Income Tax Fundamentals 2014 Whittenburg 32nd Edition Test Bank Chapters 1 5-7-12

Income Tax Fundamentals 2014 Whittenburg 32nd
Edition Test Bank, Chapters 1-5, 7-12
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Income Tax Fundamentals 2014 Whittenburg 32nd Edition Test Bank, Chapters 1-5, 7-12
CHAPTER 7
ACCOUNTING PERIODS AND METHODS AND DEPRECIATION
TEST BANK
TRUE/FALSE
1. “Annualizing” is a method by which the taxpayer can usually decrease the amount of tax he or she pays.
ANS: F
In order to calculate the tax for a short period, a taxpayer must annualize his or her income from the short
period.
OBJ: 7.1
2. Most partnerships, S corporations, and personal service corporations owned by individuals choose a
September 30 year-end so that they may defer 3 months of income.
ANS: F
Most partnerships, S corporations, and personal service corporations owned by individuals file on a
calendar year-end basis.
OBJ: 7.1
3. The hybrid method of accounting involves the use of both the accrual and cash methods of accounting.
ANS: T OBJ: 7.2
4. In general, accrual basis taxpayers recognize income when it is earned, regardless of when it is received.
ANS: T OBJ: 7.2
5. Generally, cash basis taxpayers must account for payments of prepaid interest using the accrual method.
ANS: T OBJ: 7.2
6. Under the cash basis of accounting, expenses are generally deducted in the year they are paid.
ANS: T OBJ: 7.2
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458 Chapter 7 – Accounting Periods and Methods and Depreciation
7. All S corporations must use the accrual basis of accounting.
ANS: F
Many S corporations use the cash method of accounting. Regular corporations, partnerships that have a
regular corporation as a partner, and tax-exempt trusts with unrelated business income are generally the
entities prohibited from using the cash method.
OBJ: 7.2
8. Maintenance costs for capital assets are deducted in the year the amount is paid or incurred.
ANS: T OBJ: 7.3
9. Depreciation refers to the physical deterioration or loss of value of an asset.
ANS: F
Depreciation is the accounting process of allocating and deducting the cost of an asset over a period of
years.
OBJ: 7.3
10. Expenditures incurred to maintain an asset in good operating condition must be depreciated over the
remaining useful life of the asset.
ANS: F
Expenditures incurred to maintain an asset in good operating condition are deductible as maintenance
expenses.
OBJ: 7.3
11. If land declines in value, it may be depreciated for tax purposes.
ANS: F
Land cannot be depreciated for tax purposes.
OBJ: 7.3
12. Depreciation is the process of allocating the cost of assets to expense over a period of years.
ANS: T OBJ: 7.3
13. Residential real estate purchased during 2013 is assigned a 27.5-year cost recovery period under the
Modified Accelerated Cost Recovery System.
ANS: T OBJ: 7.4
Test Bank – Chapter 7 459
14. Automobiles placed in service in 2013 generally have a 3-year cost recovery period under the Modified
Accelerated Cost Recovery System (MACRS).
ANS: F
Automobiles placed in service in the current year generally have a 5-year cost recovery period under the
Modified Accelerated Cost Recovery System.
OBJ: 7.4
15. If an asset’s actual useful life is longer than the assigned recovery period, the MACRS tables cannot be
used.
ANS: F
The MACRS table is used even if the asset’s useful life is longer than the assigned recovery period.
OBJ: 7.4
16. Under MACRS, the same method of depreciation (accelerated or straight-line) must be used for all
property in a given class placed in service during that year.
ANS: T OBJ: 7.4
17. Taxpayers must use the straight-line method of depreciation for all productive assets.
ANS: F
For property, other than real estate, a taxpayer may elect to use straight-line depreciation or accelerated
depreciation.
OBJ: 7.4
18. In applying the statutory rates from the MACRS tables, the cost of the asset must first be reduced by the
prior year’s depreciation.
ANS: F
The cost of the property to which the rates from the MACRS tables are applied is not reduced for prior
years’ depreciation.
OBJ: 7.4
19. Depreciation on property in the five-year MACRS class is claimed over a period of six tax years due to
the half-year convention.
ANS: T OBJ: 7.4
20. Taxpayers may expense the cost of depreciable personal property placed in service during the year and
used in a trade or business in an amount up to a maximum of $20,000 annually.
ANS: F
For 2013, the maximum cost of depreciable personal property that may be expensed in the year of
acquisition is $500,000.
OBJ: 7.5
21. The election to expense is not permitted where listed property does not meet the qualified business use
test.
ANS: T OBJ: 7.6
22. The tax law imposes restrictions on the depreciation of “listed” property such as automobiles and
computers.
ANS: T OBJ: 7.6
23. If listed property is used more than 50 percent in a qualified business use, depreciation must be
calculated using the straight-line method.
ANS: F
If listed property is used 50 percent or less in a qualified business use, then depreciation must be
calculated using the straight-line method.
OBJ: 7.6
24. The annual automobile depreciation limitations apply only to the first four years of the asset’s recovery
period.
ANS: F
Automobiles are subject to the luxury automobile limitations until the automobile is fully depreciated.
OBJ: 7.7
25. If actual business use of an automobile is less than 100 percent, the annual automobile depreciation
limitations must be reduced to reflect the actual business use only.
ANS: T OBJ: 7.7
26. If an automobile is purchased for 100 percent use in the taxpayer’s business, the annual automobile
depreciation limitations do not apply.
ANS: F
Generally, automobiles are subject to luxury automobile depreciation limitations.
OBJ: 7.7
27. Goodwill is considered to be a Section 197 asset amortized over 15 years for tax purposes.
ANS: T OBJ: 7.8
28. Sales of property at a gain may be restricted under the related party rules of the Internal Revenue Code.
ANS: F
Sales of property at a loss may be restricted under the related party rules.
OBJ: 7.9
MULTIPLE CHOICE
1. Choose the incorrect statement.

