CHAPTER 8 DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION

1. On March 1, 2014, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2014, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table is $20, determine Lana’s inclusion as a result of the lease.

a. $0.

b. $10.

c. $17.

d. $20.

e. None of the above.

2. On June 1, 2014, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table is $241, determine Norm’s inclusion amount.

a. $0.

b. $241.

c. $907.

d. $1,687.

e. None of the above.

3. Bhaskar purchased a new factory building on September 10, 2014, for $3,700,000. Five hundred thousand of the purchase price was allocated to the land. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2015.

a. $23,328.

b. $80,000.

c. $82,048.

d. $92,500.

e. None of the above.

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4. Pat purchased a used five-year class asset on March 15, 2014, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2014 for earnings and profits purposes.

a. $2,000.

b. $3,000.

c. $6,000.

d. $12,000.

e. None of the above.

5. George purchases used seven-year class property at a cost of $200,000 on April 20, 2014. Determine George’s cost recovery deduction for 2014 for alternative minimum tax purposes, assuming George does not elect § 179.

a. $2,500.

b. $10,000.

c. $14,280.

d. $28,580.

e. None of the above.

6. During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange Corporation may amortize.

a. $16,667.

b. $26,667.

c. $33,333.

d. $100,000.

e. None of the above.

7. On June 1, 2014, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2014 for the patent.

a. $0.

b. $1,667.

c. $11,667.

d. $35,000.

e. None of the above.

8. Orange Corporation begins business on April 2, 2014. The corporation has startup expenditures of $64,000 which it incurred last year. If Orange Corporation elects § 195, determine the total amount that Orange may deduct in 2014.

a. $0.

b. $3,200.

c. $4,267.

d. $7,950.

e. None of the above.

9. On January 15, 2014, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2014 of $500,000. The percentage depletion rate is 22%. Determine Vern’s depletion deduction for 2014.

a. $150,000.

b. $175,000.

c. $176,000.

d. $200,000.

e. $250,000.

10.Tom purchased and placed in service used office furniture on January 3, 2014, for $40,000. Tom’s accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The accountant also used the same depreciation amounts when filing Tom’s income tax returns. On January 10, 2019, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.

11.Jim acquires a new seven-year class asset on September 20, 2013, for $80,000. He placed the asset in service on October 5, 2013. He does not elect to expense any of the asset under § 179 or elect straight­line, cost recovery. He takes additional first-year depreciation. He sells the asset on August 25, 2014. This is the only asset he acquires in 2013. Determine Jim’s cost recovery in 2013 and 2014.

12.Rod paid $1,950,000 for a new warehouse on April 14, 2014. He sold the warehouse on September 29, 2019. Determine the cost recovery deduction for 2014 and 2019.

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13.On March 3, 2014, Sally purchased and placed in service a building costing $12,000,000. The building has 10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000. Determine Sally’s cost recovery for the building in 2014.