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CHAPTER 8
DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) Property that is classified as personal use property is not used in a trade or business or a
transaction entered into for profit and, hence, is not subject to cost recovery.
2. (LO 1) Personal property is any asset that is not real property. Personal use property is any property
(realty or personalty) that is held for personal use rather than for use in a trade or business or income-
producing activity.
3. (LO 1) Land improvements have a MACRS class life of 15 years.
4. (LO 2) The relevant issues for Henry:

• Can a portion of the purchase costs of a ski resort, which are allocated to the construction costs of
the resort’s mountain roads, trails, and slopes, be depreciated?
• If such costs can be depreciated, what is the correct recovery period?
• Can costs incurred subsequent to the purchase, attributable to maintenance of such mountain
roads, trails, and slopes, be depreciated?
5. (LO 2) The three factors the MACRS tables take into account are (1) recovery period, (2) method,
and (3) convention.
6. (LO 2) The asset is treated as if it were placed in service in the middle of the quarter. The factors in
the table take this into account; hence, the cost of the asset is multiplied by the factor to determine the
first year’s cost recovery.
7. (LO 2) The asset is treated as if it were sold in the middle of the quarter; hence, one-half quarter of
cost recovery is allowed in the quarter of the sale. If the sale is in the first quarter, the ratio is .5/4; in
the second quarter, 1.5/4; in the third quarter, 2.5/4; and in the fourth quarter, 3.5/4.
8. (LO 2) Even if MACRS straight-line is elected for the 7-year class assets, the cost recovery on the
5-year class assets is computed using regular MACRS with a mid-quarter convention unless a
separate election is made to use MACRS straight-line for the 5-year class assets (the mid-quarter
convention also applies to the 7-year class assets). With respect to the mid-quarter convention, the
assumption is made that Robert is a calendar year taxpayer.
9. (LO 2) The following issues are relevant for Jim.

• What is the cost of a self-produced animal for purposes of computing its cost recovery?
• What is the proper placed-in-service date relating to self-produced breeding animals?
8-1
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8-2 2016 Individual Income Taxes/Solutions Manual
10. (LO 3) Ordinary income recapture is required anytime property on which an expense has been taken
under § 179 is no longer used predominantly in a trade or business.
11. (LO 3) The basis of the property for cost recovery purposes is reduced by the § 179 amount [after it is
adjusted for property placed in service in excess of the appropriate acquisition limit ($2 million in
2015 and 2014)]. The business income limitation does not affect basis.
12. (LO 3) The § 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1)
the statutory dollar amount ($500,000 in 2015 and 2014) reduced by the cost of § 179 property placed
in service in excess of the appropriate acquisition limit in the carryforward year ($2,000,000 in 2015
and 2014) or (2) the business income limitation in the carryforward year.
13. (LO 3) For § 179 purposes, taxable income is defined as the aggregate amount of taxable income of
any trade or business of the taxpayer without regard to the amount expensed under § 179. Therefore,
the taxable income computation for purposes of the § 179 limit includes the deduction for additional
first-year depreciation and MACRS.
14. (LO 2, 3) The following issues are relevant to John.
• Is John entitled to a § 179 deduction?
• How much, if any, can John deduct under § 179 on his own tax return?
15. (LO 4) The cost of listed property that does not pass the more-than-50% business usage test must be
recovered using the straight-line method. If the listed property is an automobile, the cost recovery is
further limited by the cost recovery limitations.
16. (LO 4) The property is subject to cost recovery recapture, which is included in the taxpayer’s income
tax return as ordinary income. The amount of the inclusion is the excess cost recovery, which is the
excess of the cost recovery deduction taken in prior years using the statutory percentage method over
the amount that would have been allowed if the straight-line method had been used since the property
was placed in service.
17. (LO 7) The amortization period for a § 197 intangible is 15 years regardless of the actual useful life.
18. (LO 7) The following issues are relevant for Orange Motors.
• Does the noncompete agreement come under § 197 for intangibles?
• Was the noncompete agreement in connection with the acquisition of a trade or business?
• Can the cost of the noncompete agreement be amortized over a period other than the normal
statutory period if the noncompete agreement is legally enforceable for a shorter period of time?
• What is the normal statutory period for amortizing intangibles?
19. (LO 7) The following issues are relevant for George.
• Are all of the expenditures qualifying expenditures?

