Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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LO 7.5
14. The amortization period for Section 197 intangibles is:
a. 5 years
b. 7 years
c. 10 years
d. 15 years
e. 40 years
LO 7.5
15. Which of the following intangibles is defined as a Section 197 intangible asset?
a. An interest in land
b. A partnership interest
c. A patent
d. A covenant not to compete
e. A sound recording
LO 7.6
16. Pekoe sold stock to Rose for $13,000, its fair market value. The stock cost Pekoe
$16,000 5 years ago. Also, Pekoe sold Earl (an unrelated party) stock for $6,500 that
cost $7,500 3 years ago. Rose and Pekoe are brother and sister. What is Pekoe’s rec-
ognized loss?
a. $6,500
b. $4,000
c. $3,000
d. $1,000
e. $0
LO 7.6
17. B Corporation, an accrual basis taxpayer, is owned 75 percent by Bonnie, a cash basis
taxpayer. On December 31, 20X1, the corporation accrues interest of $4,000 on a loan
from Bonnie and also accrues a $15,000 bonus to Bonnie. The bonus is paid to Bonnie
on March 1, 20X2; the interest is not paid until 20X3. How much can B Corporation
deduct on its 20X1 tax return?
a. $0
b. $4,000
c. $15,000
d. $19,000
e. $12,000
LO 7.6
18. Using the same facts as in question 17, how much can B Corporation deduct on its
20X2 tax return?
a. $0
b. $4,000
c. $15,000
d. $19,000
e. $12,000
LO 7.6
19. BJT Corporation is owned 40 percent by Bill, 35 percent by Jack, and 25 percent by
Teresa. Bill and Jack are father and son. What is Jack’s total direct and indirect own-
ership under Section 267?
a. 65%
b. 40%
c. 75%
d. 35%
e. None of the above
Questions and Problems 7-31
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
GROUP 2:
PROBLEMS
.............................................. .............................................. .
LO 7.1 1. Y&M Associates is a partnership that wishes to retain its fiscal year ending October 31,
but it does not meet the business purpose requirement. Therefore, the partnership agrees
to make the ‘‘required tax payment.’’ The partnership made a required tax payment for
the prior year of $7,000 and earned $300,000 for the fiscal year ended October 31, 2010.
a. Calculate Y&M Associates’ required tax payment for the fiscal year ending October
31, 2010.
$ ____________
b. What is the due date for the required tax payment? ____________
LO 7.1 2. Yolanda is a cash basis taxpayer with the following transactions during the year:
Cash received from sales of products $65,000
Cash paid for expenses (except rent and interest) 40,000
Rent paid on a leased building for 6 months
beginning December 1 12,000
Prepaid interest on a bank loan, paid on
December 31 for the next 3 months 5,000
Calculate Yolanda’s income from her business for this calendar year.
Sales income $ ____________
Expenses:
Other than rent and interest $ ____________
Rent $ ____________
Interest $ ____________
Net income $ ____________
LO 7.1 3. Geral dine is an accrual basis taxpayer who has the following transactions d uring the
current calendar tax year:
Accrued business income (except rent) $220,000
Accrued business expenses (except rent) 170,000
Rental income on a building lease for the
next 6 months, received on December 1 21,000
Prepaid rent expense for 6 months, paid on
December 1 12,000
Calculate Geraldine’s net income from her business for the current year.
Income:
Other than rental $ ____________
Rental $ ____________
Expenses:
Other than rental $ ____________
Rental $ ____________
Net income $ ____________
LO 7.1 4. Amy is a calendar-year taxpayer reporting on t he cash basis. Please indicate ho w she
should treat the following expenses for 2010:
a. She makes a deductible contribution to an IRA on April 15, 2011.
_______________________________________________________________________
b. She has made an election to accrue the increase in value of savings bonds even
though the increase is not received in cash.
______________________________________________________________________
7-32 Chapter 7
Accounting Periods and Methods and Depreciation
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
c. She prepays half a year of interest in advance on her mortgage on the last day of
2010. _________________________________________________________________
d. She pays all of her outstanding invoices for stand ard business expenses in the last
week of December.___________________ ___________________________________
e. She sends out a big bill to a customer on January 1, 2011, even though she did all of
the work in December of 2010. _________________________________________
LO 7.2 5. Is land allowed to be depreciated? Why or why not?
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 7.2 6. Is it possible to depreciate a res idential rental building when it is actually increasing in
value? Why?