a. Books and records may be kept on a different year-end basis than the year-end used for tax
purposes.
b. The choice to file on a fiscal year-end basis must be made with an initial tax return.
c. Almost all individuals file tax returns using a calendar year accounting period.
d. An individual may request IRS approval to change to a fiscal year-end basis if certain
conditions are met.
ANS: A OBJ: 7.1
2. The Dot Corporation has changed its year-end from a calendar year-end to July 31. The income for its
short period from January 1 to July 31 is $35,000. The tax for this short period is:
a. $5,250
b. $5,833
c. $9,000
d. $10,000
ANS: B
Step 1: Annualize the income $35,000 x 12/7 $60,000
Step 2: Tax on the annualized income 15% x $50,000 7,500

25% x $10,000 2,500
$ 10,000
Step 3: Short period tax $10,000 x 7/12 $ 5,833
OBJ: 7.1
3. Mark the correct answer. In cash basis accounting, for tax purposes:
a. Income is recognized when it is actually or constructively received and expenses are
recognized when they are actually or constructively incurred, regardless of when paid.
b. Income is recognized when it is earned regardless of when received and expenses are
recognized when they are actually or constructively incurred.
c. Income is generally recognized when it is actually or constructively received and expenses
are generally recognized when they are paid.
d. The cash basis is not allowed for businesses reported on Schedule C.
ANS: C OBJ: 7.2
4. From the records of Tom, a cash basis sole proprietor, the following information was available:
Gross receipts $30,000

Dividend income (on personal investments) $ 200
Cost of sales $15,000
Other operating expenses $ 3,000
State business taxes paid $ 300
What amount should Tom report as net earnings from self-employment?

a. $10,900
b. $11,700
c. $12,000
d. $15,000
e. None of the above
ANS: B
$30,000 - $15,000 - $3,000 - $300
OBJ: 7.2
5. Vernon is a cash basis taxpayer with a calendar tax year. On November 1, 2013, Vernon entered into a
lease to rent a building for use in his business at $4,000 a month. On that day Vernon paid 18 months
rent on the building, a total of $72,000 ($4,000  18 months). How much may Vernon deduct for rent
expense on his 2013 tax return?
a. $4,000
b. $8,000
c. $16,000
d. $24,000
ANS: B
$4,000 x 2 months
OBJ: 7.2
6. Amy is a calendar year taxpayer reporting on the cash basis. Indicate which of the following income or
expense items should not be included in her 2013 tax return.
a. On April 15, 2014, she makes a deductible contribution to an IRA for 2013.
b. She prepays half a year of interest in advance on her mortgage on the last day of 2013.
c. She pays all her outstanding invoices for standard business expenses in the last week of
December.
d. She sends out a big bill to a customer on January 1, 2014, even though she did all of the
work in December of 2013.
ANS: B OBJ: 7.2
7. William, a cash-basis sole proprietor, had the following receipts and disbursements for 2013:
Gross receipts $60,000

Cost of sales $30,000
Other operating expenses $ 6,000
Medical expenses $ 600
For 2013, what amount should William report as net earnings from self-employment?
a. $30,000
b. $24,600
c. $24,000
d. $23,400
ANS: C
$60,000 - $30,000 - $6,000
OBJ: 7.2
8. Which of the following is not an acceptable method of accounting under the tax law?
a. The accrual method
b. The cash method
c. The hybrid method
d. All of the above are acceptable
ANS: D OBJ: 7.2
9. Which one of the following entities cannot use the cash method for tax purposes?
a. A large almond farm with $40 million in gross receipts.
b. A continuing education provider with $2 million in gross receipts and 20 employees.
c. A nationwide law firm with $5.4 million in gross receipts.
d. A small sole proprietorship with $150,000 in gross receipts.
e. All of the above may use the cash method.
ANS: E OBJ: 7.2
10. Kate is an accrual basis, calendar-year taxpayer. On November 1, 2013, Kate leased out a building for
$4,000 a month. On that day Kate received 6 months rental income on the building, a total of $24,000
($4,000  6 months). How much income must Kate include on her 2013 tax return as a result of this
transaction?
a. $4,000
b. $8,000
c. $16,000
d. $24,000
ANS: D OBJ: 7.2
11. Becky is a cash basis taxpayer with the following transactions during her calendar tax year:
Cash basis revenue $54,000

