DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION.doc

Depreciation, Cost Recovery, Amortization, and Depletion8-33CHAPTER 8DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETIONInstructor: The test items in both the print Test Bank and ExamView test-creation software are numbered by question type within each chapter. Thus, users of ExamView can more easily preview their selections using the printed Test Bank in the same numbering system.Learning Objective, Level of Difficulty, Estimated Time to Completion, and the AACSBs and AICPAs Core Competencies for each test item are located within the item itself.Status:Q/PQuestion/Presentin PriorProblemTopicEditionEditionTRUE OR FALSE1Cost recovery: conceptNew2Cost recovery: allowed and allowableUnchanged23Cost recovery: antiquesNew4Cost recovery: recovery period commencesUnchanged45Cost recovery: land improvementsUnchanged56Cost recovery: conversion to business useUnchanged67Cost recovery: MACRSUnchanged78Cost recovery: MACRSUnchanged89Cost recovery: half-year conventionUnchanged910Cost recovery: mid-quarter conventionNew11Cost recovery: mid-quarter conventionNew12Cost recovery: MACRS real propertyUnchanged1213Cost recovery: MACRS real propertyUnchanged1314Cost recovery: MACRS real propertyUnchanged1415Cost recovery: straight-lineUnchanged1516Cost recovery: straight-line and mid-quarterUnchanged16 convention17Cost recovery: farm propertyNew18Cost recovery: farm propertyUnchanged1819Cost recovery: farm propertyUnchanged1920Cost recovery: leasehold improvement propertyUnchanged2021Cost recovery: leasehold improvement propertyNew22Section 179 expensingModified2223Section 179 expensingUnchanged2324Section 179 expensingUnchanged2425Section 179 expensing: effect of MACRSUnchanged2526Section 179 expensing: effect on basisUnchanged26Status:Q/PQuestion/Presentin PriorProblemTopicEditionEdition27Section 179 expensing: production of incomeUnchanged27 property28Listed property: 280F limitsUnchanged2829Listed property: 179 expensingNew30Listed property: 50% business use testUnchanged3031Listed property: effect of statutory dollar amountsUnchanged3132Listed property: statutory dollar amountsUnchanged3233Listed property: statutory dollar amounts andUnchanged33 mid-quarter convention34Listed property: cost recovery recaptureModified3435Listed property: leasing and inclusion amountUnchanged3536Listed property: substantiationUnchanged3637Alternative depreciation system (ADS): AMTNew adjustment38ADS: straight-lineUnchanged3839ADS: convention for personaltyUnchanged3940ADS: election to useUnchanged4041ADS: election to useUnchanged4142ADS: convention for realtyUnchanged4243Covenant not to compete: 197 intangibleUnchanged4344Amortization of acquired goodwillUnchanged4445Amortization: self-created intangiblesUnchanged4546Start-up expendituresNew47Start-up expendituresUnchanged4748Depletion: costUnchanged4849Depletion: percentageUnchanged4950Depletion: intangible drilling costsUnchanged50MULTIPLE CHOICE1Cost recovery: placed in serviceUnchanged12Cost recovery: eligible propertyUnchanged23Cost recovery: basis of property converted toUnchanged3 rental use4Cost recovery: allowed and allowable Unchanged45Cost recovery: MACRS personal propertyUnchanged56Cost recovery: MACRS personal propertyUnchanged67Cost recovery: MACRS personal propertyModified78Cost recovery: MACRS personal propertyUnchanged89Cost recovery: MACRS personal propertyUnchanged910Cost recovery: MACRS personal propertyModified1011Cost recovery: MACRS real propertyUnchanged1112Cost recovery: MACRS real propertyUnchanged1213Cost recovery: MACRS real propertyUnchanged1314Cost recovery: MACRS real propertyUnchanged1415Farm propertyUnchanged1516Farm propertyNew17Farm propertyNewStatus:Q/PQuestion/Presentin PriorProblemTopicEditionEdition18Leasehold improvement propertyModified1819Leasehold improvement propertyModified1920Section 179 expensing and MACRSNew21Section 179 expensing and MACRSNew22Section 179 expensingUnchanged2223Listed propertyUnchanged2324Listed propertyUnchanged2425Listed property: luxury autoModified2526Listed property: luxury autoModified2627Listed property: luxury autoModified2728Listed property: luxury autoModified2829Listed property: cost recovery recaptureModified2930Listed property: cost recovery recaptureModified3031Listed property: luxury auto and weight exceptionModified3132Listed property: leasingUnchanged3233Listed property: leasingUnchanged3334Alternative depreciation system (ADS)Unchanged3435ADS: E & PUnchanged3536ADSUnchanged3637Amortization: self-created goodwillUnchanged3738Amortization: 197 intangibleUnchanged3839Start-up expendituresUnchanged3940Depletion: cost versus percentageUnchanged40PROBLEMS1Cost recovery: MACRS personal propertyUnchanged12Cost recovery: MACRS real propertyUnchanged23Cost recovery: MACRS personal property andModified3 179 expensing4Cost recovery: MACRS real propertyUnchanged45Cost recovery: MACRS personal property andModified5 179 expensing6Cost recovery: MACRS personal property,Modified6 179 expensing, and mid-quarter convention7Cost recovery: farm propertyModified78Cost recovery: leasehold improvement propertyModified89Listed property and 179 expensingUnchanged910Listed property: luxury auto and