Chapter 9 Tax Quiz

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Property Acquisition & Cost Recovery

• 1.

Assets utilized for more than ____________  generally must be capitalized and its cost is then recovered over the life of estimated life of that asset.

a year
1 year
one year
Explanation
Assets that are utilized for more than a year generally must be capitalized and their cost is then recovered over the estimated life of the asset. This means that if an asset is used for a period longer than a year, its cost cannot be fully expensed in the year it was purchased. Instead, the cost is spread out over the useful life of the asset through depreciation or amortization. This allows for a more accurate representation of the asset's value and helps to match expenses with the revenue generated by the asset over its lifetime.

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• 2.

The name of the cost recovery system depends on the type of business property capitalized: 1.Depreciation: ____________ property (e.g., equipment) and real property (e.g., buildings (not land))

Personal
Explanation
The correct answer is "Personal." Depreciation is a cost recovery system that applies to both personal property (such as equipment) and real property (such as buildings, excluding land).

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• 3.

2. Amortization: ____________ assets (e.g., start-up costs, goodwill, etc.)

Intangible
Explanation
The correct answer is "Intangible." Amortization is the process of allocating the cost of intangible assets over their useful life. Intangible assets are non-physical assets that lack a physical substance but have value, such as patents, trademarks, copyrights, and goodwill. Start-up costs and goodwill are examples of intangible assets that may be subject to amortization.

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• 4.

3. .Depletion: ____________ resources (e.g., timber, coal, oil, gas, etc.)

Natural
Explanation
Depletion refers to the reduction or exhaustion of resources. In this context, the resources being referred to are natural resources such as timber, coal, oil, and gas. These resources are finite and can be depleted over time through extraction and consumption.

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• 5.

Basis of property is ____________ by cost recovered every year

• A.

Increased

• B.

Reduced

• C.

Remains constant

• D.

None of the above

B. Reduced
Explanation
The basis of property is reduced by cost recovered every year. This means that the cost of the property is gradually decreasing over time as the cost is being recovered annually. This could be due to depreciation or other factors that result in the reduction of the property's value.

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• 6.

Adjusted basis (net book value) or Tax basis are terms for the amount of the asset’s cost that has yet to be recovered

• A.

True

• B.

False

A. True
Explanation
The explanation for the given correct answer is that adjusted basis or tax basis refers to the remaining amount of an asset's cost that still needs to be recovered. This means that the asset's cost has not been fully depreciated or deducted for tax purposes. Therefore, the statement that adjusted basis or net book value is the amount of the asset's cost that has yet to be recovered is true.

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• 7.

Which items are added to the cost on the date of acquiisition to calculate adjusted basis?

• A.

Depreciation

• B.

Cost of improvements (not routine repair or maintenence)

• C.

Insurance proceeds

• D.

Deductible loss on destruction casulaties

• E.

Buying expenses including commissions, legal, title search, surveys and appraisal fees paid at date of original purchase

• F.

Capital gain on destruction casualties

B. Cost of improvements (not routine repair or maintenence)
E. Buying expenses including commissions, legal, title search, surveys and appraisal fees paid at date of original purchase
F. Capital gain on destruction casualties
Explanation
The items that are added to the cost on the date of acquisition to calculate adjusted basis are the cost of improvements (not routine repair or maintenance), buying expenses including commissions, legal, title search, surveys, and appraisal fees paid at the date of the original purchase, and capital gain on destruction casualties. These items increase the initial cost of the asset and are taken into account when determining the adjusted basis for tax purposes.

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• 8.

Minor or routine maintenance of capitalized assets are ____________ when incurred.

Expensed
Explanation
When minor or routine maintenance is performed on capitalized assets, the cost of the maintenance is expensed, meaning it is recorded as an expense in the accounting records. This is because the maintenance is considered a normal operating cost and does not increase the value or extend the useful life of the asset. By expensing the cost, it is immediately recognized as an expense on the income statement, rather than being added to the asset's value on the balance sheet.

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• 9.

Additional costs that significantly extend an asset’s useful life, the expenditure generates a new asset (for cost recovery purposes) separate from the original asset are not expensed.

• A.

True

• B.

False

B. False
Explanation
The statement suggests that additional costs that significantly extend an asset's useful life and generate a new asset are not expensed. However, this is incorrect. In accounting, these additional costs are capitalized and added to the cost of the original asset, increasing its value. This is done to reflect the increased usefulness and value of the asset. Therefore, the correct answer is False.

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• 10.

When multiple assets are purchased together at a “bargain price”, must allocate total cost according to the relative ____________ of each property.

