreciation for 2020 (assume that taxable income is sufficient). Calculate Boxer's maximum depreciation
deduction for 2020. (Use MACRS Table 1, MACRS Table 5, and Exhibit 10-10. ) (Round final answer to the nearest whole number.)
$249,727.
§179 allows expensing of all the 2020 tangible personal property ($199,000 = $100,000 + $65,000 + $34,000), with the exception of
the automobile. The maximum depreciation for 2020 on luxury automobiles is $10,100 plus $8,000 of bonus depreciation. The
depreciation of the remaining assets is as follows: 2019 machinery ($25,000 × 0.2449 = $6,123), 2019 warehouse ($800,000 ×
0.02564 = $20,512), and the 2020 office building ($800,000 × 0.00749 = $5,992).
2020
Asset Depreciation
Machinery $ 6,123
Warehouse 20,512
Furniture 100,000
Computer equipment 65,000
Office equipment 34,000
Automobile 18,100
Office building 5,992
Total $ 249,727
References
Essay Learning Objective: 10-02

Determine the applicable
cost recovery (depreciation)
life, method, and convention
for tangible personal and
real property and the
deduction allowable under
basic Modified Accelerated
Cost Recovery System
(MACRS).
Difficulty: 3 Hard Learning Objective: 10-03

Calculate the deduction
allowable under the
additional special cost
recovery rules (§179, bonus,
and listed property).
Assume that Yuri acquires a competitor's assets on May 1st. The purchase price was $500,000. Of that amount, $325,000 is allocated
to tangible assets and $175,000 is allocated to goodwill (a §197 intangible asset). What is Yuri's amortization deduction for the current
$7,778.
The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $7,778 = ($175,000 ÷ 180) ×
8.
References
Essay Difficulty: 1 Easy Learning Objective: 10-04 Calculate the deduction for
amortization.
Assume that Yuri acquires a competitor's assets on May 1st. The purchase price was $504,000. Of that amount, $327,000 is allocated
to tangible assets and $177,000 is allocated to goodwill (a §197 intangible asset). What is Yuri's amortization deduction for the current
$7,867.
The full-month convention applies. §197 assets have a recovery period of 180 months. The amortization is $7,867 = ($177,000 ÷ 180) ×
8.
References
Essay Difficulty: 1 Easy Learning Objective: 10-04 Calculate the deduction for
amortization.
Assume that Cannon LLC acquires a competitor's assets on June 15th of a prior year. The purchase price was $450,000. Of the
amount, $196,200 is allocated to tangible assets and $253,800 is allocated to three §197 intangible assets: $153,000 to goodwill,
$50,400 to a customer list with an expected life of eight years, and $50,400 to a three-year noncompete agreement. On May 30th of
the second year, the customer list is sold for $10,000. (Round your amortization and final answer to the nearest whole number. Round
your allocation percentage to the nearest whole percentage, e.g., 0.1234 as 12 percent.)
1) What is Cannon's amortization deduction for the second year?

2) What is the basis of the intangibles at the end of the second year?
1) Cannon's amortization deduction for the second year is $16,500. This is calculated as follows:
Goodwill Covenant Customer List Total