• Which of the expenditures must be capitalized?
• Which of the expenditures will qualify for amortization under § 195?
• What amount may be deducted under § 195 for 2015?
20. (LO 8) The cost basis is divided by the estimated recoverable units of the asset to arrive at the
depletion per unit. The depletion per unit then is multiplied by the number of units sold during the
year to arrive at the cost depletion allowed.
Depreciation, Cost Recovery, Amortization, and Depletion 8-3
COMPUTATIONAL EXERCISES
21. (LO 2) The IRS provides tables that specify cost recovery allowances for personalty and for realty. To
determine the amount of the cost recovery allowances, simply identify the asset by class and go to the
appropriate table for the percentage (or factor).
2015: $80,000 × .1429 = $11,432. 2016: $80,000 × .2449 = $19,592.
22. (LO 2) The mid-quarter convention applies if more than 40% of the value of property other than
eligible real estate is placed in service during the last quarter of the year. Hamlet acquired 100% of
assets in the last quarter of the year. Therefore mid-quarter convention applies.
2015: $100,000 × .0357 = $3,570
2016: $100,000 × .2755 = $27,550
23. (LO 2) The IRS provides tables that specify cost recovery allowances for personalty and for realty.
Under MACRS, the cost recovery period for residential rental real estate is 27.5 years, and the straight-
line method is used for computing the cost recovery allowance. Nonresidential real estate uses a
recovery period of 39 years; it also is depreciated using the straight-line method. Cost recovery is
computed by multiplying the applicable rate by the cost recovery basis.
a. Residential rental real estate: $1,000,000 × .03636 = $36,360.
b. Nonresidential rental real estate: $1,000,000 × .02564 = $25,640.
24. (LO 2) The IRS provides tables that specify cost recovery allowances for personalty and for realty.
The taxpayer may elect to use the straight-line method for depreciable personal property. The
property is depreciated using the class life (recovery period) of the asset with a half-year convention
or a mid-quarter convention, whichever applies. The election is available on a class-by-class and
year-by-year basis (see Concept Summary 8.3). The percentages for the straight-line election with a
half-year convention appear in Exhibit 8.6.
2015: $2,800 × .10 = $280.
2016: $2,800 × .20 = $560.
25. (LO 2) Additional first-year depreciation is taken in the year in which the qualifying property is
placed in service; it may be claimed in addition to the otherwise available depreciation deduction.
After the additional first-year depreciation is calculated, the standard MACRS cost recovery
allowance is calculated by multiplying the cost recovery basis (original cost recovery basis less
additional first-year depreciation) by the percentage that reflects the applicable cost recovery method
and convention. Because the asset was purchased during the last quarter of the year and is the only
asset purchased during the year, the, mid-quarter convention applies.
Diana’s $34,125 ($32,500 + $1,625) deduction is computed as follows.

50% additional first-year depreciation: ($65,000 × 50%) = $32,500.
MACRS cost recovery: ($65,000 − $32,500) × .05 = $1,625.
26. (LO 3) Assuming that Congress extends the 2014 amounts to 2015, § 179 permits the taxpayer to
elect to write off up to $500,000 of the acquisition cost of tangible personal property used in a trade
or business.
Two additional limitations apply to the amount deductible under § 179. First, the ceiling amount on
the deduction is reduced dollar for dollar when § 179 property placed in service during the taxable
year exceeds a maximum amount ($2 million). Second, the § 179 deduction cannot exceed the
taxpayer’s trade or business taxable income, computed without regard to the § 179 amount.
§ 179 deduction before adjustment $212,000
Less: Dollar limitation reduction ($212,000 < $2,000,000) (–0–)
Remaining § 179 deduction $212,000
§ 179 deduction allowed due to business income limitation $ 5,600
§ 179 deduction carryforward ($212,000 − $5,600) $206,400
27. (LO 4) The law places special limitations on cost recovery deductions for passenger automobiles. The
luxury auto limits are imposed before any percentage reduction for personal use. The cost recovery
limitations are maximum amounts. If the regular MACRS calculation produces a lesser amount of
cost recovery, the lesser amount is used.
Year MACRS Amount Recovery Limitation Deduction Allowed

