Chapter 10 Flashcards
Which of the following would be considered an improvement rather than routine maintenance?
a) oil change
b) engine overhaul
c) wiper blade replacement
d) air filter change
b) engine overhaul
The engine overhaul is an improvement because it restores a major component of an asset, while the other items are routine maintenance.
The MACRS recovery period for automobiles and computers is:
five years
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.)
$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.
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
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.
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.)
Note: Round final answer to the nearest whole number.
$2,714
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).
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)
Note: Round final answer to the nearest whole number.
$1,249
The half-year convention applies. The calculations are $20,000 × 0.1249 = $2,498 × 1 ÷ 2 = $1,249.
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.)
$1,728
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.
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.)
Note: Round final answer to the nearest whole number.
$2,648
The mid-month convention applies. Nonresidential property has a 39-year recovery period. The depreciation is $2,648 ($275,000 × 0.963%).
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.)
$2,273
The mid-month convention applies. Residential property has a 27.5-year recovery period. The depreciation is $2,273 ($100,000 × 2.273%).
Clay LLC placed in service machinery and equipment (seven-year property) with a basis of $3,450,000 on June 6, 2023. 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.)
Note: Round final answer to the nearest whole number.
$1,007,265
The $1,160,000 §179 expense is reduced to $600,000 because of the property placed in service limitation ($3,450,000 − $2,890,000 threshold). The half-year convention applies. The expense is $1,007,265, which is depreciation of $2,850,000 × 0.1429 = $407,265 plus $600,000 of §179 expense.
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.)
$288
The asset’s recovery period is five years and the half-year convention applies. The calculation is $2,400 × 0.20 × 60% = $288.
Potomac LLC purchased an automobile for $30,000 on August 5, 2023. What is Potomac’s depreciation deduction for 2023? (Ignore any possible bonus depreciation.) (Use MACRS Table 1 and Exhibit 10-10.)
$6,000
A luxury auto’s maximum depreciation in the first year is the lesser of $12,200 or its MACRS amount of $6,000 ($30,000 × 20 percent) for 2023.
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?
$5,000
$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.
Daschle LLC completed some research and development in the U.S. during June of the current year. The related costs were $60,000. How much amortization may Daschle deduct during the current year?
$6,000
The amortization is $6,000 [($60,000 ÷ 60) × 0.5 year]. The amortization period on capitalized research and development is 60 months with a half-year convention.
