Test April, questions and answers PDF

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1.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

Josepurchasedadeliveryvanforhisbusinessthroughanonlineauction.Hiswinningbidforthevanwas $24,500.Inaddition,Joseincurredthefollowingexpensesbeforeusingthevan:shippingcostsof$650; painttomatchtheotherfleetvehiclesatacostof$1,000;registrationcostsof$3,200,whichincluded $3,000ofsalestaxandaregistrationfeeof$200;washanddetailingfor$50;andanenginetuneupfor $250.  WhatisJose’scostbasisforthedeliveryvan? Costbasis

$

29,150

 Explanation: $29,150,costbasisinthedeliveryvan,computedasfollows: Description Purchaseprice Shippingcosts Paint Salestax  Totalcostbasis 

Amount  $24,500   650   1,000   3,000   $29,150  

Explanation*  Businesspreparationcost Businesspreparationcost Businesspreparationcost   

 *Notethattheregistrationfee,washinganddetailing,andenginetuneuparecostsforrepairsand maintenancethatarenotrequiredtobecapitalized.



References

eBook&Resources

Problem

Difficulty:1Easy

LearningObjective:1001Explainthe conceptofbasisandadjustedbasisand describethecostrecoverymethodsused underthetaxlawtorecoverthecostof personalproperty,realproperty, intangibleassets,andnaturalresources.

2.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

Emilypurchasedabuildingtostoreinventoryforherbusiness.Thepurchasepricewas$760,000.Beyond this,Emilyincurredthefollowingnecessaryexpensestogetthebuildingreadyforuse:$10,000torepair theroof(doesnotextendtherooflife),$5,000tomaketheinteriorsuitableforherfinishedgoods,and$300 inlegalfees.  WhatisEmily’scostbasisinthenewbuilding? Costbasis

$

775,300

 Explanation: $775,300costbasis,computedasfollows:

 Description Purchaseprice Roofrepair Improvements Legalfees

Amount  $ 760,000   10,000   5,000   300 

Explanation  Businesspreparationcosts Businesspreparationcosts Businesspreparationcosts



   $ 775,300 







Costbasisinbuilding 













References

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Problem

Difficulty:1Easy

LearningObjective:1001Explainthe conceptofbasisandadjustedbasisand describethecostrecoverymethodsused underthetaxlawtorecoverthecostof personalproperty,realproperty, intangibleassets,andnaturalresources.

3.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

Denniscontributedbusinessassetstoanewbusinessinexchangeforstockinthecompany.Theexchange didnotqualifyasanontaxableexchange.Thefairmarketvalueoftheseassetswas$287,000onthe contributiondate.Dennis’soriginalbasisintheassetshecontributedwas$143,000,andtheaccumulated depreciationontheassetswas$78,000.  a. Whatisthebusiness’sbasisintheassetsitreceivedfromDennis? Business'sbasis

$

287,000





 b. Whatwouldbethebusiness’sbasisifthetransactionqualifiedasanontaxableexchange? Business'sbasis

$

65,000



   Explanation:

a. Becausethisexchangeisafullytaxabletransaction,thebusiness’sbasisinDennis’sassetsisthe $287,000fairmarketvalueoftheassets.  b. Ifthetransactionqualifiedasanontaxableexchange,thebusinesswouldtakethesameadjustedbasisin the assets that Dennis had. That is, the business will receive an exchanged basis of $65,000 ($143,000 originalbasisminusaccumulateddepreciationof$78,000)intheassets.



References

eBook&Resources

Problem

Difficulty:1Easy

LearningObjective:1001Explainthe conceptofbasisandadjustedbasisand describethecostrecoverymethodsused underthetaxlawtorecoverthecostof personalproperty,realproperty, intangibleassets,andnaturalresources.

4.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

Brittanystartedalawpracticeasasoleproprietor.Sheownedacomputer,printer,desk,andfilecabinet shepurchasedduringlawschool(severalyearsago)thatsheisplanningtouseinherbusiness. Asset Computer Printer Desk Filecabinet

FMVatTimeConverted PurchasePrice toBusinessuse $ 2,500 $ 800  300  150  1,200  1,000  200  225

Usingtheaboveinformation,whatisthedepreciablebasisthatBrittanyshoulduseinherbusinessforeach asset?