FMV
Fair market value
Explanation
When multiple assets are purchased together at a "bargain price," the total cost must be allocated according to the relative fair market value of each property. Fair market value is the price at which the property would be exchanged between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts. Allocating the cost based on fair market value ensures that each property is accounted for accurately and fairly, reflecting its individual worth in the overall purchase.

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• 11.

Assets such as building, land and personal-use assets are depreciable.

• A.

True

• B.

False

B. False
Explanation
Land and personal-use assets are not depreciable.

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• 12.

Lessor
• 13.

The adjusted basis for assets acquired through nontaxable exchange is generally the ____________ basis as the property transferred

• A.

Same

• B.

Greater

• C.

Seller's

• D.

Cost

A. Same
Explanation
The adjusted basis for assets acquired through a nontaxable exchange is generally the same as the basis of the property transferred. This means that the basis of the acquired assets will be equal to the basis of the property that was exchanged for them. This ensures that the tax consequences of the exchange are neutral, as the taxpayer will not experience a gain or loss due to the exchange itself.

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• 14.

Basis of property acquired by gift is generally the basis of the donor?

• A.

True

• B.

False

A. True
Explanation
The basis of property acquired by gift is generally the basis of the donor. This means that when someone receives a gift, the value of the property for tax purposes is based on the original cost or basis of the property for the person who gave the gift. This is true in most cases, although there may be exceptions or special circumstances that could affect the basis of the gifted property.

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• 15.

Basis of property acquired by inheritance is generally the FMV at decedent’s ____________.

• A.

Previous year's basis

• B.

Salvage value

• C.

Death

• D.

None of the above

C. Death
Explanation
The basis of property acquired by inheritance is generally the Fair Market Value (FMV) at the decedent's death. This means that when someone inherits property from a deceased person, the value of the property for tax purposes is determined based on its FMV at the time of the decedent's death. This is important for calculating any potential capital gains or losses when the property is later sold.

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• 16.

Personal property refers to the physical nature of the property. It means that the property is immovable?

• A.

True

• B.

False

B. False
Explanation
Personal property refers to the movable nature of the property, not the immovable nature. Immovable property, also known as real property, refers to land and any permanent structures attached to it. Personal property, on the other hand, includes movable assets such as furniture, vehicles, and personal belongings. Therefore, the statement that personal property is immovable is false.

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• 17.

Personal-use property refers to property held for the taxpayer's own enjoyment?

• A.

True

• B.

False

A. True
Explanation
Personal-use property refers to property that is owned and used by the taxpayer for their own enjoyment or personal purposes. This can include items such as a personal residence, a vacation home, a personal vehicle, or personal belongings. The taxpayer derives personal satisfaction or enjoyment from these properties, rather than using them for business or investment purposes. Therefore, the statement that personal-use property refers to property held for the taxpayer's own enjoyment is correct.

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• 18.

Which property qualifies as real property?

• A.

Land

• B.

Equipment

• C.

Building

• D.

Land Improvements

• E.

Office Equipment

• F.

Building improvements

A. Land
C. Building
D. Land Improvements
F. Building improvements
Explanation
Real property refers to immovable property, such as land and any structures or improvements permanently attached to it. Land, building, land improvements, and building improvements all fall under this category as they cannot be easily moved or removed. Equipment and office equipment, on the other hand, are considered personal property as they are movable and not permanently attached to the land. Therefore, the correct answer includes land, building, land improvements, and building improvements.

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• 19.

Which declining balance applies to 3-year, 5-year, 7-year and 10-year classes of property?

• A.

200%

• B.

150%

• C.

Double declining

• D.

Straight line

A. 200%
Explanation
The declining balance of 200% applies to 3-year, 5-year, 7-year, and 10-year classes of property. This means that the asset will be depreciated at a rate of 200% of its straight-line depreciation rate each year. This method allows for a faster depreciation of the asset in the early years, gradually decreasing over time.

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• 20.

Which declining balance applies to 15-year and 20-year classes of property.?

• A.

200%

• B.

150%

• C.

Double declining

• D.

Straight line

B. 150%
Explanation
The declining balance of 150% applies to 15-year and 20-year classes of property. This means that the asset's value will be depreciated by 150% of its straight-line depreciation rate each year. This method allows for a faster depreciation in the early years of the asset's life, gradually slowing down over time.

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• 21.

Which declining balance applies to 27.5 & 39-year classes of property?

• A.

200%

• B.

150%

• C.

Double declining

• D.

