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9/6/2017 Print Questions 1. Explain the difference between cost depletion and percentage depletion. Which of these two methods generally provides the largest deduction? A. Cost depletion is computed by multiplying the percentage depletion rate times the gross income from the property. Percentage depletion is similar to the units-of-production method of depreciation and is calculated by dividing the asset's adjusted basis by the estimated recoverable units to arrive at a per-unit depletion amount. This per-unit amount is then multiplied by the number of units sold to determine the cost depletion deduction. Cost depletion will generally provide larger deductions than cost depletion, especially when measured over the life of the property. B. Cost depletion is similar to the units-of-production method of depreciation and is calculated by dividing the asset's adjusted basis by the estimated recoverable units to arrive at a per-unit depletion amount. This per-unit amount is then multiplied by the number of units sold to determine the cost depletion deduction. Percentage depletion is computed by multiplying the percentage depletion rate times the gross income from the property. Percentage depletion will generally provide larger deductions than cost depletion, especially when measured over the life of the property. C. Cost depletion is similar to the units-of-production method of depreciation and is computed by multiplying the percentage depletion rate times the gross income from the property. Percentage depletion is calculated by dividing the asset's adjusted basis by the estimated recoverable units to arrive at a per-unit depletion amount. This per-unit amount is then multiplied by the number of units sold to determine the cost depletion deduction. Both methods will generally result in the same overall deductions over the life of the property. D. Cost depletion is similar to the units-of-production method of depreciation and is computed by multiplying the percentage depletion rate times the gross income from the property. Percentage depletion is calculated by dividing the asset's adjusted basis by the estimated recoverable units to arrive at a per-unit depletion amount. This per-unit amount is then multiplied by the number of units sold to determine the cost depletion deduction. Percentage depletion will generally provide larger deductions than cost depletion, especially when measured over the life of the property. 2. In a business combination, why does the buyer generally prefer to allocate as much of the purchase price to short-lived depreciable assets, ordinary assets such as inventory, and Sec. 197 intangible assets? A. Buyers generally prefer a liberal allocation of the purchase price to ordinary assets such as inventory because gross profit is reduced when the inventory is sold. B. Allocations to short-lived depreciable assets and Sec. 197 intangibles are preferred over allocations to land and other non-depreciable assets due to the tax benefits obtained from the depreciation and amortization. C. Buyer generally prefer to allocate as much of the purchase price to short-lived depreciable assets, ordinary assets such as inventory, and Sec. 197 intangible assets because there are fewer recordkeeping requirements. D. Both A and B are correct. https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 1/22 9/6/2017 Print Questions 3. Susan acquired business machinery (which qualified as 10-year MACRS property) on July 15, 2014, for $22,000. In 2014, Susan claimed a $2,200 regular MACRS depreciation deduction and she elected not to claim Sec. 179 depreciation or bonus depreciation. Because of net operating losses in 2015 2017, Susan did not claim any depreciation deduction on her tax returns in those years. She sells the machine on July 1, 2017, for $16,000. 1 (Click the icon to view the MACRS half-year convention rates.) Read the requirements2. Requirement a. What is the adjusted basis of the machine on the sale date? Select the formula and enter the amounts to compute the adjusted basis of the machine on the sale date. (Use MACRS rates to three decimal places, X.XXX%. Round interim annual depreciation calculations and your final answers to the nearest dollar.) (1) (2) - = Adjusted basis at time of sale = Requirement b. How much gain or loss is recognized on the sale of the machine? Susan will recognize a (3) of $ on the sale of the machine. 1: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 2/22 9/6/2017 Print Questions 2: Requirements a. What is the adjusted basis of the machine on the sale date? b. How much gain or loss is recognized on the sale of the machine? (1) Life in years Acquisition cost Allowable depreciation Allowed depreciation (2) Life in years Acquisition cost Allowable depreciation Allowed depreciation (3) gain loss https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 3/22 9/6/2017 Print Questions 4. Small Corporation acquired and placed in service the following 100% business-use assets. Small did not claim Sec. 179 or bonus depreciation expensing on any of these properties. 