2015 $5,040 $2,212 $2,212
($36,000 × .20 × 70%) ($3,160 × 70%)
2016 $8,064 $3,570 $3,570
($36,000 × .32 × 70%) ($5,100 × 70%)
28. (LO 7) Taxpayers can claim an amortization deduction on intangible assets called “amortizable § 197
intangibles.” The amount of the deduction is determined by amortizing the adjusted basis of such
intangibles ratably over a 15-year period beginning in the month in which the intangible is acquired.
The 2015 § 197 amortization deduction of $ $7,250 ($1,000 + $6,250) is computed as follows.
Patent: $60,000/15 years = $4,000 × 3/12 = $1,000.
Goodwill: $375,000/15 years × 3/12 = $6,250.
29. (LO 8) Cost depletion is determined using the adjusted basis of the asset. The basis is divided by the
estimated recoverable units of the asset (e.g., barrels and tons) to arrive at the depletion per unit. This
amount is then multiplied by the number of units sold (not the units produced) during the year to
arrive at the cost depletion allowed.
Parscale’s depletion per ton is $16 ($8,000,000 adjusted basis/500,000 estimated recoverable tons). If
75,000 tons are sold this year, the cost depletion is $1,200,000 ($16 depletion per ton × 75,000 tons
sold).
30. (LO 8) Percentage depletion (also referred to as statutory depletion) uses a specified percentage
provided by the Code. The percentage varies according to the type of mineral interest involved. The
rate is applied to the gross income from the property, but in no event may percentage depletion
exceed 50% of the taxable income from the property before the allowance for depletion.
Gross income $340,000
Less: Other expenses (229,000)
Taxable income before depletion $111,000
Depletion allowance $ 47,6001
1
[The lesser of $47,600 (14% × $340,000) or $55,500 (50% × $111,000)].
PROBLEMS
31. (LO 1, 2)
Cost of asset $200,000
Less: Greater of allowed and allowable cost recovery:
2013 $ 910
2014 7,272 (8,182)
Basis at the end of 2014 $191,818
Less: Cost recovery for 2015 ($200,000 × .03636 × .5/12) (303)
Basis on date of sale $ 191,515
Loss on sale of asset ($180,000 − $191,515) ($ 11,515)
32. (LO 1, 2) José’s basis for cost recovery is $300,000 because the basis of the house at the date of the
conversion from personal use to rental property ($300,000) is less than the $400,000 fair market
value. The cost recovery is $8,637 [$300,000 × .02879 (Exhibit 8.9)].
33. (LO 2) The office furniture qualifies for additional first-year depreciation. So part of the $130,000
cost can be deducted as additional first-year depreciation. The property is 7-year class property. Cost
recovery would be calculated as follows.
Additional first-year depreciation:
($130,000 × .50) $65,000
MACRS cost recovery:
[($130,000 − $65,000) × .1429 (Exhibit 8.4)] 9,289
Total cost recovery $74,289
34. (LO 2)
a. The mid-quarter convention must be used. The office machine is 7-year class property.
2014
Additional first-year depreciation
($75,000 × .50) $37,500
MACRS cost recovery
[($75,000 − $37,500) × .0357 (Exhibit 8.5)] 1,339
b. 2015
MACRS cost recovery [$37,500 × (.2755 × 2.5/4)] $6,457
35. (LO 2)
a. 2015
MACRS cost recovery ($200,000 × 20%) (Exhibit 8.4) $40,000
b. 2016
MACRS cost recovery [$200,000 × 32% (Exhibit 8.4) × 1/2] $32,000
36. (LO 2) The mid-quarter convention must be used because the cost of the computers acquired in the
fourth quarter exceeds 40% of the cost of all the personal property acquired during the year
($70,000/$150,000 = 47%).
Furniture (7-year class property)

