Chapter 8 - Depreication, Cost Recovery, Amortization, and Depletion HW Quiz Questions

Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape's cost recovery would begin:

a. In the following year, using a mid-quarter convention.

b. In the current year, using a mid-quarter convention.

c. In the following year, using a half-year convention.

d. In the current year, using a half-year convention.

c. In the following year, using a half-year convention.

Hazel purchased a new business asset (5-year property) on September 30, 2024, at a cost of $100,000. On October 4, 2024, she placed the asset in service. This was the only asset she placed in service in 2024. Hazel did not elect § 179 or additional first-year depreciation. On August 20, 2025, Hazel sold the asset. Determine the cost recovery for 2025 for the asset.

$23,750 - The asset was placed in service in October 2024 (and was the only asset placed in service in 2024); as a result, the mid-quarter convention is used. 2025 is the second year of cost recovery. [$100,000 × 0.38 × (2.5/4) = $23,750.]

Tan Company acquires a new machine (10-year MACRS property) on January 15, 2024, at a cost of $200,000. Tan also acquires another new machine (7-year MACRS property) on November 5, 2024, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2024.

$25,716 -

10-year property
	MACRS cost recovery ($200,000 × 0.10)	$20,000
7-year property
	MACRS cost recovery ($40,000 × 0.1429)	5,716
Total cost recovery		$25,716

James purchased a new business asset (3-year MACRS property) on July 23, 2024, at a cost of $40,000. James takes additional first-year depreciation but does not elect § 179 expense on the asset. Determine the cost recovery deduction for 2024.

$29,280 -

Additional first-year depreciation ($40,000 × 60%)	$24,000
MACRS cost recovery [($40,000 − $24,000) × 0.33 (Exhibit 8.3)]	5,280
Total cost recovery deduction	$29,280

Alice purchased office furniture on September 20, 2023, for $100,000. On October 10, 2023, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2024. She did not elect to expense any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2024.

$30,290 -

Regular MACRS
Furniture (7-year MACRS property)	$100,000 × 0.1429	$14,290
Computers (5-year MACRS property)	$80,000 × 0.20	16,000
Total cost recovery		$30,290

Kenji purchased a used business asset (7-year MACRS property) on September 30, 2024, at a cost of $200,000. This is the only asset he purchased during the year. Kenji did not elect to expense any of the asset under § 179, did not claim additional first-year depreciation, and did not elect straight-line cost recovery. Kenji sold the asset on July 17, 2025. Determine the cost recovery deduction for 2025.

$24,490 - The half-year convention applies [$200,000 × 0.2449 × 1/2 = $24,490].

Bonnie purchased a new business asset (5-year MACRS property) on March 10, 2024, at a cost of $30,000. She also purchased a new business asset (7-year MACRS property) on November 20, 2024, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2024 for these assets.

$43,000 - The half-year convention applies.

5-year property:	Additional first-year depreciation ($30,000 × 60%)	$18,000
MACRS cost recovery	[($30,000 - $18,000) * 0.20 (Exhibit 8.3)]	2,400
7-year property:	Additional first-year depreciation ($13,000 × 60%)	7,800
MACRS cost recovery	[($13,000 - $7,800) * 0.1429 (Exhibit 8.3)]	743
Total cost recovery		$28,943

White Company acquires a new machine (7-year MACRS property) on January 10, 2024, at a cost of $620,000. White makes the election to expense the maximum amount under § 179 and wants to take any additional first-year depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2024, assuming that White reports taxable income of $800,000.

$620,000 -

§ 179 expense

$620,000

 In 2023, Mei had a § 179 deduction carryover of $30,000. In 2024, she elected § 179 for an asset acquired at a cost of $115,000. Mei's § 179 business income limitation for 2024 is $140,000. Determine Mei's § 179 deduction for 2024.

$140,000 - $140,000 [$30,000 + $115,000 (limited to $140,000)].

Angie purchased one new asset during the year (5-year MACRS property) on November 10, 2024, at a cost of $660,000. She would like to use the § 179 election (but will not take additional first-year depreciation). The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the maximum cost recovery deduction available on this asset for 2024.