3 (Click the icon to view the business-use assets.) Read the requirements4. 5 (Click the icon to view the MACRS half-year convention rates.) 6 (Click the icon to view the MACRS mid-quarter convention rates for property placed in service in the first quarter.) 7 (Click the icon to view the MACRS mid-quarter convention rates for property placed in service in the fourth quarter.) 8 (Click the icon to view the MACRS straight-line rates for 39-year property.) Requirement a. What is Small's total depreciation deduction in 2017? (Use MACRS rates to three decimal places, X.XXX%. Round all amounts to the nearest dollar. Enter a "0" if no depreciation is allowed.) Asset 2017 Depreciation Truck Machinery Land Building Total depreciation Requirement b. Small Corporation sells the machinery on February 2, 2019 and sells the building on September 18, 2019. What are the adjusted bases of these two assets on the dates of sale (compute accumulated depreciation to date of sale)? Select the formula and enter the amounts to compute the adjusted basis of the two assets on the sale date. (Use MACRS rates to three decimal places, X.XXX%. Round interim annual depreciation calculations and your final answers to the nearest dollar.) Asset (1) - (2) = Machinery - = Building - = Adjusted basis at time of sale 3: More Info Truck (light-duty, modified non-personal use) costing $32,000: Placed in service on March 3, 2017 with a 5-year MACRS recovery period. Machinery costing $76,000: Placed in service on November 15, 2017 with a 7-year MACRS recovery period. Land costing $95,000: Placed in service on October 12, 2017. Building costing $340,000: Placed in service on December 4, 2017 with a 39-year MACRS recovery period. 4: Requirements a. What is Small's total depreciation deduction in 2017? b. Small Corporation sells the machinery on February 2, 2019 and sells the building on September 18, 2019. What are the adjusted bases of these two assets on the dates of sale (compute accumulated depreciation to date of sale)? 5: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 4/22 9/6/2017 Print Questions 6: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 5/22 9/6/2017 Print Questions 7: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 6/22 9/6/2017 Print Questions 8: Reference (1) Life in years Acquisition cost Accumulated depreciation Annual depreciation https://xlitemprod.pearsoncmg.com/api/v1/print/accounting (2) Life in years Acquisition cost Accumulated depreciation Annual depreciation 7/22 9/6/2017 Print Questions 5. In 2017, Terry acquires and places into service in her business 7-year MACRS property costing $45,000 and 7-year MACRS property costing $155,000. Terry elects Sec. 179 expensing for all of the properties' cost. Terry's taxable income (before the Sec. 179 and 50% of self-employment deductions) is $160,000. 9 (Click the icon to view the MACRS half-year rates.) Read the requirements10. Requirement a. What amount may Terry deduct under Sec. 179 for 2017 for the properties? What amount can she carry over to 2018? Terry may deduct $ under Sec. 179 for 2017. Terry can carry over $ to 2018. Requirement b. What is Terry's total 2017 depreciation deduction? (Complete all answer boxes. Enter a "0" for any zero amounts.) Asset Depreciation deduction Sec. 179 expense Bonus depreciation MACRS depreciation Total 2017 depreciation Requirement c. What are the limitations on Terry's ability to use the Sec. 179 carryover in 2018? (Abbreviation used: SE = self-employment.) To use the carryover in 2018, Terry must (1) below (2) and also not have the dollar limitation next year be reduced . Requirement d. How would your answers to Parts a, b, and c change if Terry's 2017 business taxable income (before the Sec. 179 expense and the 50% of self-employment tax deductions) was $290,000 instead of $160,000? (Complete all answer boxes. Enter a "0" for any zero amounts.) In part a, Terry could deduct $ for 2017 under Sec. 179. She would have $ over to 2018. In part b, her total 2017 depreciation deduction would be $ to carry . In part c, she would have $ to carry over to 2018. 9: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 8/22 9/6/2017 Print Questions 10: Requirements a. What amount may Terry deduct under Sec. 179 for 2017 for the properties? What amount can she carry over to 2018? b. What is Terry's total 2017 depreciation deduction? c. What are the limitations on Terry's ability to use the Sec. 179 carryover in 2018? d. How would your answers to Parts a, b, and c change if Terry's 2017 business taxable income (before the Sec. 179 expense and the 50% of self-employment tax deductions) was $290,000 instead of $160,000? (1) have sufficient asset purchases have sufficient business taxable income after deducting 50% of SE deductions have sufficient business taxable income after deducting the Sec. 179 deductions have sufficient business taxable income before the Sec. 179 and 50% of SE deductions (2) the carryover amount the carryover amount plus the cost of 2018 property for which she elects Sec. 179 treatment the total cost of property placed in service in 2017 https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 9/22 9/6/2017 Print Questions 6. Naples Corporation sold the following assets in 2017: 11 (Click the icon to view the data.) Requirements a. What is the depreciation deduction for each asset in 2017? b. Compute the gain or loss on each asset sold. 12 (Click the icon to view the MACRS half-year convention rates.) 