MACRS cost recovery
[$40,000 × .1785 (Exhibit 8.5)] $ 7,140
Trucks (5-year class property)
MACRS cost recovery
[$40,000 × .15 (Exhibit 8.5)] 6,000
Computers (5-year class property)

MACRS cost recovery
[$70,000 × .05 (Exhibit 8.5)] 3,500
37. (LO 2)
a. The building was placed in service in October.
2015: $3,800,000 × .00535 (Exhibit 8.9) = $20,330
b. 2019: $3,800,000 × .02564 (Exhibit 8.9) × 6.5/12 = $52,776
38. (LO 2) The building meets the 80% gross receipts from dwelling units test. Therefore, it is classified
as residential real property. The building’s depreciable basis is $1,500,000 [$2,000,000 (cost) −
$500,000 (land)].
$1,500,000 × 2.576% (Exhibit 8.9) = $38,640
39. (LO 2)
2015: $10,800,000 × .01605 (Exhibit 8.9) = $173,340
2025: $10,800,000 × .02564 (Exhibit 8.9) = $276,912
40. (LO 2) The building’s depreciable basis is $1,300,000 [$1,600,000 (cost) − $300,000 (land)].
a. 2015: $1,300,000 × .0197 (Exhibit 8.9) = $25,610
b. 2021: $1,300,000 × .03636 (Exhibit 8.9) × 10.5/12 = $41,360
41. (LO 2) The 150% declining-balance method must be used under these circumstances with a 7-year
cost recovery period.
MACRS cost recovery ($150,000 × .1071) (Exhibit 8.7) $16,065
42. (LO 2) MACRS cost recovery (straight-line method)

[$80,000 × .05 (Exhibit 8.8)] $4,000
43. (LO 2, 3, 9)
a. 5-year class property
Immediate expense deduction under § 179 $200,000
7-year class property
Immediate expense deduction under § 179 300,000
($500,000 − $200,000)
MACRS cost recovery
[($400,000 − $300,000) × .1429] 14,290
Total deduction $514,290
b. 7-year class property

Immediate expense deduction under § 179 $400,000
5-year class property
Immediate expense deduction under § 179 100,000
[($200,000 − $100,000) × .20] 20,000
c. The deduction for the year would be $5,710 ($520,000 − $514,290) larger if § 179 expense
was first allocated to the 7-year class property (i.e., the longer lived asset). Therefore, she
should elect to expense the 7-year property (the furniture) first.
44. (LO 2, 3)
Section 179 limit $500,000
Cost recovery for 7-year class assets
[($600,000 − $500,000) × .1429] $14,290
Income limitation
Income before § 179 and cost recovery $250,000
Cost recovery ($95,000 + $14,290) (109,290)
Income before § 179 amount $140,710
Section 179 amount of $500,000 (limited to $140,710) 140,710

Total deduction with respect to the 7-year assets in 2015 $155,000
Section 179 carryforward ($500,000 − $140,710) $359,290
45. (LO 2, 3, 9)
2014:
Section 179 expense $500,000
[($550,000 − $500,000) × .50] 25,000
MACRS cost recovery
[($550,000 − $500,000 − $25,000) × .1429] 3,573
2015:
MACRS cost recovery
[($550,000 − $500,000 − $25,000) × .2449] $ 6,123
Total deduction $ 6,123
46. (LO 3, 4) Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

5191 Natorp Boulevard
Mason, OH 45040
December 20, 2015
Mr. Jabari Johnson
100 Morningside
Clinton, MS 39058
Dear Mr. Johnson:
I am responding to your inquiry concerning the amount of cost recovery you may deduct in the first
year of operation of a new taxi. If the automobile is purchased at the beginning of 2015 for $35,000,
the total cost recovery deductions in the first year will be $35,000 (via an expense election under
§ 179).
Because the car will be used as a taxi, it is not subject to the cost recovery limitations imposed on
passenger automobiles. This $35,000 cost recovery assumes that your income from your taxi business
before consideration of this cost recovery will be at least $35,000 and an election is made under § 179
to expense the maximum allowable amount.
If you need additional information or need clarification of our calculations, please contact me.
Sincerely yours,
John J. Jones, CPA
Partner
TAX FILE MEMORANDUM