Cash basis expenses, except rent $25,000
Rent expense (paid on December 1) for use of a building for 18 months $36,000
What is the amount of Becky’s taxable income from her business for this tax year?
a. $17,000
b. $23,000
c. $25,000
d. $27,000
ANS: D
$54,000 - $25,000 – ($36,000 / 18 months x 1 month)
OBJ: 7.2
12. Cork Oak Corporation purchased a heavy-duty truck (not considered a passenger automobile for
purposes of the listed property and luxury automobile limitations) on June 1, 2013 for use in its business.
The truck, with a cost basis of $18,000, has a 5-year estimated life. It also is 5-year recovery property.
How much depreciation should be taken on the truck for the 2013 calendar tax year using the
conventional (for financial accounting purposes) straight-line depreciation method?
a. $1,800
b. $2,100
c. $2,567
d. $3,600
ANS: B
$18,000 / 60 months x 7 months
OBJ: 7.3
13. Jenny constructed a building for use as a residential rental property. The cost of the building was
$180,000, and it was placed in service on August 1, 1990. The building has a 27.5-year MACRS life.
What is the amount of depreciation on the building for 2013 for tax purposes?
a. $2,000
b. $6,000
c. $3,000
d. $6,547
ANS: D
$180,000 x 3.637%
OBJ: 7.3
14. ABC Corp bought a production machine on January 1, 2012 for $30,000. The company elected out of
Section 179 expensing and elected out of claiming bonus depreciation in 2012, and is depreciating the
machine using the MACRS accelerated depreciation tables for 5-year property. What is the 2013
depreciation (year 2) deduction for the machine?
a. $9,600
b. $24,000
c. $6,000
d. $12,000
e. None of the above is correct
ANS: A
$30,000 x 32%
OBJ: 7.4
15. Which one of the following is true about Modified Accelerated Cost Recovery System (MACRS)?
a. A building is depreciated using 200 percent declining balance depreciation.
b. Buildings and autos both have the same depreciation life.
c. A light duty business truck is depreciated using accelerated depreciation.
d. All of the above are false.
ANS: C OBJ: 7.4
16. Steve Corp bought a $925,000 apartment building in 2012. Of the purchase price, $100,000 is allocated
to the value of the land. What is the maximum amount of depreciation that the company can claim in
2013 (year 2) for the building?
a. $29,997
b. $825,000 under the election to expense business property
c. $250,000 under the election to expense business property
d. $82,500
e. You cannot depreciate property costing over $800,000
ANS: A
($925,000 - $100,000) x 3.636%
OBJ: 7.4
17. Which of the following statements with respect to the depreciation of real property under MACRS is
correct?
a. Real property is depreciated using a mid-quarter convention.
b. Only one-half year of depreciation is allowed in the year of acquisition of real property,
regardless of the actual date the property is placed in service.
c. Assuming the property is not disposed of during the year, the depreciation deduction for
the second year of use of the real property will be greater than the depreciation deduction
in the first year.
d. In some cases, where a significant amount of property is acquired during the last quarter of
the taxpayer’s tax year, the taxpayer may be required to use a mid-quarter convention in
calculating depreciation on real property.
e. None of the above.
ANS: C OBJ: 7.4
18. John purchases residential rental property on October 31, 2013 for a cost of $290,000. Of this amount,
$140,000 is allocable to the cost of the home and the remaining $150,000 is allocable to the cost of the
land. What is John’s maximum depreciation deduction for 2013?
a. $2,198
b. $1,099
c. $1,061
d. $850
ANS: C
$140,000 x 0.758%
OBJ: 7.4
NOTE: Additional tables, rates or other schedules may be required to assist the student in completing this
test question.
19. On January 1, 2013, Roxburgia Company places a commercial storage building in service. The costs
allocated to construction of the building total $300,000 and land is accounted for separately. Which of
the following is a true statement with respect to the depreciation of the building?
a. The period over which the building must be depreciated is shorter than the period over
which a residential building must be depreciated.
b. Since the building was placed in service on the first day of the year, the depreciation
expense for each year the building is used, except for the year of disposition, will be the
same amount.
c. Since the land is accounted for separately, the amount of depreciation expense for the
building cannot be determined from the information given.
d. The depreciation expense for Year 2 would be the same regardless of whether the building
is placed in service on January 1, 2013 or February 1, 2013.
e. All of the above.
ANS: D OBJ: 7.4
20. What is the minimum number of years over which computers may be depreciated under MACRS?
a. 3 years
b. 5 years
c. 7 years
d. 10 years
e. 15 years
ANS: B OBJ: 7.4
21. Which of the following is true about the MACRS depreciation system?
a. No salvage value is used before depreciation percentages are applied to depreciable real
estate.
b. Residential rental buildings are depreciated straight-line over 20 years.
c. Commercial real estate buildings are depreciated over 39 years using accelerated
depreciation.
d. No matter when equipment is purchased during the month, it is considered to have been
purchased mid-month for MACRS depreciation purposes.
ANS: A OBJ: 7.4
22. An asset other than a passenger automobile is placed in service on May 15, 2013 and has a depreciable
basis of $32,000. The asset is in the 7-year recovery class. What is the maximum depreciation deduction
that may be claimed for 2013, excluding the election to expense and bonus depreciation?
a. $2,286
b. $32,000
c. $4,573
d. $2,960
ANS: C
$32,000 x 14.29%
OBJ: 7.4
test question.
23. Mark the correct answer. In calculating depreciation:

a. Straight-line depreciation is higher than double declining balance depreciation in the early
years.
b. Straight-line depreciation is higher than double declining balance depreciation in the later
years.
c. Double declining balance is a method of straight-line depreciation.
d. MACRS depreciation requires that salvage value be taken into account.
ANS: B OBJ: 7.4
24. Mark the correct statement.