13 (Click the icon to view the MACRS straight-line rates for 39-year property.) 14 (Click the icon to view the Luxury Automobile Depreciation Limits.) Requirement a. What is the depreciation deduction for each asset in 2017? (Do not round intermediary calculations. Only round the amount you input in the cell to the nearest dollar.) Asset 2017 Depreciation Automobile Equipment Building Total Requirement b. Compute the gain or loss on each asset sold. First select the formula and enter the amounts to compute the adjusted basis of each asset on the sale date. (Use MACRS rates to three decimal places, X.XXX%. Do not round intermediary calculations. Only round the annual depreciation calculations and your final answers to the nearest dollar.) (1) Asset (2) - = Automobile - = Equipment - = Building - = Adjusted basis at time of sale Now calculate the gain or loss on each asset sold. (Use a minus sign or parentheses for a loss.) Asset Gain/(loss) on sale Automobile Equipment Building 11: Data Table Date Original Depreciation/ Recovery Cost Cost-Recovery Period Sales Basis Method (Years) Price 9,500 MACRS 5 Acquired Date Sold Automobile 1/1/14 12/1/17 a Equipment 1/6/14 9/1/17 a 22,000 MACRS 7 10,200 Building (nonresidental) 4/1/07 12/10/17 250,000 MACRS 39 230,000 $ $ 3,100 a The half-year convention was used in the year of acquisition. Naples did not claim Sec. 179 expense or bonus depreciation during the acquistion years. 12: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 10/22 9/6/2017 Print Questions 13: Reference 14: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 11/22 9/6/2017 Print Questions TAX AUTHORITY UPDATE At the time this edition went to print, the IRS had not yet released the 2017 ceiling limits. For this problem we assume the limits will be the same for 2017 as they were in 2016. (1) Life in years Acquisition cost Accumulated depreciation Annual depreciation https://xlitemprod.pearsoncmg.com/api/v1/print/accounting (2) Life in years Acquisition cost Accumulated depreciation Annual depreciation 12/22 9/6/2017 Print Questions 7. Legas Corporation acquired a 100% business-use automobile (MACRS 5-year recovery) on July 1, 2017 for $58,560. The company did not elect Sec. 179 expensing and elects out of bonus depreciation. 15 16 (Click the icon to view MACRS half-year convention rates.) (Click the icon to view Luxury Automobile Depreciation limits.) Requirement What is depreciation for 2017-2019, and any subsequent years? (Use MACRS rates to three decimal places, X.XXX%. Round all currency amounts to the nearest dollar.) Year Allowable Depreciation Deduction 2017 2018 2019 For subsequent years, the allowed depreciation deduction each year is (1) until the automobile is fully depreciated. 15: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 13/22 9/6/2017 Print Questions 16: Reference TAX AUTHORITY UPDATE At the time this edition went to print, the IRS had not yet released the 2017 ceiling limits. For this problem we assume the limits will be the same for 2017 as they were in 2016. (1) $1,875 equal to the regular MACRS deduction the lesser of the regular MACRS deduction or $1,875 the greater of the regular MACRS deduction or $1,875 https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 14/22 9/6/2017 Print Questions 8. Troy has owned an oil and gas property for a number of years. The following information is provided about the property's operations in the current year: 17 (Click the icon to view the information.) 18(Click the icon to view the depletion rates.) Read the requirements19. Requirement a. What is the percentage depletion amount if the IDCs are expensed? If the IDCs are expensed, the percentage depletion amount is $ . Requirement b. What is the percentage depletion amount if the IDCs are capitalized? If the IDCs are capitalized, the percentage depletion amount is $ . Requirement c. What is the depletion deduction amount assuming that the IDCs are expensed? If the IDCs are expensed, the depletion deduction will be $ . Requirement d. Based on the information above, which method should be used for the IDCs? Explain. The (1) method should be used because the taxpayer (2) 17: More Info Gross income $ 550,000 (240,000) Minus: Expenses (including IDCs of $80,000) $ 310,000 Cost depletion (if IDCs are expensed) $ 45,000 Cost depletion (if IDCs are capitalized) $ 18,000 Taxable income (before depletion) 18: Reference 19: Requirements a. What is the percentage depletion amount if the IDCs are expensed? b. What is the percentage depletion amount if the IDCs are capitalized? c. What is the depletion deduction amount assuming