Straight line

D. Straight line
Explanation
The straight line method of declining balance applies to the 27.5 and 39-year classes of property. This method assumes that the asset depreciates evenly over its useful life, resulting in an equal amount of depreciation expense each year. It does not take into account the asset's salvage value or the rate of decline. Therefore, the straight line method is the correct answer for this question.

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• 22.

You do not consider salvage value when calculating MACRS depreciation rates?

• A.

True

• B.

False

A. True
Explanation
When calculating MACRS (Modified Accelerated Cost Recovery System) depreciation rates, salvage value is not considered. MACRS is a depreciation method used for tax purposes in the United States, and it assumes that the asset being depreciated has no salvage value at the end of its useful life. Therefore, the depreciation rates are determined based on the cost of the asset and its assigned recovery period, without taking into account any potential salvage value.

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• 23.

The decision to use an accelerated method or SL applies to ____________ property

• A.

Personal

• B.

Real

• C.

Personal-use

• D.

All

D. All
Explanation
The decision to use an accelerated method or SL applies to all types of property, including personal, real, and personal-use property. This means that regardless of the type of property, the taxpayer can choose to use either an accelerated method or the straight-line method for depreciation purposes.

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• 24.

You cannot change from SL to accelerated for future year's acquisitions once you choose a method?

• A.

True

• B.

False

B. False
Explanation
You can change from straight-line (SL) depreciation to accelerated depreciation for future year's acquisitions even after choosing a method. This means that if you initially choose to use the SL method for depreciation, you can later decide to switch to an accelerated method such as the double declining balance or sum-of-the-years' digits method. Therefore, the statement "You cannot change from SL to accelerated for future year's acquisitions once you choose a method" is false.

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• 25.

Which convention applies to PERSONAL property.

• A.

Mid-month

• B.

Half-year

• C.

Mid-quarter

• D.

Full year

B. Half-year
Explanation
The convention that applies to PERSONAL property is half-year. This convention means that the property is assumed to be acquired or disposed of halfway through the year for depreciation or tax purposes. It allows for a more accurate calculation of the property's value and depreciation over time.

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• 26.

Which convention applies when more than 40% personal property cost is placed in service during the last quarter?

• A.

Mid-month

• B.

Half-year

• C.

Mid-quarter

• D.

Full year

C. Mid-quarter
Explanation
The mid-quarter convention applies when more than 40% of personal property cost is placed in service during the last quarter. This means that if a taxpayer places more than 40% of their personal property cost in service during the last quarter of the year, they must use the mid-quarter convention for depreciation purposes. This convention requires the taxpayer to treat all property placed in service during the year as if it was placed in service in the middle of the quarter in which it was actually placed in service.

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• 27.

Which convention applies to real property?

• A.

Mid-month

• B.

Half-year

• C.

Mid-quarter

• D.

Full year

A. Mid-month
Explanation
The mid-month convention is a convention that applies to real property. According to this convention, it is assumed that the property was placed in service or disposed of in the middle of the month, regardless of the actual date. This convention is used for calculating depreciation and determining the number of months that the property is considered to be in service for tax purposes.

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• 28.

At the beginning of the year, Dan bought and placed in service the following assets during the year:                  Asset                                                         Date Acquired                                                 Cost Basis Computer Equipment  (5 yr)                       3/23                                                                 \$5,000 Dog grooming furniture (7 yr)                     5/12                                                                   7,000 Pickup truck (5 yr)                                      9/17                                                                 10,000 Commercial building                                 10/11                                                               270,000 Land (one acre)                                        10/11                                                                 80,000 What is Dan's year 1 depreciation expense for each asset?  Round to the nearest dollar.

\$5,442
5,442
5442
Explanation
Computer 5000 x 20% = 1,000
Furniture 7000 x 14.29% = 1,000.30
Truck 10,000 x 20% = 2,000
Building (270,000/39) x (2.5/12) = 1,442
Total \$5,442

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• 29.

At the beginning of the year, Dan bought and placed in service the following assets during the year:                  Asset                                                         Date Acquired                                                 Cost Basis Computer Equipment  (5 yr)                       3/23                                                                 \$5,000 Dog grooming furniture (7 yr)                     5/12                                                                   7,000 Pickup truck (5 yr)                                      9/17                                                                 10,000 Commercial building                                 10/11                                                               270,000 Land (one acre)                                        10/11                                                                 80,000 What is Dan's year 2 depreciation expense for each asset?  Round to the nearest dollar.

\$13,437
13,437
13437
Explanation
Computer 5000 x 32% = 1,600
Furniture 7000 x 24.49% = 1,714.30
Truck 10,000 x 32% = 3,200
Building (270,000/39) = 6,923
Total \$13,437

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• 30.