Initial basis $ 153,000 $ 50,400 $ 50,400
Recovery period, months 180 180 180
Per month $ 850 $ 280 $ 280
Year 1, seven months $ 5,950 $ 1,960 $ 1,960
Year 2, five months $ 4,250 $ 1,400 $ 1,400 $ 7,050
Basis, May 30, Year 2 $ 142,800 $ 47,040 $ 47,040
Selling price $ (10,000)
Remaining basis $ 142,800 $ 47,040 $ 37,040
Reallocation pro rata on $189,840 (goodwill and covenant) 75 percent, 25
percent $ 27,780 $ 9,260 $ (37,040)
Reallocated basis $ 170,580 $ 56,300 $0
Remaining months 168 168
Per month, rounded $ 1,015 $ 335
June to December (seven months) $ 7,105 $ 2,345 $ 9,450
1) Total amortization, Year 2 $ 11,355 $ 3,745 $ 1,400 $ 16,500
2) The basis of the remaining assets is as follows:
Goodwill Covenant
Initial basis $ 153,000 $ 50,400
Amortization Year 1, seven months (5,950) (1,960)
Amortization Year 2, five months (4,250) (1,400)
Reallocated basis, May 30, Year 2 27,780 9,260
Amortization Year 2, seven months (7,105) (2,345)
Basis, end of Year 2 $ 163,475 $ 53,955
References
Essay Difficulty: 3 Hard Learning Objective: 10-04 Calculate the deduction for
amortization.
Oksana started a LLC on November 2 of the current year. She incurred $30,000 of start-up costs. How much of the start-up costs can
be immediately expensed for the year? How much amortization may Oksana deduct in the first year?
$5,278.
$5,000 of start-up costs can be immediately deducted and $278 [($25,000 ÷ 180) × 2 months] of amortization may be deducted.
References
Essay Difficulty: 2 Medium Learning Objective: 10-04 Calculate the deduction for
amortization.
Oksana started a LLC on November 2 of the current year. She incurred $39,000 of start-up costs. How much of the start-up costs can
be immediately expensed for the year? How much amortization may Oksana deduct in the first year?
$5,378.
$5,000 of start-up costs can be immediately deducted and $378 [($34,000 ÷ 180) × 2 months] of amortization may be deducted.
References
amortization.
Patin Corporation began business on September 23rd of the current year. It incurred $40,000 of start-up costs and $60,000 of
organizational expenditures. How much total amortization may be deducted in the first year? (Round final answer to the nearest whole
number.)
$7,111.
Total amortization is $7,111. $5,000 of start-up costs can be immediately expensed. Patin may not immediately deduct the
organizational costs because the immediate deduction is phased out dollar for dollar for organization expenditures exceeding
$50,000. As a result, when the expenses exceed $55,000, no immediate deduction can be taken. In addition, $2,111 ($35,000 ÷ 180) ×
4 months = $778 of the start-up costs may be amortized and ($60,000 ÷ 180) × 4 months = $1,333 of the organizational expenditures
may be amortized.
References
amortization.
Paulman incurred $55,000 of research and experimental expenses and began amortizing them over 60 months during June of Year 1.
During May of Year 3, Paulman received a patent based upon the research being amortized. $36,000 of legal expenses for the patent
were incurred. The patent is expected to have a remaining useful life of 17 years.
1) What is the basis of the patent? (Round amortization for each year to the nearest whole number.)
2) What is the amortization deduction with respect to the patent during the year it was issued? (Round final answer to the nearest
whole number.)
1) $69,000.
The basis of the patent is $69,000 ($36,000 of legal costs and $33,000 of unamortized research expenses). The research expense is
$55,000/60 months = $916.67. Year 1 is $6,417 for seven months; Year 2 is a full year of $11,000, and five months in Year 3 is $4,583.
Total research expensed is $22,000 and remaining unamortized expense to add to patent capitalization is $33,000.
2) $2,368.
The amortization is $2,368 = ($69,000 ÷ 204 months) × 7 months in Year 3.
References
amortization.
Paulman incurred $69,000 of research and experimental expenses and began amortizing them over 60 months during June of Year 1.
During May of Year 3, Paulman received a patent based upon the research being amortized. $50,000 of legal expenses for the patent
were incurred. The patent is expected to have a remaining useful life of 17 years.
1) What is the basis of the patent? (Round amortization for each year to the nearest whole number.)
2) What is the amortization deduction with respect to the patent during the year it was issued? (Round final answer to the nearest
whole number.)
1) $91,400.
The basis of the patent is $91,400 ($50,000 of legal costs and $41,400 of unamortized research expenses). The research expense is
$69,000 / 60 months = $1,150.00. Year 1 is $8,050 for seven months; Year 2 is a full year of $13,800, and five months in Year 3 is
$5,750. Total research expensed is $27,600 and remaining unamortized expense to add to patent capitalization is $41,400.
2) $3,136.
The amortization is $3,136 = ($91,400 ÷ 204 months) × 7 months in year 3.
References
amortization.
Sequoia purchased the rights to cut timber on several tracts of land over a 15-year period. It paid $500,000 for cutting rights. A timber
engineer estimates that 500,000 board feet of timber will be cut. During the current year, Sequoia cut 45,000 board feet of timber,
which it sold for $900,000. What is Sequoia's cost depletion deduction for the current year?
$45,000.
The depletion expense is $45,000 ($500,000 ÷ 500,000) × 45,000.
References
Essay Difficulty: 1 Easy Learning Objective: 10-05 Explain cost recovery of