Asset

DepreciableBasis

Computer

$

800

Printer

$

150

Desk

$

1,000

Filecabinet

$

200

 Explanation: Thebasisofassetsconvertedfrompersonalusetobusinessuseisthelesserof(1)fairmarketvalueon dateofconversionor(2)basisonthedateofconversion.Thebasisofeachassetisasfollows:

Asset Computer Printer Desk Filecabinet



(1) FMV $800 $150 $1,000 $225

Lesserof (2) (1)or(2) BasisonDateof DepreciableBasis Conversion $2,500 $800 $300 $150 $1,200 $1,000 $200 $200

References

eBook&Resources

Problem

Difficulty:1Easy

LearningObjective:1001Explainthe conceptofbasisandadjustedbasisand describethecostrecoverymethodsused underthetaxlawtorecoverthecostof personalproperty,realproperty, intangibleassets,andnaturalresources.

5.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

MegO’Brienreceivedagiftofsomesmallscalejewelrymanufacturingequipmentthatherfatherhadused forpersonalpurposesformanyyears.Herfatheroriginallypurchasedtheequipmentfor$1,500.Because theequipmentisoutofproductionandnolongeravailable,thepropertyiscurrentlyworth$4,000.Meghas decidedtobeginanewjewelrymanufacturingtradeorbusiness.  Whatisherdepreciablebasisfordepreciatingtheequipment? Depreciablebasis

$

1,500

 Explanation: Thebasisofagiftisacarryoverbasisfromthedonor.ThereforeMeg’sdepreciablebasisinthepropertyis $1,500.



References

eBook&Resources

Problem

Difficulty:1Easy

LearningObjective:1001Explainthe conceptofbasisandadjustedbasisand describethecostrecoverymethodsused underthetaxlawtorecoverthecostof personalproperty,realproperty, intangibleassets,andnaturalresources.

6.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

GaryinheritedaMainesummercabinon10acresfromhisgrandmother.Hisgrandparentsoriginally purchasedthepropertyfor$500in1950andbuiltthecabinatacostof$10,000in1965.Hisgrandfather diedin1980andwhenhisgrandmotherrecentlypassedaway,thepropertywasappraisedat$500,000for thelandand$700,000forthecabin.SinceGarydoesn’tcurrentlyliveinNewEngland,hedecidedthatit wouldbebesttoputthepropertytouseasarental.  WhatisGary’sbasisinthelandandinthecabin?

Gary’sBasis Land

$

500,000

Cabin

$

700,000

 Explanation: Thebasisofinheritedpropertyisthefairmarketvalueonthedateofdeathor,ifelectedbytheestate,the alternatevaluationdateifless.Consequently,Gary’sbasiswillbe$500,000inthelandand$700,000for thecabin.



References

eBook&Resources

Problem

Difficulty:1Easy

LearningObjective:1001Explainthe conceptofbasisandadjustedbasisand describethecostrecoverymethodsused underthetaxlawtorecoverthecostof personalproperty,realproperty, intangibleassets,andnaturalresources.

7.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

Wantingtofinalizeasalebeforeyearend,onDecember29,WROutfitterssoldtoBobawarehouseand thelandfor$125,000.Theappraisedfairmarketvalueofthewarehousewas$75,000,andtheappraised valueofthelandwas$100,000.(Donotroundintermediatecalculations.Roundyouranswerstothe nearestwholedollaramount.)  a. WhatisBob’sbasisinthewarehouseandintheland?

Bob’sBasis Warehouse

$

53,571+/-1

Land

$

71,429+/-1

 b. WhatwouldbeBob’sbasisinthewarehouseandinthelandiftheappraisedvalueofthewarehouseis $50,000,andtheappraisedvalueofthelandis$125,000?

