Chapter 10A - Property Acquisition & Cost Recovery (Personal Property)
True / False Questions
1. Like financial accounting, most business property must be capitalized for tax purposes.
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TRUE
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2. Tax cost recovery methods include depreciation, amortization, and depletion.
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TRUE
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3. If a business mistakenly claims too little depreciation, the business must only reduce the asset's basis by the depreciation actually taken rather than the amount of the allowable depreciation.
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FALSE - Allowed or allowable concept.
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4. An asset's capitalized cost basis includes only the actual purchase price; whereas the other expenses associated with the asset are immediately expensed.
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FALSE - capitalized cost also includes sales tax, shipping and installation costs.
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5. Depreciation is currently computed under the Modified Accelerated Cost Recovery System (MACRS).
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TRUE
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6. Taxpayers use the half-year convention for all assets.
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FALSE - for personal property, taxpayers must use either the half-year or mid-quarter convention.
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7. The MACRS depreciation tables automatically switch to the straight-line method when it exceeds the declining balance method.
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TRUE
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8. 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.
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FALSE - the half-year convention still applies in the year of disposition.
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9. 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 percentage by 50 percent to calculate the depreciation expense properly.
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TRUE - only 50% of the full year depreciation amount is allowed in the year of disposition.
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10. All taxpayers may use the §179 immediate expensing election on certain property.
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FALSE - subject to a phase-out limitation.
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11. The §179 immediate expensing election phases out based upon a taxpayer's taxable income.
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FALSE - the §179 phase out is based upon the amount of property placed in service during the year.
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12. The §179 immediate expensing election phases out based upon the amount of tangible personal property a taxpayer places in service during the year.
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TRUE
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13. 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.
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TRUE
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14. In general, a taxpayer should select longer-lived property for the §179 immediate expensing election.
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TRUE
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15. Business assets that tend to be used for both business and personal purposes are referred to as listed property.
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TRUE
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16. Significant limits are placed on the depreciation of luxury automobiles.
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TRUE
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Multiple Choice Questions
17. Tax cost recovery methods do not include:
A. Amortization
B. Capitalization
C. Depletion
D. Depreciation
E. All of these are tax cost recovery methods
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B. Capitalization
Amortization, depletion, and depreciation are cost recovery methods as a result of asset capitalization.
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18. Which of the following is not depreciated?
A. Automobile
B. Building
C. Patent
D. Machinery
E. All of these are depreciated
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C. Patent
Patents are amortized rather than depreciated.
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19. Which of the following is not usually included in an asset's tax basis?
A. Purchase price
B. Sales tax
C. Shipping
D. Installation costs
E. All of these are included in an asset's tax basis
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E. All of these are included in an asset's tax basis
The purchase price, sales tax, shipping, and installation costs are all included in an assets tax basis.
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20. Which of the following would be considered an improvement rather than a routine maintenance?
A. Oil change
B. Engine overhaul
C. Wiper blade replacement
D. Air filter change
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B. Engine overhaul
A permanent improvement must be capitalized and depreciated, while routine maintenance may be expensed. The engine overhaul is an improvement because it extends the useful life of the asset while the other items are routine maintenance.
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21. Tax depreciation is currently calculated under what system?
A. Sum of the years digits
B. Accelerated cost recovery system
C. Modified accelerated cost recovery system
D. Straight line system
E. None of these
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C. Modified accelerated cost recovery system
The modified accelerated cost recovery system (MACRS) is the current tax depreciation system.
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22. 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
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D. Sum of the years digits
The sum of the years digits is not an allowable method under MACRS.
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23. Which of the allowable methods allows the most accelerated depreciation?
A. 150 percent declining balance
B. 200 percent declining balance
C. Straight line
D. Sum of the years digits
E. None of these allow accelerated depreciation
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B. 200 percent declining balance
The 200 percent declining balance method allows the most depreciation expense.
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24. How is the recovery period of an asset determined for tax purposes?
A. Estimated useful life
B. Treasury regulation
C. Revenue Procedure 87-56
D. Revenue Ruling 87-56
E. None of these
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C. Revenue Procedure 87-56
Revenue Procedure 87-56 helps taxpayers determine the recovery period for assets.
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25. 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
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A. Full-month
The full month convention is used for tax amortization which does not fall under MACRS depreciation.
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26. 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 of these are conventions for tangible personal property
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B. Half-year
The half-year convention is the general rule for tangible personal property, while the mid-quarter convention is the exception.
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27. The MACRS recovery period for automobiles and computers is:
A. 3 years
B. 5 years
C. 7 years
D. 10 years
E. None of these
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B. 5 years
These assets' recovery period is 5 years.
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28. Lax, LLC purchased only one asset during the current year. It placed in service computer equipment (5-year property) on August 26 with a basis of $20,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation):
A. $2,000
B. $2,858
C. $3,000
D. $4,000
E. None of these
answer
D. $4,000
The asset's recovery period is 5 years and the half-year convention applies. The calculation is $20,000 × .2 = $4,000.
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29. Sairra, LLC purchased only one asset during the current year. It placed in service furniture (7-year property) on April 16 with a basis of $25,000. Calculate the maximum depreciation expense for the current year, rounding to a whole number (ignoring §179 and bonus depreciation):
A. $1,786
B. $3,573
C. $4,463
D. $5,000
E. None of these
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B. $3,573
The asset's recovery period is 7 years and the half-year convention applies. The calculation is $25,000 × .1429 = $3,573.