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 7.2 7. Mike purchases a heavy-duty truck (5-year class recovery property) for his delivery ser-
vice on April 30, 2010. The truck is not considered a passenger automobile for purposes
of the listed property and luxury automobile limitations. The truck has a depreciable
basis of $39,080 and an estimated useful life of 5 years. Assume no election to expense
is made and no bonus depreciation is taken.
a. Calculate the amount of depreciation for 2010 using financial accounting straight-
line depreciation (not the straight-line MACRS election) over the truck’s estimated
useful life.
$ ____________
b. Calculate the amount of depreciation for 2010 using the straight-line depreciation
election under MACRS over the minimum number of years.
$ ____________
c. Calculate the amount of accelerated depreciation for 2010 that Mike could deduct
using MACRS.
$ ____________
LO 7.2
LO 7.3
LO 7.4
8. During 2010, William purchases the following capital assets for use in his catering business:
New passenger automobile (September 30) $21,500
Baking equipment ( June 30) 6,500
Assume t hat Willia m decides to use the election to expense on the baking equip-
ment but not on the automobile, and he also uses the MACRS accelerated method
to calculate depreciation. He also takes bonus depreciation on the automobile. Calcu-
late William’s maximum depreciation deduction for 2010, assuming he uses the auto-
mobile 100 percent in his business.
$ ____________
LO 7.2 9. On August 8, 2010, Holly purchased a residential apartment building. The cost basis
assigned to the building is $800,000. Holly also owns another residential apartment
building that she purchased on June 15, 2010, with a cost basis of $500,000.
a. Calculate Holly’s total depreciation deduction for the apartments for 2010 using
MACRS.
$ ____________
b. Calculate Holly’s total depreciation deduction for the apartments for 2011 using
MACRS.
$ ____________
Questions and Problems 7-33
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
LO 7.4
LO 7.2
10. On September 14, 2010, Jay purchased a passenger automobile that is used 75 percent
in his accounting business. The automobile has a basis for depreciation purposes of
$35,000, and Jay uses the accelerated method under MACRS. Jay does not take
bonus depreciation or elect to expense.
a. Calculate Jay’s depreciation deduction for 2010.
$ ____________
b. Assuming the same business percentage (75 percent) in 2011, calculate Jay’s depre-
ciation deduction for 2011.
$ ____________
LO 7.2
LO 7.4
11. On February 2, 2010, Alexandra purchases a personal computer for her home. The
computer cost $3,000. Alexandra uses the computer 80 percent of the time in her
accounting business, 10 percent of the time for managing her investments, and the
remaining 10 percent of the time for various personal uses. Calculate Alexandra’s max-
imum depreciation deduction for 2010 for the computer, assuming she does not make
the election to expense or take bonus depreciation.
$ ____________
LO 7.2
LO 7.4
12. During 2010, Palo Fiero purchases the following property for use in his manufacturing
business:
Item Date Acquired Cost
Manufacturing equipment June 2, 2010 $ 35,000
Office furniture November 15, 2010 4,500
Office computer September 18, 2010 3,500
Passenger automobile (used
90 percent for business) May 31, 2010 35,000
Warehouse March 23, 2010
Building 165,000
Land 135,000
Palo uses the accelerated depreciation method under MACRS, if available, and does
not make the election to expense or take bonus depreciation. Use Form 4562 on pages
7-37 and 7-38 to report Palo’s depreciation expense for 2010.
LO 7.2 13. Please give the MACRS depreciation life of the following assets:
a. An autom obile __________________
b. Business furniture __________________
c. A computer __________________
d. Residential real estate __________________
e. Commercial real estate __________________
f. Land __________________
LO 7.2 14. Explain the use of the mid-quarter convention for MACRS depreciation:
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 7.2 15. Calculate the following:
a. The first year of depreciation on a residential rental building costing $200,000 pur-
chased May 2, 2010. $____________
b. The second year of depreciation on a computer costing $3,000 purchased in May 2009,
using the half-year convention and accelerated depreciation.
$____________
7-34 Chapter 7
Accounting Periods and Methods and Depreciation
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
c. The first year of depreciation on a computer costing $4,000 purchased in May 2010,
using the half-year convention and straight-line depreciation.
$____________
d. The third year of depreciation on business furniture costing $10,000 purchas ed in
March 2008, using the half-year convention and accelerated depreciation.