Bob’sBasis Warehouse

$

35,714+/-1

Land

$

89,286+/-1

 c. WhichappraisalwouldBoblikelyprefer?   Appraisedvalueinpart(a)  Appraisedvalueinpart(b)

 Explanation: NOTE:Thisisabargainpurchase.Thesalespriceislessthantheappraisedvalue.Thissolutionusesthe relativeappraisedvaluesofthelandandthewarehousetoallocatethepurchasepricebetweenthesetwo assets. a. Bob'scostbasisinthelandis$71,429.Becausethepurchasepriceislessthantheappraisedvaluesfor thelandandthewarehouse,thepurchasepricemustbeallocatedbetweenthelandandthewarehouse. The$71,429basisforthelandistheamountofthe$125,000purchasepricethatisallocatedtotheland basedontherelativevalueoftheland($100,000)tothevalueoftheland($100,000)plusthevalueofthe warehouse($75,000)basedontheappraisal.Theformulausedtodeterminethebasisallocatedtotheland is$125,000(purchaseprice)×$100,000/($100,000+75,000). UsethesameprocesstodeterminethatBob’sbasisinthewarehouseis$53,571.  b. Bob'scostbasisforthelandis$89,286.Becausethepurchasepriceislessthantheappraisedvaluesfor thelandandthewarehouse,thepurchasepricemustbeallocatedbetweenthelandandthewarehouse. The$89,286basisforthelandistheamountofthe$125,000purchasepricethatisallocatedtotheland basedontherelativevalueoftheland($125,000)tothevalueoftheland($125,000)plusthevalueofthe warehouse($50,000)basedontheappraisal.Theformulausedtodeterminethebasisallocatedtotheland is$125,000(purchaseprice)×$125,000/($50,000+125,000). UsethesameprocesstodeterminethatBob’sbasisinthewarehouseis$35,714.

 c. Bobwouldlikelyprefertheappraisalfrompart(a),becausetheappraisalallowshimtoallocatemorebasis tothewarehouse,whichisdepreciable.



References

eBook&Resources

Problem

Difficulty:1Easy

LearningObjective:1001Explainthe conceptofbasisandadjustedbasisand describethecostrecoverymethodsused underthetaxlawtorecoverthecostof personalproperty,realproperty, intangibleassets,andnaturalresources.

8.

 Award: 10 10..00 points

Problems? Adjust credit for all students.

Atthebeginningoftheyear,PoplockbeganacalendaryeardogboardingbusinesscalledGriff'sPalace. Poplockboughtandplacedinservicethefollowingassetsduringtheyear:

 Asset Computerequipment Doggroomingfurniture Pickuptruck Commercialbuilding Land(oneacre)

DateAcquired CostBasis 3/23 $ 5,000 5/12  7,000 9/17  10,000 10/11  270,000 10/11  80,000

 AssumingPoplockdoesnotelect§179expensingorbonusdepreciation,answerthefollowingquestions: (UseMACRSTable1,Table2,Table3,Table4andTable5.)(Roundyouranswerstothenearest wholedollaramount.)

 a.

WhatisPoplock’syear1depreciationexpenseforeachasset?(Leavenoanswerblank.Enterzeroif applicable.) Depreciation Expense

Asset Computerequipment

$

1,000+/-1

Doggroomingfurniture

$

1,000+/-1

Pickuptruck

$

2,000+/-1

Building

$

1,445+/-1

Land

$

0





 b.

WhatisPoplock’syear2depreciationexpenseforeachasset?(Leavenoanswerblank.Enterzeroif applicable.)

Depreciation Expense

Asset Computerequipment

$

1,600+/-1

Doggroomingfurniture

$

1,714+/-1

Pickuptruck

$

3,200+/-1

Building

$

6,923+/-1

Land

$

0

  Explanation: Landisnotdepreciable. a. $5,445,underthehalfyearconventionforpersonalproperty,calculatedasfollows:

 Asset

Purchase Date

Quarter

Recovery Period

(1) Original Basis

(2) Rate

(1)×(2) Depreciation

Computerequipment

23Mar

Doggroomingfurniture Pickuptruck Building   

12May 17Sep 11Oct   

1st 2nd 3rd 4th   

5years

$

5,000

20.00%

$1,000

7years $ 7,000 5years $ 10,000 39years $ 270,000         

14.29% 20.00% 0.535%   

1,000 2,000 1,445

(1) Original Basis $ 5,000

(2) Rate 32.00%

(1)×(2) Depreciation $1,600

$ 7,000 $ 10,000 $ 270,000      

24.49% 32.00% 2.564%   

1,714 3,200 6,923

$5,445

 b. $13,437,calculatedasfollows:

 Asset Computerequipment Doggroomingfurniture Pickuptruck Building   

References

Problem



Purchase Date 23Mar

Recovery Period 5years

Quarter 1st

12May 17Sep 11Oct   

2nd 3rd 4th   

7years 5years 39years   

eBook&Resources

Difficulty:2Medium

LearningObjective:1002Determinethe applicablecostrecovery(depreciation)life, method,andconventionfortangible personalandrealpropertyandcalculatethe deductionallowableunderbasicMACRS.

$13,437

9.

 Award: 10. 10.00 00 points

Problems? Adjust credit for all students.

DLWCorporationacquiredandplacedinservicethefollowingassetsduringtheyear:

 Asset Computerequipment Furniture Commercialbuilding

Date Acquired 2/17 5/12 11/1

Cost Basis $10,000 17,000 270,000

 AssumingDLWdoesnotelect§179expensingorbonusdepreciation,answerthefollowingquestions: (UseMACRSTable1,Table2,Table3,Table4andTable5.)(Roundyouranswerstothenearest wholedollaramount.)

 a. WhatisDLW'syear1costrecoveryforeachasset?

Computerequipment

Year1 CostRecovery $ 2,000

Furniture

$

2,429

Building

$

867

Asset

$

Total

5,296



 

b. WhatisDLW'syear3costrecoveryforeachassetifDLWsellsalloftheseassetson1/23ofyear3?

Year3 CostRecovery

Asset Computerequipment

$

960

Furniture

$

1,487

Building

$

288

Total

$

2,735

  Explanation: a.  $5,296,underthehalfyearconventionforpersonalproperty,calculatedasfollows:

 Purchase Asset Date Quarter Computerequipment 17Feb 1st Furniture 12May 2nd Building 1Nov 4th   

Recovery Period 5years 7years 39years 

   

(1) Original Basis $ 10,000 $ 17,000 $ 270,000  

(2) Rate 20.00% 14.29% 0.321% 

(1)×(2) Depreciation $2,000 2,429 867

TotalDepreciationExpense 





 

 

 

 

 

$5,296

 b. $2,735,calculatedasfollows: 

 Original Recovery Asset Basis Period Computerequipment  $ 10,000 5years Furniture  $ 17,000 7years Building  $ 270,000 39years      TotalDepreciationExpense   

References

Problem



Rate 19.20% 17.49% 2.564%  

Depreciation PortionofYear Expense 50.00% $ 960 50.00%   1,487  4.17%   288      $ 2,735  

eBook&Resources

Difficulty:2Medium

LearningObjective:1002Determinethe applicablecostrecovery(depreciation) life,method,andconventionfortangible personalandrealpropertyandcalculate thedeductionallowableunderbasic MACRS.

10.

 Award: 10 10.00 .00 points

Problems? Adjust credit for all students.

Atthebeginningoftheyear,Deebeganacalendaryearbusinessandplacedinservicethefollowing assetsduringtheyear: 

 Asset Computerequipment Furniture Pickuptruck Commercialbuilding

Date Acquired 3/23 5/12 11/15 10/11

Cost Basis $5,000 7,000 10,000 270,000

 AssumingDeedoesnotelect§179expensingorbonusdepreciation,answerthefollowingquestions: (UseMACRSTable1,Table2,Table3,Table4andTable5.)(Roundyouranswerstothenearest wholedollaramount.) 

 a. WhatisDee’syear1costrecoveryforeachasset? Year1 CostRecovery

Asset Computerequipment

$

1,750

Furniture

$

1,250

Pickuptruck

$

500

Building

$

1,445

$

Total

4,945

 



b. WhatisDee’syear2costrecoveryforeachasset? Year2 CostRecovery

Asset Computerequipment

$

1,300

Furniture

$

1,643

Pickuptruck

$

3,800