recaptureModified1011Listed property: luxury autoUnchanged1112Listed property: predominant business useUnchanged1213Depletion: cost versus percentageUnchanged13Status:Q/PQuestion/Presentin PriorProblemTopicEditionEditionESSAY1Cost recovery: half-year versus mid-quarterUnchanged1 convention2Cost recovery: MACRS realty and residential Unchanged2 rental classification3Cost recovery: farm propertyUnchanged34Listed property: 179 and production of incomeUnchanged4 use5Listed property: luxury auto and SUV limitUnchanged56Listed property: leasingUnchanged67Start-up expendituresUnchanged7TRUE/FALSE1.The concept of depreciation is based on the premise that an asset benefits more than one accounting period.ANS:TPTS:1DIF:1REF:p. 8-3OBJ:1NAT:AICPA FN-Reporting | AACSB AnalyticMSC:2 min2.The basis of cost recovery property must be reduced by the cost recovery allowed and by not less than the cost recovery allowable.ANS:TPTS:1DIF:1REF: p. 8-4OBJ:1NAT:AICPA FN-Reporting | AACSB AnalyticMSC:2 min3.Antiques are not eligible for cost recovery.ANS:TPTS:1DIF:1REF:p. 8-4OBJ:1NAT:AICPA FN-Reporting | AACSB AnalyticMSC:2 min4.The key date for calculating cost recovery is the date the asset is purchased.ANS:FThe key date for calculating cost recovery is the date the asset is placed in service.PTS:1DIF:1REF:p. 8-4OBJ:1NAT:AICPA FN-Reporting | AACSB AnalyticMSC:2 min5.Land improvements are generally not eligible for cost recovery.ANS:FLand improvements are 15-year class property.PTS:1DIF:1REF:Exhibit 8.1OBJ:1NAT:AICPA FN-Reporting | AACSB AnalyticMSC:2 min6.The cost recovery basis for property converted from personal use to business use is the adjusted basis of the property at the time of the conversion.ANS:FThe cost recovery basis for property converted from personal use to business use is the lower of the fair market value or the adjusted basis at the time of the conversion.PTS:1DIF:1REF:p. 8-5OBJ:1NAT:AICPA FN-Reporting | AACSB AnalyticMSC:2 min7.The cost recovery method for all personal property under MACRS is 200% declining balance.ANS:FMACRS uses both 200% and 150% declining balance depending on the class of the property.PTS:1DIF:1REF:p. 8-7OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min8.If 150% declining-balance is used, there is no straight-line switchover.ANS:FThe straight-line switchover takes place whether 200% or 150% declining-balance is used.PTS:1DIF:1REF:p. 8-7OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min9.Under the MACRS half-year convention, an asset sold on December 10 will be treated as though it were sold on July 1 for a calendar year taxpayer.ANS:TPTS:1DIF:1REF:p. 8-8OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min10.If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property will be allowed 1.5 months of cost recovery.ANS:FOnly the property placed in service during the last quarter will be allowed 1.5 months of cost recovery.PTS:1DIF:1REF:p. 8-9OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min11.Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is sold.ANS:TPTS:1DIF:1REF:p. 8-9OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min12.All eligible real estate under MACRS is permitted a full month of cost recovery in the month of disposition.ANS:FOne-half month of cost recovery is permitted in the month of disposition for realty under MACRS.PTS:1DIF:1REF:p. 8-11 | Concept Summary 8.2OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min13.Hotels placed in service after May 12, 1993 have a cost recovery period of 39 years.ANS:TPTS:1DIF:1REF:p. 8-10OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min14.Apartment buildings are classified as residential rental real estate.ANS:TPTS:1DIF:1REF:p. 8-10OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min15.Taxpayers may elect to use the straight-line method under MACRS for personalty.ANS:TPTS:1DIF:1REF:p. 8-11OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min16.Under the MACRS straight-line election for personalty, the mid-quarter convention is not applicable.ANS:FThe mid-quarter convention is applicable under the MACRS straight-line election for personalty.PTS:1DIF:1REF:p. 8-11OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min17.The cost recovery period for new farm equipment placed in service during 2009 is seven years.ANS:FThe cost recovery period for such farm equipment is five years.PTS:1DIF:1REF:p. 8-12OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min18.In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees.ANS:TPTS:1DIF:1REF:p. 8-11 | p. 8-12OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min19.In a farming business, if an election is made to not have the uniform capitalization rules apply, cost is recovered using the ADS straight-line method.ANS:TPTS:1DIF:1REF:p. 8-12OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min20.When lessor owned leasehold improvements are abandoned because of the termination of the lease, a loss can be taken for the unrecovered basis.ANS:TPTS:1DIF:1REF:p. 8-13OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min21.The costs of qualified leasehold improvements owned by the lessee are recovered over a 15-year MACRS recovery period.ANS:TPTS:1DIF:1REF:p. 