a. Residential real property is depreciated over 39 years.
b. Nonresidential real property is depreciated over 27.5 years.
c. Nonresidential real property is depreciated over 39 years.
d. Depreciation on real property starts at the beginning of the year in which the property is
placed in service.
ANS: C OBJ: 7.4
25. During 2013, Travis purchases $130,000 of used manufacturing equipment (7-year property) for use in
his business. Travis has taxable income from his business of $500,000. What is the maximum amount
that Travis may deduct under the election to expense?
a. $130,000
b. $18,571
c. $250,000
d. $0
ANS: A OBJ: 7.5
26. Aaron has a successful business with $50,000 of income in 2013. He purchased a new 7-year MACRS
property with a cost of $7,000. For tax purposes, what is the largest write-off Aaron can obtain in 2013
for the new asset?
a. $1,000
b. $500
c. $7,000
d. $3,500
ANS: C OBJ: 7.5
27. Taxpayers choosing the election to expense:

a. May depreciate the amount of the asset cost that exceeds the amount allowed under the
election to expense.
b. Will have the maximum that can be expensed under the election reduced by $0.50 for each
dollar by which the cost of the asset acquired exceeds a specified limit.
c. May not carry over any amounts elected which are not allowed because of taxable income
limitations.
d. May expense a $125,000 automobile so long as it is used 100 percent for business.
ANS: A OBJ: 7.5
28. On January 1, 2013, Sandy, a sole proprietor, purchased for use in her business a used production
machine (7-year property) at a cost of $40,000. Sandy does not purchase any other property during 2013
and has net income from her business of $80,000. If the standard recovery period table would allow
$5,716 of depreciation expense on the $40,000 of equipment purchased in 2013, what is Sandy’s
maximum depreciation deduction, including bonus depreciation and the Section 179 election to expense,
for 2013?
a. $5,716
b. $8,000
c. $25,716
d. $40,000
ANS: D OBJ: 7.5
29. What is the maximum depreciation expense deduction for Year 2 (2014) for a passenger automobile,
used 100 percent for qualified business use, placed in service on June 15, 2013 and costing $12,000 (the
election to expense is not made and no bonus depreciation was taken)?
a. $3,840
b. $4,900
c. $3,060
d. $2,400
ANS: A
Lesser of $12,000 x 32% = $3,840 or $5,100 limitation
OBJ: 7.7
test question.
30. Jasper is a self-employed businessman. On March 5, 2013 he purchases a personal computer for use at
his home. He uses the computer for personal purposes 50 percent of the time and for business use the
remainder of the time. The computer cost $2,100. Jasper wants to claim the maximum amount of
depreciation possible for 2013, including the election to expense, if it is available. What is the amount of
depreciation that Jasper should claim on the computer for 2013?
a. $2,100
b. $1,050
c. $420
d. $210
e. Some amount less than the above amounts
ANS: E
$2,100 x 10% x 50% = $105
OBJ: 7.6
test question.
31. On June 1, 2013, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its
business. The automobile is in the 5 year cost recovery class and has a basis for depreciation of $30,000.
Assuming that the corporation elects the accelerated method of cost recovery for the asset and does not
elect to expense any of its cost or take bonus depreciation, what is the total tax depreciation deduction for
the 2013 calendar tax year (Year 1)?
a. $3,160
b. $3,060
c. $6,000
d. $4,287
ANS: A
OBJ: 7.7
test question.
32. Which one of the following may not be depreciated using an accelerated method?
a. A farming tractor
b. A computer used strictly for the farming business
c. A corn-husking machine
d. A farm truck that is operated for personal use more than 50 percent of the time
e. All of the above items may be depreciated using an accelerated method
ANS: D OBJ: 7.6
33. On June 1, 2013, Cork Oak Corporation purchased a passenger automobile for 100 percent use in its
business. The auto, with a cost basis of $22,000, has a 5-year estimated life. It also is 5-year recovery
property. How much depreciation should be taken for 2013, assuming Cork Oak Corporation uses the
accelerated depreciation method under MACRS but does not choose to make the election to expense or
take bonus depreciation?
a. $3,160
b. $2,100
c. $4,900
d. $4,400
ANS: A
OBJ: 7.7
test question.
34. Which one of the following is a Section 197 intangible?

a. Computer software available for purchase by the general public
b. A building
c. A stock investment
d. An interest-earning certificate of deposit
e. Goodwill
ANS: E OBJ: 7.8
35. On January 1, 2013, Ted purchased a small software company for $200,000. He paid $95,000 for the
fixed assets of the company and $105,000 for goodwill. How much amortization may Ted deduct on his
2013 tax return for the purchased goodwill?
a. $0
b. $7,000
c. $15,000
d. $21,000
e. $105,000
ANS: B
$105,000 / 15 years
OBJ: 7.8
36. Section 197 intangibles:

a. Are amortized over a 15-year period.
b. Include goodwill, going-concern value, and information bases.
c. Were defined in the Revenue Reconciliation Act of 1993.
d. Are not amortized over the actual estimated useful life of the intangible asset.
e. All of the above are true.
ANS: E OBJ: 7.8
37. Mark the correct answer. Section 197 intangibles:

a. Are amortized based on current fair market value rather than their actual cost.
b. Must be amortized over a 15 year life, regardless of their actual life.
c. Include intangible assets created and not purchased by the taxpayer.
d. Do not include purchased goodwill or going-concern value.
ANS: B OBJ: 7.8
38. Which of the following is true with respect to the related party rules?
a. Bill sells stock to his sister for a $3,000 loss. Bill can deduct the loss on his tax return.
b. A taxpayer’s uncle is a related party for purposes of Section 267.
c. A disallowed loss on a related party transaction can be used to offset any future gain when
the property is sold to an unrelated party.
d. Under the constructive ownership rules of Section 267, a shareholder owns 10 percent of
the stock owned by a corporation in which he or she is a shareholder.
e. None of the above are true.
ANS: C OBJ: 7.9
39. Mary sells to her father, Robert, her shares in AA Corp for $55,000. The shares cost Mary $80,000. How
much loss may Mary claim from the sale?
a. $80,000
b. $55,000
c. $0
d. $25,000
e. None of the above is correct
ANS: C OBJ: 7.9
40. Jerry and Julie are brother and sister. Jerry sold stock to Julie for $5,000, its fair market value. The stock
cost Jerry $10,000 5 years ago. Also, Jerry sold Carol (an unrelated party) stock for $2,000 that cost
$10,000 3 years ago. What is Jerry’s recognized loss before the $3,000 capital loss limitation?
a. $0
b. $8,000
c. $5,000
d. $13,000
e. $14,000
ANS: B
$2,000 - $10,000
OBJ: 7.9
41. If a loss from sale or exchange of property between related parties is disallowed and the property is
subsequently sold to an unrelated party,
a. An amended return may be filed to claim the loss previously disallowed.
b. The unrelated party may claim the loss previously disallowed.
c. The disallowed loss may be used to offset gain on the subsequent sale.
d. The disallowed loss may be used if there is a further loss on the subsequent sale.
e. The disallowed loss is lost forever.
ANS: C OBJ: 7.9
PROBLEM
1. Quince Corporation changes its year-end from a fiscal year-end to a calendar year-end. The corporation
has taxable income of $30,000 for its 3-month short period beginning October 1, 2013 and ending
December 31, 2013. Calculate the corporation’s tax for the short period.
ANS:
$30,000 / 3 months  12 months = $120,000
Tax on $120,000 = $30,050; $30,050 = [$22,250 + 39% x ($120,000 - $100,000)]
$7,512 = $30,050 / 12  3, short-period tax
OBJ: 7.1
test question.
2. Polly is a cash basis taxpayer with the following transactions during the year:
Cash received from sales of products $85,000

Cash paid for expenses (except rent and interest) $30,000
Rent paid on a leased building for 18 months beginning December 1 $54,000
Prepaid interest on a bank loan, paid on December 1, for the next 3 months $ 6,000
Four months’ rent received on a leased building, on October 1 $ 8,000
Calculate Polly’s income from her business for this calendar year.
Sales income $
Rental income __________
Total income $
Expenses other than rent and interest $
Rent __________
Interest __________
Total expenses __________
Net income $
ANS:
Sales income $85,000

Rental income 8,000
Total income $93,000
Expenses other than rent and interest $30,000
Rent 3,000
Interest 2,000
Total expenses $35,000
Net income $58,000
OBJ: 7.2
3. Countryside Acres Apartment Complex had the following transactions during the year:
Rental income collected for Apts A-F $216,000

12 months prepaid rental from new tenant in Apt G who moved
in on November 1 36,000
Operating expenses (except for interest) 24,000
Prepaid interest on bank loan, paid in December, for 6 months 9,000
including December
Using the accrual method, calculate the net income:
Rental income Apts A-F ________
Rental income from new tenant ________
Total income ________
Operating expenses (except for interest) ________

Prepaid interest ________
Total expenses ________
Total net income ________
ANS:
Accrual
Rental income Apts A-F $216,000
Rental income from new tenant 36,000
Total income $252,000
Operating expenses (except for interest) $ 24,000

Prepaid Interest 1,500
Total expenses $ 25,500
Total net income $226,500
OBJ: 7.2
4. If a taxpayer purchases land worth $200,000 with an office building valued at $100,000 on it, how are
the two depreciated for tax purposes?
Land:
Office building:
ANS:
Land is considered to be an asset that is not subject to obsolescence and therefore no depreciation is
allowed.
The office building will be depreciated straight-line over 39 years, starting with the middle of the month
in which it is purchased.
OBJ: 7.3
5. To be depreciated, must an asset actually lose value each year?