December 20, 2015
FROM: John J. Jones
SUBJECT: Jabari Johnson: Calculations for cost recovery in year of acquisition
Facts. Jabari Johnson is considering purchasing an automobile at the beginning of 2015 to be used
100% as a taxi. The cost of the automobile is $35,000. Jabari wants to know the total recovery for the
year of acquisition of the car.
Calculations. Because the automobile will be used as a taxi, it is not subject to the cost recovery
limitations for passenger automobiles. Therefore, Jabari can elect § 179 expensing and expense the
entire cost of the automobile (which is less than the $500,000 maximum § 179 election amount). In
deducting the full § 179 amount of $35,000, the assumption is made that John’s income from the taxi
business before consideration of the § 179 expense will equal or exceed $35,000.
47. (LO 2, 4) Because the car is a used car, it is not eligible for additional first-year depreciation, if
available.
MACRS cost recovery:

Cost $25,000
Statutory percentage (mid-quarter convention) × 5%
Cost recovery but subject to the limitation $ 1,250
Recovery limit (limited to $3,160*) $ 1,250
Less: Personal usage (20% × $1,250) (250)
Cost recovery $ 1,000
*These cost recovery limits are indexed annually. The 2014 amounts are used.
48. (LO 4)
Deduction for 2014
Additional first-year depreciation ($20,000 × 50%) $10,000
MACRS cost recovery [($20,000 − $10,000) × 20%] 2,000
Limited to $11,160* ($3,160 + $8,000) $12,000
Deduction for 2015

($10,000 × .32) = $3,200 (limited to $5,100*) $3,200
So the deduction for 2014 is $11,160; for 2015, it is $3,200.

49. (LO 2, 3, 4)
Because the Escalade has a GVW rating in excess of 6,000 pounds, it is not a passenger automobile
and hence is not subject to the cost recovery limitations. However, because the vehicle is an SUV
with a GVW between 6,000 and 14,000 pounds, the § 179 expense amount is limited to $25,000.
The total MACRS deductions would be computed, including the first-year amount, as follows.
§ 179 expense $25,000

Additional first-year depreciation [($62,000 – $25,000) × 50%] 18,500
MACRS cost recovery [($62,000 − $25,000 – 18,500) × 20%] 3,700
50. (LO 2, 4)
Deduction for 2015
MACRS cost recovery ($20,000 × 20%) = $4,000
(limited to $3,160*) × 80% $2,528
Deduction for 2016

Straight-line ($20,000 × 20%) = $4,000 (limited to $5,100*) × 70% $2,800
Cost recovery recapture in 2016

2015 deduction $2,528
Straight-line ($20,000 × 10%) = $2,000
(limited to $3,160*) × 80% (1,600)
Excess $ 928
51. (LO 2, 4, 9)
100% business use
[$4,000 × 20% (Exhibit 8.4)] × 100% $800
45% business use
[($4,000 × 10%) (Exhibit 8.8)] × 45% (180)
Reduced cost recovery if personal use occurs $620
Tax cost ($620 × 28%) $174
52. (LO 2, 4, 9) Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

Mason, OH 45040
December 20, 2014
Mr. Dennis Harding
150 Avenue I
Memphis, TN 38112
Dear Mr. Harding:
I am writing in response to your request concerning the tax consequences of purchasing versus
leasing an automobile. Our calculations are based on the data you provided in our telephone
conversation.
If the automobile is purchased, the total cost recovery deductions for the five years will be $15,060. If
the automobile is leased, lease payment deductions will total $22,500. In addition, you also must
include $421 in your gross income.
If you need additional information or clarification of our calculations, please contact us.
Sincerely yours,
John J. Jones, CPA
Partner
TAX FILE MEMORANDUM