$600,000 - Although mid-quarter convention would apply to the MACRS calculation, Angie can elect to use § 179 expensing depreciation on the asset to avoid it. The § 179 taxable income limitation will apply; so Angie's maximum 2024 deduction will be $600,000 (with a § 179 carryover of $60,000 to 2025).

On June 1, 2024, 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 2024 for the patent.

$11,667 -  $11,667 [$300,000 × (7 months/180 months)]. The statutory amortization period for § 197 intangibles is 15 years.

Mauve Corporation begins business on April 2, 2024. The corporation reports startup expenditures of $64,000 all incurred last year. Determine the total amount that Mauve can elect to deduct in 2024.

$3,200 -

Deductible amount [$5,000 – ($64,000 – $50,000)]	$   –0–
Amortizable amount [($64,000 – $0)/180 × 9 months]	3,200
Total deduction	$3,200

Which of the following is not a characteristic of MACRS for property other than real estate?

a. MACRS increases taxable income in the early years of the asset's life.

b. MACRS uses shorter asset lives.

c. MACRS accelerates cost recovery.

d. MACRS decreases taxable income in the early years of the asset's life.

a. MACRS increases taxable income in the early years of the asset's life. - Accelerated depreciation (either 200% or 150% declining balance) is used for MACRS. As a result, cost recovery is accelerated to early years of an asset's life. This reduces taxable income (rather than increasing taxable income).

Under MACRS, which one of the following is not considered in determining depreciation for tax purposes?

a. Half-year convention.

b. Salvage (or residual) value.

c. Cost of asset.

d. Property recovery class.

b. Salvage (or residual) value. - Salvage value is ignored under MACRS.

 Which of the following depreciation conventions are not used under MACRS?

a. Mid-quarter.

b. Half-year.

c. Full-month.

d. Mid-month.

c. Full-month.

A major objective of MACRS is to:

a. Ensure that the amount of cost recovery for tax purposes will be the same as book depreciation.

b. Help companies achieve a faster write-off of their capital assets.

c. Reduce the amount of the cost recovery deduction on businesses tax returns.

d. Require companies to use the actual economic lives of assets in calculating cost recovery for tax purposes.

b. Help companies achieve a faster write-off of their capital assets. - MACRS does help companies achieve a faster write-off of their capital assets. MACRS does not reduce the amount of cost recovery deductions; MACRS generally has shorter lives and, for property other than real estate, uses accelerated methods, so MACRS cost recovery will not be the same as book depreciation; economic lives are not used for MACRS cost recovery (although they are used to place assets in MACRS classes).

On May 5 of the current tax year, Byrne purchased a patent that qualifies as a § 197 intangible. The cost of the patent was $207,000, and Byrne is a calendar year taxpayer. In the current tax year, how much of the patent's cost may Byrne amortize?

$9,200. - The patent cost can be amortized on a straight-line basis over 180 months. In the year of acquisition, eight months of amortization can be deducted. So, $9,200 can be amortized; ($207,000 ÷ 180 months) × 8 months.

Indigo Company acquires a new machine (5-year MACRS property) on February 2, 2024, at a cost of $100,000. On November 18, 2024, Indigo also acquires office equipment (7-year MACRS property) at a cost of $50,000. Indigo does not make a § 179 expense election and chooses not to take additional first-year depreciation. What is Indigo's total MACRS deduction for 2024?

$27,145. - Normal MACRS applies; the mid-quarter convention does not apply because only 33.33% of assets were placed in service during the last quarter of the year.

5-year MACRS	$100,000 × 0.2000	$20,000
7-year MACRS	$50,000 × 0.1429	7,145
Total		$27,145

Maple Company purchases new equipment (7-year MACRS property) on January 10, 2024, at a cost of $430,000. Maple also purchases new machines (5-year MACRS property) on July 19, 2024, at a cost of $290,000. Maple wants to maximize its MACRS deductions; assume no taxable income limitations apply. What is Maple's total MACRS deduction for 2024?

 $720,000. - In 2024, the maximum § 179 deduction is 1,220,000. As Maple's 2024 acquisitions are less than this amount, § 179 can be used to expense both assets. As a result, the maximum MACRS deduction for 2024 is $720,000 ($430,000 + $290,000). Although available, there is no need to claim additional first-year (bonus) depreciation.