ANS:
No. For tax purposes, the term depreciation does not necessarily mean physical deterioration or the loss
of value of an asset. It is an allocation of the cost of an asset over a specified period of time. Tax law
allows a taxpayer to take tax depreciation on a depreciable asset no matter what happens to the value of
the asset. Even if the value of an asset increases significantly, depreciation is allowed according to the
related IRS percentage schedule.
OBJ: 7.3
6. On September 1, 2013, David purchased manufacturing equipment for use in his business. The
equipment cost $13,000 and has an estimated useful life and MACRS class life of 7 years. No election to
expense or use bonus depreciation is made.
a. Calculate the amount of depreciation on the manufacturing equipment for 2013 using
conventional (financial accounting, not MACRS) straight-line depreciation.
b. Calculate the amount of depreciation on the manufacturing equipment for 2013 using the
straight-line MACRS optional method.
c. Calculate the amount of depreciation on the manufacturing equipment for 2013 using the
accelerated MACRS method.
ANS:
a. $619 = $13,000 / 84 months  4 months
b. $928 = $13,000  7.14% (from Table 3)
c. $1,858 = $13,000  14.29% (from Table 2)
OBJ: 7.4
test question.
7. On July 2, 2013, Scott purchased a commercial building. The cost basis assigned to the building is
$600,000. Scott also owns a residential apartment building he purchased on June 15, 2012 with a cost
basis of $400,000.
a. Calculate Scott’s total depreciation deduction for the buildings for 2013, using the Modified
Accelerated Cost Recovery System.
b. Calculate Scott’s total depreciation deduction for the buildings for 2014, using the Modified
Accelerated Cost Recovery System.
ANS:
a. Commercial (nonresidential) ($600,000  1.177%) $ 7,062
Residential ($400,000 x 3.636%) 14,544
Total depreciation $21,606
b. Commercial (nonresidential) ($600,000 x 2.564%) $15,384

Residential ($400,000 x 3.636%) 14,544
OBJ: 7.4
test question.
8. On August 21, 2013, Jay purchased a commercial building. The cost basis assigned to the building is
$800,000. Jay also owns a residential apartment building he purchased on June 15, 2012 with a cost basis
of $500,000.
a. Calculate Jay’s total depreciation deduction for the buildings for 2013, using MACRS.
b. Calculate Jay’s total depreciation deduction for the apartment building for 2014, using
MACRS.
ANS:
a. Commercial (nonresidential) ($800,000  .963%) $ 7,704

Residential ($500,000 x 3.636%) 18,180
b. Residential ($500,000 x 3.636%) $18,180
OBJ: 7.4
test question.
9. Explain the use of the half-year convention for MACRS depreciation for assets other than real estate and
the exception to the half-year convention rule.
ANS:
The half-year convention assumes for depreciation purposes that all assets are purchased at mid-year.
When a taxpayer acquires an asset (other than real estate) during the year, the taxpayer must use the half-
year convention in calculating depreciation. The exception to this rule occurs when more than 40% of the
assets are purchased in the final quarter of the year. The mid-quarter convention then must be used. This
treatment requires that all assets purchased in any quarter of the year be treated as having been purchased
in the middle of that quarter.
OBJ: 7.4
test question.
10. Calculate the following amounts:
a. The first year of depreciation on a residential rental building costing $100,000, purchased on
August 30.
b. The first year of depreciation on an auto used 100 percent in business, costing $30,000, purchased in
May, 2013. (No bonus depreciation deducted).
c. The second year of depreciation on a computer used exclusively for business, costing $8,000,
purchased May 2012.
d. The third year of depreciation on business furniture costing $1,000, purchased in July 2011, using the
half-year convention and accelerated depreciation.
ANS:
a. $1,364 = 1.364% x $100,000
b. 20% x $30,000 = $6,000, limited to $3,160
c. 32% x $8,000 = $2,560
d. $175 = 17.49% x $1,000
OBJ: 7.4
test question.
11. Betty purchases a used $12,000 car in 2013, to use exclusively in her business.
a. What will the standard MACRS depreciation schedule be for the 6 years the auto is depreciated?
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
Year 6:
b. If Betty holds the car until it is fully depreciated, and uses straight-line depreciation, how many years
will this take?
ANS:
a. Since the car costs only $12,000, it is not subject to the luxury auto limitations. Using the standard
MACRS depreciation:
Year 1: $2,400 = $12,000 x 20%
Year 2: $3,840 = $12,000 x 32%
Year 3: $2,304 = $12,000 x 19.2%
Year 4: $1,382 = $12,000 x 11.52%
Year 5: $1,382 = $12,000 x 11.52%
Year 6: $ 692 = $12,000 x 5.76% (Remaining balance)
b. The depreciation would be spread over 6 years.
OBJ: 7.4 | 7.7

test question.
12. Give the depreciable or amortizable lives for 2013 tax purposes for these assets:
Automobiles
Business furniture
Computers
Residential real estate
Commercial real estate
Land
Purchased goodwill
ANS:
Automobiles: 5 years
Business furniture: 7 years
Computers: 5 years
Residential real estate: 27.5 years
Commercial real estate: 39 years
Land: No depreciation is allowed; it has an indefinite life
Purchased goodwill: 15 years
OBJ: 7.4 | 7.8

test question.
13. Lanyard purchased office equipment (7-year property) for use in his business. He paid $100,000 for the
equipment on July 1, 2013. Lanyard did not purchase any other property during the year. For 2013, his
business had net income of $350,000, before depreciation and before considering the election to expense.
a. What is the maximum amount that Lanyard can deduct in 2013 under the election to expense?
b. What is the total depreciation (regular depreciation and the amount allowed under the election
to expense) on the office equipment for 2013, assuming Lanyard uses the accelerated method
under MACRS and claims the maximum amount allowable under the election to expense?
c. What is Lanyard’s total depreciation deduction for 2014 on the 2013 purchase of equipment?
ANS:
a. $100,000 may be deducted under the election to expense