December 20, 2014
FROM: John J. Jones
SUBJECT: Dennis Harding: Calculation of lease versus purchase
Facts. Dennis Harding is considering purchasing or leasing an automobile on January 1, 2015. The
purchase price of the automobile is $48,500. The lease payments for five years would be $375 per
month. The inclusion dollar amounts for the next five years would be $28, $62, $93, $111, and $127.
Dennis wants to know the effect on his adjusted gross income for purchasing versus leasing the
automobile for five years.
Calculations
Purchase: Cost recovery deductions
2015 ($48,500 × 20%) = $9,700 (limited to $3,160*) $ 3,160
2016 [$48,500 × 32% (limited to $5,100*)] 5,100
2017 [$48,500 × 19.2% (limited to $3,050*)] 3,050
2018 [$48,500 × 11.52% (limited to $1,875*)] 1,875
2019 [$48,500 × 11.52% (limited to $1,875*)] 1,875
Total cost recovery deductions $15,060
Lease:
Lease payments ($375 × 60) $22,500
Inclusion dollar amounts ($28 + $62 + $93 + $111 + $127) $ 421
53. (LO 2, 5)
For regular income tax liability
MACRS cost recovery ($16,000 × .20) $3,200
For AMT liability
($16,000 × .15) $2,400
54. (LO 2, 5, 9)
MACRS:
Year 1 [$100,000 × 14.29% (Exhibit 8.4)] $14,290
Year 2 ($100,000 × 24.49%) 24,490
Year 3 ($100,000 × 17.49%) 17,490
ADS:
Year 1 [$100,000 × 10.71% (Exhibit 8.7)] $10,710
Year 2 ($100,000 × 19.13%) 19,130
Year 3 ($100,000 × 15.03%) 15,030
Total cost recovery (44,870)
Cost recovery lost by electing ADS $11,400
Tax cost of election ($11,400 × 28%) $ 3,192
55. (LO 2, 7, 9) Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

Mason, OH 45040
October 15, 2015
Mr. Mike Saxon

200 Rolling Hills Drive
Shavertown, PA 18708
Dear Mr. Saxon:
This letter is in response to your request concerning the tax consequences of allocating the purchase
price of a business between the two assets purchased: a warehouse and goodwill.
If the purchase price of $2,000,000 is allocated $1,200,000 to the warehouse and $800,000 to
goodwill, the total recovery in the first year of operations will be $82,865. Cost recovery on the
warehouse will be $29,532, and amortization of the goodwill will be $53,333. If the purchase price is
allocated $1,500,000 to the warehouse and $500,000 to goodwill, the total recovery in the first year of
operations will be $70,248. Cost recovery on the warehouse will be $36,915, and amortization of the
goodwill will be $33,333.
Therefore, under the first option, your deductions in the first year will be $12,617 greater ($82,865 −
$70,248). The building is written off over 39 years, whereas the goodwill is written off over 15 years.
Thus, the higher the allocation to goodwill, the faster the write-off. Should you need more
information or clarification of calculations, please contact us.
Sincerely yours,
John J. Jones, CPA

Partner
TAX FILE MEMORANDUM
October 15, 2015
FROM: John J. Jones
SUBJECT: Mike Saxon: Calculations of amount of recovery depending on the allocation of

purchase price between a warehouse and goodwill
Facts. Mike is negotiating the purchase of a business. The final purchase price ($2 million) has been
determined, but the allocation of the purchase price between a warehouse and goodwill is still subject
to discussion. Two alternatives are being considered. The first alternative allocates $1,200,000 to the
warehouse and $800,000 to goodwill. The second alternative allocates $1,500,000 to the warehouse
and $500,000 to goodwill. Mike wants to know the total recovery during the first year of operation
from each alternative.
Calculations
Alternative 1
Warehouse [$1,200,000 × 2.461% (Exhibit 8.9)] $29,532
Goodwill ($800,000/15 years) 53,333
Total recovery $82,865
Alternative 2
Warehouse [$1,500,000 × 2.461% (Exhibit 8.9)] $36,915
Goodwill ($500,000/15 years) 33,333
Total recovery $70,248
Additional deductions in first year under alternative 1