8-12OBJ:2NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min22.For all property placed in service in 2009, the 179 maximum deduction is limited to $250,000.ANS:FThis is the statutory ceiling amount for the deduction in 2009, but only personalty is eligible for 179 expensing.PTS:1DIF:1REF:p. 8-14OBJ:3NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min23.The 179 deduction can exceed $250,000 in 2009 if the taxpayer had a 179 amount which exceeded the taxable income limitation in the prior year.ANS:FThe 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1) the statutory dollar amount ($250,000 in 2009) reduced by the cost of 179 property placed in service in excess of $800,000 in the carryforward year or (2) the business income limitation in the carryforward year.PTS:1DIF:1REF:p. 8-14OBJ:3NAT:AICPA FN-Measurement | AACSB AnalyticMSC:5 min24.Any 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.ANS:TPTS:1DIF:1REF:p. 8-14OBJ:3NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min25.Taxable income for purposes of 179 limited expensing is computed without regard to MACRS.ANS:FMACRS depreciation is a deduction in computing taxable income for purposes of the 179 limitations.PTS:1DIF:1REF:p. 8-14OBJ:3NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min26.The basis of property for cost recovery is reduced by the 179 amount that is disallowed because of the business income limitation.ANS:TThe basis is reduced by the 179 amount before the business income ceiling is applied.PTS:1DIF:1REF:p. 8-15OBJ:3NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min27.Property used for the production of income is not eligible for 179 expensing.ANS:TPTS:1DIF:1REF:p. 8-14OBJ:3NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min28.The statutory dollar cost recovery limits under 280F apply to all automobiles.ANS:FThe statutory cost recovery limits under 280F apply only to automobiles which meet the definition of a passenger automobile (e.g., do not apply to a taxi).PTS:1DIF:1REF:p. 8-16OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min29.The 179 limit for a sports utility vehicle with a GVW of 7,000 pounds used in a trade or business is $25,000.ANS:TPTS:1DIF:1REF:p. 8-14 | p. 8-18OBJ:3 | 4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min30.Once the more-than-50% business usage test is passed for listed property, it does not matter if the business usage for the property drops to 50% or less during the recovery period.ANS:FIf the business usage declines to 50% or less, the straight-line method must be used and the property is subject to cost recovery recapture.PTS:1DIF:1REF:p. 8-18 | p. 8-19OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min31.If a new car that is used predominantly in business is placed in service in 2009, the statutory dollar cost recovery limit under 280F will depend on whether the taxpayer takes MARCS or straight-line depreciation.ANS:FThe statutory cost recovery limits apply regardless of whether MACRS or straight-line apply.PTS:1DIF:1REF:p. 8-16 | p. 8-17OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min32.If an automobile is placed in service in 2009, the limitation for cost recovery in 2011 will be based on the cost recovery limits for the year 2011.ANS:FThe limits will be based on the limits for automobiles placed in service in 2009.PTS:1DIF:1REF:p. 8-17OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min33.The statutory dollar cost recovery limits under 280F for passenger automobiles do not apply if mid-quarter cost recovery is used.ANS:FThe 280F limits apply to all passenger automobiles, regardless of the MACRS convention used.PTS:1DIF:1REF:p. 8-16OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min34.If an $80,000 automobile used 100% for business in the first year (2009) fails the 50% business usage test in the second year, no cost recovery will be recaptured.ANS:FThe total cost recovery deduction for the first year would be $10,960 ( 280F limit). The cost recovery in the first year using straight-line would be $8,000 ($80,000 10% = $8,000) (limited to $10,960; 280F limit). So the cost recovery recapture would be $2,960 ($10,960 $8,000).PTS:1DIF:1REF:p. 8-18 | p. 8-19OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:5 min35.The inclusion amount for a leased automobile is not adjusted by a business usage percentage.ANS:FThe inclusion amount for a leased automobile is adjusted for business use.PTS:1DIF:1REF:p. 8-19 | p. 8-20OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min36.All listed property is subject to the substantiation requirements of 274.ANS:TPTS:1DIF:1REF:p. 8-20OBJ:4NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min37.If a taxpayer uses regular MACRS for all property, an alternative minimum tax adjustment is made with respect to the depreciation on all property.ANS:FNo adjustment is required on 15 and 20-year class property because they use 150% declining-balance depreciation.PTS:1DIF:1REF:p. 8-20 to 8-22OBJ:2 | 5NAT:AICPA FN-Measurement | AACSB AnalyticMSC:2 min38.ADS 150% declining-balance depreciation is used to compute earnings and profits.ANS:FADS straight-line depreciation is used to compute earnings and profits.PTS:1DIF:1REF:p. 8-20OBJ:5NAT:AICPA FN-Measurem