b. $100,000
c. $0
OBJ: 7.5
14. Eva purchased office equipment (7-year property) for use in her business. She paid $126,000 for the
equipment on July 1, 2013. Eva did not purchase any other property during the year. For 2013, her
business had net income of $26,000, before depreciation and before considering the election to expense.
a. What is the maximum amount that Eva can elect to expense in 2013 under Section 179?
b. What is the total depreciation (regular depreciation and the amount allowed as a 2013
deduction under the election to expense) on the office equipment for 2013, assuming Eva uses
the accelerated method under MACRS and claims the maximum amount allowable under the
election to expense?
c. Assuming that Eva elected to expense the equipment in 2013 and that her business has net
income in 2014 of $200,000, before depreciation and before considering the election to
expense, what is Eva’s total depreciation deduction (regular depreciation and the amount
allowed under the election to expense) for the equipment for 2014?
ANS:
a. $126,000, the cost of the asset in 2013 may be claimed as Section 179 expense but is limited to
the taxpayer’s net income from the trade or business, less depreciation. Any part of the
$126,000 that exceeds the limitation can be carried forward as an expense to following years.
b. $26,000 = $26,000 election to expense limited to net income.
c. $100,000 carryover of expense election from 2013.
OBJ: 7.5
test question.
15. On July 15, 2013, H. P. purchases a personal computer for his home. The computer cost $3,000. H. P.
uses the computer 55 percent of the time in his business, 20 percent of the time for managing his
investments and the remaining 25 percent of the time for various personal uses. Calculate H. P.’s
maximum depreciation deduction for 2013 for the computer, assuming he does not make the election to
expense or take bonus depreciation.
ANS:
$450 = $3,000  20%  (55% + 20%). The total allowable depreciation on the computer must be divided
between the business use, $330 (55% / 75%  $450) and the investment use, $120 (20% / 75%  $450)
OBJ: 7.6
test question.
16. For each of the following independent situations, indicate with a “Yes” if the asset is listed property.
Indicate with a “No” if the asset is not listed property.
a. Airplane used 25 percent for business ______

b. Fleet of cabs ______
c. A moving van ______
d. DVD player used 10 percent for business ______
e. A digital camera used 30 percent of the time to list eBay items ______
ANS:
a. Yes
b. No
c. No
d. Yes
e. Yes
OBJ: 7.6
17. Patrick purchased a used passenger automobile on June 1, 2013. He paid $17,000 for the automobile.
During 2013, he uses the automobile 80 percent of the time for business. Patrick wishes to claim the
maximum amount of depreciation possible.
a. Calculate Patrick’s depreciation expense on the automobile for 2013.

b. Calculate Patrick’s depreciation expense on the automobile for 2014, assuming the same 80
percent business use.
ANS:
a. $2,528, which is the lesser of ($3,160  80%) or $2,720, ($17,000  20%)  80%.
b. $4,080, which is the lesser of ($5,100 (maximum)  80%) or $4,352, ($17,000  32%  80%).
OBJ: 7.7
test question.
18. Shellie purchased a passenger automobile on March 2, 2013. She paid $14,000 for the automobile and
can support business use of 90 percent. Calculate the amount of depreciation on the automobile for 2013
using the accelerated MACRS method (if available), assuming Shellie does not make the election to
expense or claim bonus depreciation.
ANS:
$2,520 = $14,000  20% (from Table 2)  90% business use. The maximum annual depreciation for the
year under the luxury automobile limitations is $2,844 ($3,160  90%), which is more than the actual
depreciation expense; therefore, the limitation does not apply to the calculation of depreciation expense
for 2013.
OBJ: 7.7
19. Joyce purchased a passenger automobile on March 2, 2013. She paid $12,000 for the automobile and can
support business use of 90 percent. Calculate the amount of depreciation on the automobile for 2013
using the accelerated MACRS method (if available), assuming Joyce does not make the election to
expense or claim bonus depreciation.
ANS:
$2,160 = $12,000  20% (from Table 2)  90% business use. The maximum annual depreciation for the
year under the luxury automobile limitations is $2,844 ($3,160  90%), which is more than the actual
depreciation expense; therefore, the limitation does not apply to the calculation of depreciation expense
for 2013.
OBJ: 7.7
test question.
20. Scott purchases a small business from Lew on July 1, 2013. He paid the following amounts for the
business:
Land $100,000
Commercial building 200,000
Furniture and equipment 80,000
Going-concern value 50,000
Workforce in place 25,000
Total $455,000
a. How much of the $455,000 purchase price is for Section 197 intangible assets?
b. What amount can Scott deduct on his 2013 tax return as Section 197 intangible amortization?
ANS:
a. $75,000 = $50,000 + $25,000
b. $2,500 = $75,000 / 15 years  6 months / 12 months
OBJ: 7.8
21. Perry develops a successful advertising business that he subsequently sells to his competitor, Carl, for
$108,000. He retires in the same town where he has always lived and done business. Carl insists that
Perry sign a covenant not to compete. The advertising business has no tangible assets; Carl receives only
the name of the business, the client lists and whatever going-concern value there is. How should Carl
treat the $108,000 cost of the advertising business he purchased?
ANS:
Carl should amortize the $108,000 as a Section 197 intangible asset at $600 a month ($7,200 a year) over
15 years.
OBJ: 7.8
22. BOND Corporation is owned 25 percent by Brian, 30 percent by Orville, 20 percent by Nate, and 25
percent by Dart Corporation. Dart Corporation is owned 80 percent by Brian and 20 percent by Nate.
Brian and Orville are brothers. Answer each of the following questions about BOND Corporation under
the constructive ownership rules of Section 267:
a. What is Brian’s constructive ownership percentage for Section 267 purposes?