At the beginning of the year, Daelynn placed in service the following assets during the year: Asset                                                                    Date Acquired                                           Cost Basis Computer Equipment (5 yr)                                  3/23                                                          \$5,000 Furniture (7 yr)                                                      5/12                                                           7,000 Pickup truck (5 yr)                                               11/15                                                         10,000 Commercial building                                             9/11                                                       270,000 What is Daelynn's year 1 cost recovery for each asset?

• A.

\$5,519

• B.

\$10,423

• C.

\$13,666

• D.

\$5,442

A. \$5,519
Explanation
Daelynn's year 1 cost recovery for each asset is \$5,519. This is calculated by multiplying the cost basis of each asset by the applicable recovery percentage for each asset. The recovery percentages for the assets are as follows: computer equipment (20%), furniture (14.29%), pickup truck (20%), and commercial building (2.564%). By multiplying the cost basis of each asset by its respective recovery percentage and summing up the results, we get a total year 1 cost recovery of \$5,519.

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• 31.

• A.

\$5,519

• B.

\$10,423

• C.

\$13,666

• D.

\$5,442

C. \$13,666
• 32.

Bonus Depreciation is eligible for new and used personal property with life expenctancies of 20 years or less.

• A.

True

• B.

False

B. False
Explanation
Only new property

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• 33.

The magnitude of the bonus depreciation depends on the date of purchase.  Check which conditions qualify.

• A.

50% for purchases before September 9, 2010.

• B.

100% for purchases after Sept 8, 2010 but before January 1, 2012.

• C.

50% for purchases after Sept 8, 2010 but before January 1, 2012.

• D.

100% will return for qualifying property after December 31, 2011 and before January 1, 2013.

• E.

50% will return for qualifying property after December 31, 2011 and before January 1, 2013.

• F.

50% for purchases after September 9, 2010.

A. 50% for purchases before September 9, 2010.
B. 100% for purchases after Sept 8, 2010 but before January 1, 2012.
E. 50% will return for qualifying property after December 31, 2011 and before January 1, 2013.
Explanation
The correct answer is a combination of different percentages for different time periods. The bonus depreciation is dependent on the date of purchase. Purchases made before September 9, 2010, qualify for a 50% bonus depreciation. Purchases made after September 8, 2010, but before January 1, 2012, qualify for a 100% bonus depreciation. After December 31, 2011, and before January 1, 2013, qualifying property will receive a 50% bonus depreciation. This explanation outlines the various conditions and percentages that determine the magnitude of the bonus depreciation based on the date of purchase.

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• 34.

Assume that Teton elected bonus depreciation for the new tangible personal property he purchased in the current service year for \$535,000.  What is Teton's bonus depreciation?

• A.

\$535,000

• B.

\$267,500

• C.

\$517,500

• D.

\$552,500

A. \$535,000
Explanation
All of it was new property which was eligible for the 100% bonus depreciation rate.

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• 35.

Assume that Teton elected bonus depreciation for the new tangible personal property he purchased in the current service year for \$535,000.  What is Teton's bonus depreciation if he elects170 expensing?

• A.

\$535,000

• B.

\$35,000

• C.

\$35,500

• D.

\$552,500

B. \$35,000
Explanation
Qualified property (535,000) - 179 expense (500,000) x bonus depreciation rate (100%) = \$35,000

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• 36.

\$11,060 is the maximum amount a business can depreciate an automobile if they elect to use the bonus depreciation in Year 1.

• A.

True

• B.

False

A. True
Explanation
3060 Auto Depreciation Limit + 8,000 monus depreciation

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• 37.

Half-year convention is required for amortization.

• A.

True

• B.

False

B. False
Explanation
Straight-line is required for amortization.

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• 38.

What is the maximum annual depreciation expense available for 2011 (year 1) on a 2012 Honda Civic costing \$15,860 and a 2012 Porsche 911 costing \$97,400 (ignoring bonus depreciation)?

\$3,060
\$3060
3,060
3060
Explanation
\$3,060 for both. Year 1 luxury automobile maximum \$3,060 deduction allowed

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• 39.

Teton sells all of its office furniture (10,000) in year 2 (the year after it buys it).  What is Teton's depreciation for the office furniture for the office furniture in the year of disposition?

• A.

\$2,229

• B.

\$2,449

• C.

\$1,225

• D.

\$1,500

C. \$1,225
Explanation
10,000 x 24.49% = 2449
x 50%
1225

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• Mar 08, 2012
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