Sequoia purchased the rights to cut timber on several tracts of land over a 15-year period. It paid $503,000 for cutting rights. A timber
engineer estimates that 503,000 board feet of timber will be cut. During the current year, Sequoia cut 48,000 board feet of timber,
which it sold for $903,000. What is Sequoia's cost depletion deduction for the current year?
$48,000.
The depletion expense is $48,000 ($503,000 ÷ 503,000) × 48,000.
References
Essay Difficulty: 1 Easy Learning Objective: 10-05 Explain cost recovery of

PC Mine purchased a platinum deposit for $3,500,000. It estimated it would extract 17,000 ounces of platinum from the deposit. PC
mined the platinum and sold it, reporting gross receipts of $500,000 and $8 million for Years 1 and 2, respectively. During Years 1 and
2, PC reported net income (loss) from the platinum deposit activity in the amount of ($100,000) and $3,800,000, respectively. In Years
1 and 2, PC actually extracted 2,000 and 8,000 ounces of platinum. What is PC's depletion deduction for Years 1 and 2 if the
applicable percentage depletion for platinum is 22 percent? (Round final answer to the nearest whole number.)
Year 1: $411,765.
Year 2: $1,760,000.
PC has a cost depletion deduction of $411,765 [($3,500,000 ÷ 17,000) × 2,000] in Year 1. Because PC has a loss in Year 1, there is no
percentage depletion. PC has percentage depletion of $1,760,000 in Year 2: the lesser of $1,760,000 ($8 million × 22 percent) or
$1,900,000 ($3.8 million × 50 percent). Cost depletion was $1,647,059 [($3,500,000 ÷ 17,000) × 8,000] and is less than percentage
depletion.
References
Essay Difficulty: 2 Medium Learning Objective: 10-05 Explain cost recovery of


Chapter 10 Test Bank

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 10 Test Bank

Uploaded by

Copyright:

Available Formats

1. Award: 1.

2. Award: 1.00 point

Tax cost recovery methods include depreciation, amortization, and depletion.

3. Award: 1.00 point

5. Award: 1.00 point

6. Award: 1.00 point

8. Award: 1.00 point

Taxpayers use the recovery periods outlined in Revenue Procedure 87-56.

9. Award: 1.00 point

Taxpayers use the half-year convention for all assets.

11. Award: 1.00 point

12. Award: 1.00 point

14. Award: 1.00 point

Real property is depreciated using the straight-line method.

15. Award: 1.00 point

17. Award: 1.00 point

18. Award: 1.00 point

20. Award: 1.00 point

21. Award: 1.00 point

Bonus depreciation is used as a stimulus tool by tax policy makers.

Used property is eligible for bonus depreciation.

23. Award: 1.00 point

24. Award: 1.00 point

Limits are placed on the depreciation of luxury automobiles.

26. Award: 1.00 point

27. Award: 1.00 point

The method for tax amortization is always the straight-line method.

29. Award: 1.00 point

All assets subject to amortization have the same recovery period.

30. Award: 1.00 point

Goodwill and customer lists are examples of §197 amortizable assets.

32. Award: 1.00 point

33. Award: 1.00 point

35. Award: 1.00 point

36. Award: 1.00 point

Cost depletion is available to all natural resource producers.

38. Award: 1.00 point

Tax cost recovery methods do not include:

 All of the choices are tax cost recovery methods.

Which of the following business assets is not depreciated?

 All of the assets are depreciated.

Patents are amortized rather than depreciated.

40. Award: 1.00 point

An oﬃce desk is an example of:

 Personal property and business property.

An example of an asset that is both personal-use and personal property is:

 A computer used solely to email company employees regarding company activities.

 A storage building used by the CEO to store personal records.

 A company airplane used by the CEO for business travel.

 All of the assets are personal-use and personal property.

42. Award: 1.00 point

Which of the following is not usually included in an asset's tax basis?

 All of the choices are included in an asset's tax basis.

 Wiper blade replacement

 Air ﬁlter change

44. Award: 1.00 point

Tax depreciation is currently calculated under what system?

 Accelerated cost recovery system

 Modiﬁed Accelerated Cost Recovery System

 None of the choices are correct.

Which is not an allowable method under MACRS?

 150 percent declining balance

 200 percent declining balance