b. If Nate sells property to BOND Corporation for a $7,500 loss, what amount of that loss can be
recognized for tax purposes (before any annual limitations)?
ANS:
a. 75% = 25% + 30% + (80%  25%)
b. $7,500. Nate does not constructively own more than 50% of BOND Corporation
OBJ: 7.9
23. ABC Corporation is owned 30 percent by Andy, 30 percent by Barry, 20 percent by Charlie, and 20
percent by Uptown Corporation. Uptown Corporation is owned 90 percent by Charlie and 10 percent by
an unrelated party. Barry and Charlie are brothers. Answer each of the following questions about ABC
under the constructive ownership rules of Section 267:
a. What is Andy’s constructive ownership percentage under Section 267?

b. What is Barry’s constructive ownership percentage under Section 267?
c. What is Charlie’s constructive ownership percentage under Section 267?
d. If Andy sells property to ABC for a $6,000 loss, what amount of that loss can be recognized for
tax purposes (before any annual limitations)?
ANS:
a. 30%
b. 68% = 30% + 20% + (90%  20%)
c. 68% = 30% + 20% + (90%  20%)
d. $6,000. Andy does not constructively own more than 50% of ABC Corporation.
OBJ: 7.9
24. Bev is the sole owner of Bev & Associates, an accrual basis corporation. In 2013, Bev & Associates has
a bad year and Bev lends the corporation $50,000 to meet expenses. The corporation accrues interest
expense of $5,000 on the loan from Bev, but does not pay the interest to her in cash.
How much of the $5,000 in accrued interest expense can Bev & Associates deduct on its 2013 corporate
tax return? Explain.
ANS:
$0. Because Bev and Bev & Associates are related parties, the interest is not deductible until it has been
paid by Bev & Associates.
OBJ: 7.9
ESSAY
1. If a corporation has a short tax year, other than their first or last year of operation, explain how the
corporation calculates the tax for the short period.
ANS:
Corporations with a short tax year are required to annualize their taxable income in order to calculate tax
for the short period. The tax liability is calculated on the total annualized income and then prorated back
to the short period based on the number of months in the short period.
OBJ: 7.1
Income Tax Fundamentals 2014 Whittenburg 32nd Edition Test Bank, Chapters 1-5, 7-12
2. If a cash basis business owner pays 18 months of rent expense in advance during the last month of the tax
year, how is this treated on the tax return? What is the reason tax law requires this treatment?
ANS:
The cash basis business owner is not allowed to deduct advance payments of rent expense beyond
12 months on his or her tax return. The payments must be deducted on the accrual basis in the year to
which the rental payments relate. Tax law requires this treatment to prevent cash basis taxpayers from
making large prepayments of rental expense covering multiple tax years at year-end to reduce taxable
income.
OBJ: 7.2
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ANS: T OBJ: 7.2

ANS: T OBJ: 7.2

ANS: T OBJ: 7.2

ANS: T OBJ: 7.2

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7. All S corporations must use the accrual basis of accounting.

ANS: T OBJ: 7.3

9. Depreciation refers to the physical deterioration or loss of value of an asset.

11. If land declines in value, it may be depreciated for tax purposes.

ANS: T OBJ: 7.3

ANS: T OBJ: 7.4

ANS: T OBJ: 7.4

ANS: T OBJ: 7.4

ANS: T OBJ: 7.6

ANS: T OBJ: 7.6

ANS: T OBJ: 7.7

ANS: T OBJ: 7.8

1. Choose the incorrect statement.

Step 2: Tax on the annualized income 15% x $50,000 7,500

Step 3: Short period tax $10,000 x 7/12 $ 5,833

Gross receipts $30,000

What amount should Tom report as net earnings from self-employment?

Gross receipts $60,000

Cash basis revenue $54,000

23. Mark the correct answer. In calculating depreciation:

24. Mark the correct statement.

27. Taxpayers choosing the election to expense:

34. Which one of the following is a Section 197 intangible?

36. Section 197 intangibles:

37. Mark the correct answer. Section 197 intangibles:

Cash received from sales of products $85,000

Sales income $85,000

Rental income collected for Apts A-F $216,000

Operating expenses (except for interest) ________

Total net income ________

Operating expenses (except for interest) $ 24,000

Total net income $226,500

5. To be depreciated, must an asset actually lose value each year?

b. Commercial (nonresidential) ($600,000 x 2.564%) $15,384

a. Commercial (nonresidential) ($800,000  .963%) $ 7,704

b. Residential ($500,000 x 3.636%) $18,180

10. Calculate the following amounts:

OBJ: 7.4 | 7.7

OBJ: 7.4 | 7.8

a. $100,000 may be deducted under the election to expense

a. Airplane used 25 percent for business ______

a. Calculate Patrick’s depreciation expense on the automobile for 2013.

a. What is Brian’s constructive ownership percentage for Section 267 purposes?

a. What is Andy’s constructive ownership percentage under Section 267?

482 Chapter 7 – Accounting Periods and Methods and Depreciation

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