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30. 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 §179 and bonus depreciation):
A. $1,785
B. $2,500
C. $7,145
D. $10,000
E. None of these
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A. $1,785
The asset's recovery period is 7 years and the mid-quarter convention applies because the property was placed in service during the fourth quarter. The calculation is $50,000 × .0357 = $1,785.
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31. Suvi, Inc. purchased two assets during the current year. It placed in service computer equipment (5-year property) on August 10 with a basis of $20,000 and machinery (7-year property) on November 18 with a basis of $10,000. Calculate the maximum depreciation expense, rounded to a whole number (ignoring §179 and bonus depreciation):
A. $857
B. $3,357
C. $5,429
D. $6,000
E. None of these
answer
C. $5,429
The half-year convention applies. The calculations are $20,000 × .2 = $4,000 and $10,000 × .1429 = $1,429. The total is $5,429 ($4,000 + $1,429).
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32. Deirdre's business purchased two assets during the current year. It placed in service computer equipment (5-year property) on January 20 with a basis of $15,000 and machinery (7-year property) on October 1 with a basis of $15,000. Calculate the maximum depreciation expense, rounded to a whole number (ignoring §179 and bonus depreciation):
A. $1,286
B. $5,144
C. $5,786
D. $6,000
E. None of these
answer
C. $5,786
The mid-quarter convention applies. The computer is 1st quarter property and the machinery is 4th quarter property. The calculations are $15,000 × .35 = $5,250 and $15,000 × .0357 = $536. The total is $5,786 ($5,250 + $536).
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33. Wheeler LLC purchased two assets during the current year. It placed in service computer equipment (5-year property) on November 16 with a 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 §179 and bonus depreciation):
A. $1,285
B. $2,714
C. $4,572
D. $5,200
E. None of these
answer
B. $2,714
The mid-quarter convention applies. The computer is 4th quarter property and the furniture is 2nd quarter property. The calculations are $15,000 × .05 = $750 and $11,000 × .1785 = $1,964. The total is $2,714 ($750 + $1,964).
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34. Anne LLC purchased computer equipment (5-year property) on August 29 with a basis of $30,000 and used the half-year convention. 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:
A. $432
B. $1,728
C. $1,874
D. $3,456
E. None of these
answer
B. $1,728
The calculations are $30,000 × .1152 = $3,456 × .5 = $1,728 since the property is considered to be owned for half the year in the year of disposition.
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35. Tasha LLC purchased furniture (7-year property) on April 20 with a basis of $20,000 and used the mid-quarter convention. 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, rounding to a whole number:
A. $898
B. $2,095
C. $2,461
D. $2,394
E. None of these
answer
B. $2,095
The mid-quarter convention applies. The property was placed in service during the 2nd quarter. The calculations are $20,000 × .1197 = $2,394 × 10.5/12 = $2,095 since the property was disposed of during the 4th quarter.
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36. Lenter LLC placed in service on April 29, 2014 machinery and equipment (7-year property) with a basis of $600,000. Assume that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing):
A. $85,740
B. $120,000
C. $514,290
D. $585,740
E. None of these
answer
C. $514,290
The $500,000 §179 expense is not limited. The half year convention applies. The expense is $514,290 which is depreciation of $100,000 × .1429 = $14,290 plus $500,000 of §179 expense.
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37. Littman LLC placed in service on July 29, 2014 machinery and equipment (7-year property) with a basis of $600,000. Littman's income for the current year before expensing was $100,000. Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing):
A. 0.
B. $85,740.
C. $142,870.
D. $171,450.
E. None of these.
answer
D. $171,450.
The $500,000 §179 expense is limited to net income of $100,000. The half year convention applies. The expense is $171,450 which is depreciation of $500,000 × .1429 = $71,450 plus $100,000 of §179 expense.
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38. Crouch LLC placed in service on May 19, 2014 machinery and equipment (7-year property) with a basis of $2,200,000. Assume that Crouch has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing):
A. $314,380.
B. $440,000.
C. $571,510.
D. $742,930.
E. None of these.
answer
C. $571,510.
The $500,000 §179 expense is reduced to $300,000 because of the property placed in service limitation ($2,200,000 - $2,000,000 threshold). The half year convention applies. The expense is $571,510 which is depreciation of $1,900,000 × .1429 = $271,510 plus $300,000 of §179 expense.
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39. Bonnie Jo purchased a used computer (5-year property) for use in her sole proprietorship. The basis of the computer was $2,400. Bonnie Jo used the computer 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 expense 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):
A. $240
B. $288
C. $480
D. $2,400
E. None of these
answer
B. $288
The asset's recovery period is 5 years and the half-year convention applies. The calculation is $2,400 × .2 × 60% = $288.
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40. Potomac LLC purchased an automobile for $30,000 on August 5, 2015. What is Potomac's depreciation expense for 2015 (ignore any possible bonus depreciation)?
A. $3,160
B. $4,287
C. $6,000
D. $30,000
E. None of these
answer
A. $3,160
A luxury auto's maximum depreciation in the first year is $3,160.
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41. Arlington LLC purchased an automobile for $40,000 on July 5, 2015. What is Arlington's depreciation expense for 2015 if its business use percentage is 75 percent (ignore any possible bonus depreciation)?
A. $2,370
B. $3,160
C. $6,000
D. $8,000
E. None of these
answer
A. $2,370
A luxury auto's maximum depreciation in the first year is $3,160 × 75% = $2,370.
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