that the IDCs are expensed? d. Based on the information above, which method should be used for the IDCs? Explain. https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 15/22 9/6/2017 Print Questions (1) cost depletion (2) percentage depletion may deduct the $82,500 only, which is still greater than the $45,000. may deduct the $82,500 plus the $18,000 of costs capitalized. may deduct the $82,500 plus the $45,000 of costs expensed. may deduct the $82,500 plus the $80,000 of IDCs in the current year. 9. On January 1 of the current year, Peony Corporation purchases the net assets of Valentina's unincorporated business for $700,000. The tangible net assets have a $300,000 book value and a $450,000 FMV. The purchase agreement states that Valentina will not compete with Peony Corporation by starting a new business in the same area for a period of five years. The stated consideration received by Valentina for the covenant not to compete is $25,000. Other intangible assets included in the purchase agreement are as follows: 20 (Click the icon to view the other intangible assets.) Read the requirements21. Requirement a. How would Valentina's assets be recorded for tax purposes by Peony Corporation? Tangible assets Intangible assets: Covenant not to compete Goodwill Patents Customer list Total Requirement b. What is the amortization amount for each intangible asset in the current year? (Round your answers to the nearest dollar.) Current Year Amortization Covenant not to compete Goodwill Patents Customer list 20: Data Table Goodwill: $135,000 Patents (14-year remaining legal life): $40,000 Customer list: $50,000 21: Requirements a. How would Valentina's assets be recorded for tax purposes by Peony Corporation? b. What is the amortization amount for each intangible asset in the current year? https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 16/22 9/6/2017 Print Questions 10. Posey Corporation incurs the following costs in the initial year of doing business: 22 (Click the icon to view the costs.) Requirement Which of these expenditures are deductible as R&E costs under Sec. 174? (Enter a "0" if an item is not deductible as an R&E cost under Sec. 174.) Amount Deductible Under Sec. 174 Materials and supplies for research laboratory $ 100,000 Utilities and depreciation on research laboratory and equipment 75,000 Costs of acquiring another entity's patent for a new product 25,000 Market research salaries for surveys relative to proposed new products 65,000 Labor and supplies for quality control tests 80,000 Research costs subcontracted to a local university 30,000 $ Total 375,000 22: Data Table Materials and supplies for research laboratory $ 100,000 Utilities and depreciation on research laboratory and equipment 75,000 Costs of acquiring another entity's patent for a new product 25,000 Market research salaries for surveys relative to proposed new products 65,000 Labor and supplies for quality control tests 80,000 Research costs subcontracted to a local university 30,000 Total $ 375,000 Posey's controller states that all of these costs are qualifying R&E expenditures and that the company policy is to expense such amounts for tax purposes in the year they are incurred. https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 17/22 9/6/2017 Print Questions 11. Bromley Corporation, a construction company that specializes in home construction, uses special computer software to schedule jobs and keep track of job costs. It uses generic software for bookkeeping and spreadsheet analysis. During 2017, Bromley Corporation had the following transactions relating to computer software: 23 24 (Click the icon to view the transactions.) (Click the icon to view the MACRS half-year convention rates.) Read the requirement25. (Include only the portion of the deduction attributable to the software, even if an item would not be separately stated. Do not round intermediary calculations. Only round the amount you input in the cell to the nearest whole dollar.) Asset Date acquired Built-in computer software May 12, 2017 Bookkeeping software September 1, 2017 Computer software June 1, 2017 2017 Deduction 23: More Info The corporation purchased a new computer system on May 12, 2017, for $30,000. The system included computer hardware and built-in computer software valued at $3,200. The corporation has never separated computer software from the hardware in prior years when a computer system was purchased. The corporation separately purchased new bookkeeping software on September 1, 2017, for $6,480. On June 1, 2017, Bromley Corporation acquired another home building company to strengthen its position in higher-priced homes. The total purchase price was $870,000 allocated to specific assets as follows: Equipment Goodwill Computer software $550,000 260,000 60,000 24: Reference https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 18/22 9/6/2017 Print Questions 25: Requirement What amount can Bromley Corporation deduct in 2017 with respect to computer software? https://xlitemprod.pearsoncmg.com/api/v1/print/accounting 19/22