$____________
LO 7.3 16. Tom has a successful business with $100,000 of income in 2010. He purchases one new
asset in 2010, a new machine which is 7-year MACRS property and costs $25,000. If
you are Tom ’s tax advisor, how would you advise Tom to treat the purchase for tax
purposes in 2010? Why?
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 7.2
LO 7.4
17. GototheIRSWebsite(www.irs.gov) and redo Problem 12 (Chapter 7, Group 2) using
the most recent interactive ‘‘Fill-in Forms’’ Form 4562, Depreciation and Amortization.
Print out the completed Form 4562.
LO 7.4 18. Deborah purchases a new $30,000 car in 2010 to use exclusively in her business. If Deborah
does not elect to expense or take bonus depreciation in 2010 and holds the car until it
is fully depreciated, how many years will this take? Please show your calculation:
_________________________________________________ ________________________
_________________________________________________ ________________________
_________________________________________________ ________________________
LO 7.5 19. Derek purchases a small business from Art on September 1, 2010. He paid the follow-
ing amounts for the business:
Fixed assets $220,000
Goodwill 40,000
Covenant not to compete
45,000
Total
$305,000
a. How much of the $305,000 purchase price is for Section 197 intangible assets?
$ ____________
b. What amount can Derek deduct on his 2010 tax return as Section 19 7 intangibl e
amortization?
$ ____________
LO 7.5 20. Annie develops a successful tax practice. She sells the p ractice to her friend Carol for
$54,000 and moves to Florida to retire. The tax practice has no assets except intan-
gible benefits such as the goodwill and g oing-concern value Annie has developed
over the years. How should Carol treat the $54,000 cost of the tax practice she has
purchased?
LO 7.6 21. JBC Corporation is owned 20 percent b y John, 30 percent by Brian, 30 percent by
Charlie, and 20 percent by Z Corporation. Z Corporation is owned 80 percent by
John and 20 percent by an unrelated party. Brian and Charlie are brothers. Answer
each of the following questions about JBC under the constructive ownership rules
of Section 267:
a. What is John’s percentage ownership? ___________ %
b. What is Brian’s percentage ownership? ___________ %
Questions and Problems 7-35
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
c. What is Charlie’s percentage ownership? ___________ %
d. If Brian sells property to JBC for a $6,000 loss, what
amount of that loss can be recognized for tax purposes
(before any annual limitations)?
$ ____________
LO 7.6 22. You have a problem and need a full-text copy of the Related Party Code Section 267.
Go to the U.S. House of Representatives’ Web site (www.house.gov) and click on the
U.S. Code Search page. The Internal Revenue Code is Title 26. Use the search page to
find Section 267 and print out a copy of Section 267(a).
GROUP 3:
COMPREHENSIVE PROBLEMS
.............................................. .............................................. .
1. Sherry Hopson owns a retail family clothing store. Her store is located at 4321 Circle
Drive, Houston, TX 77001. Her employer identif ication number is 95-1234321 and
her Social Security number is 123-45-6789. The income and expenses for the year are:
Gross sales $350,000
Returns and allowances
(4,500)
Net sales $345,500
Expenses:
Beginning inventory (at cost) $ 82,500
Add: purchases
210,000
Cost of goods available for sale 292,500
Less: ending inventory (at cost)
(71,000)
Cost of goods sold $221,500
Rent 9,000
Insurance 1,500
Legal and accounting fees 900
Payroll 38,000
Payroll taxes 2,600
Utilities 1,850
Office supplies 750
Advertising 2,100
On June 1 of this year, Sherry purchased the following new assets for the store:
Depreciable Basis Recovery Period
Heavy duty truck $31,000 5 years
Desk and file cabinets 2,000 7 years
Computer 6,000 5 years
The truck is not considered a passenger automobile for purposes of the luxury auto-
mobile limitations.
Required: Assuming that all other assets are fully depreciated and Sherry does not
make the election to expense or take bonus depreciation, complete her 2010 Schedule C
and Form 4562 on pages 7-39 to 7-42. Make up any additional information you need
to complete the schedule.
7-36 Chapter 7
Accounting Periods and Methods and Depreciation
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Questions and Problems 7-37
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
7-38 Chapter 7
Accounting Periods and Methods and Depreciation
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Questions and Problems 7-39
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
7-40 Chapter 7
Accounting Periods and Methods and Depreciation
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.