($82,865 − $70,248) $12,617
56. (LO 7)
Deductible amount [$5,000 − ($64,000 −$50,000)] $ –0–
Amortizable amount [($64,000/180) × 10 months] 3,556
Total deduction for startup expenditures $3,556
57. (LO 7)
Deductible amount [$5,000 − ($53,000 − $50,000)] $2,000
Amortizable amount {[($53,000* − $2,000)/180] × 6 months} 1,700
Total deduction for startup expenditures $3,700
*Startup expenses do not include interest expense.
58. (LO 8)
Gross income $12,000,000
Less: Expenses (5,000,000)
Taxable income before depletion $ 7,000,000
Cost depletion ($10,000,000/250,000 × 45,000) = $1,800,000
Percentage depletion (22% × $12,000,000 = $2,640,000, limited
to 50% × $7,000,000 = $3,500,000) (2,640,000)
Taxable income $ 4,360,000
59. (LO 8, 9)
Not expensed
Less: Expenses (1,240,000)
Taxable income before depletion $2,600,000
Cost depletion ($6* × 120,000) $720,000
Percentage depletion (15% × $3,840,000) $576,000
Greater of cost or percentage depletion (720,000)
Taxable income $1,880,000
Expensed
Less: Expenses, including IDC (2,240,000)
Taxable income before depletion $1,600,000
Cost depletion ($4** × 120,000) $480,000
Percentage depletion (15% × $3,840,000) $576,000
Greater of cost or percentage depletion (576,000)
Taxable income $1,024,000
*Oil interest cost plus IDC ($2,000,000 + $1,000,000) ÷ 500,000 = $6.
**Oil interest cost of $2,000,000 ÷ 500,000 = $4.
CUMULATIVE PROBLEMS
60. Net income from Writers Anonymous (Note 1) $ 17,500

Interest income 4,000
Self-employment tax deduction (Note 4) (1,237)
Adjusted gross income $ 20,263
Less: Itemized deductions (11,700)
Personal exemption (3,950)
Taxable income $ 4,613
Tax on $4,613 from 2014 Tax Table $ 463

Self-employment tax (Note 4) 2,473
Less: Estimated tax payments (3,000)
Net tax payable (or refund due) for 2014 ($ 64)
See the tax return solution beginning on p. 8-24 of this Solutions Manual.
Notes
(1) The net income of Writers Anonymous is calculated as follows.

Income from sales $85,000
Less: Rent $16,500
Utilities 7,900
Supplies 1,800
Insurance 5,000
Travel excluding meals ($3,500 − $1,200) 2,300
Meals ($1,200 − $600) 600
Depreciation and § 179 deduction (Note 3) 33,400 (67,500)
Income from business $17,500
(2) The itemized deductions include:
State income tax $ 3,000
Home mortgage interest 6,000
Property taxes on home 1,500
Charitable contributions 1,200
Total itemized deductions $11,700
(3) Furniture and fixtures:

§ 179 limited expensing $21,000
Cost recovery ($21,000 − $21,000) × .1429 –0– $21,000
Computer equipment:
§179 limited expensing $12,400
Cost recovery ($12,400 − $12,400) × .2000 –0– 12,400
All the assets acquired by Ms. Morgan can be expensed in 2014. If all assets cannot be expensed,
the § 179 limited expensing election would be allocated to the longest-lived assets first. In this
case, it would be first associated with the furniture and fixtures ($21,000) and then with the
computer equipment ($12,400). The furniture and fixtures have a 7-year recovery period,
whereas the computer equipment uses a 5-year recovery period.
(4) The self-employment tax is calculated as follows (see Chapter 13).
1. Net earnings from self-employment. $17,500

2. Multiply line 1 by 92.35%. 16,161
3. If the amount on line 2 is $117,000 or less,
multiply the line 2 amount by 15.3%. This is
the self-employment tax. $ 2,473
One-half of the self-employment tax, or $1,237, is a deduction for AGI.
61. Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

Mason, OH 45040
December 21, 2015
Mr. John Smith

1045 Center Street
Lindon, UT 84042
Dear Mr. Smith:
I am writing in response to your request concerning the effects on your 2015 adjusted gross income of
selling IBM stock and using some of the proceeds to purchase an automobile to be used in your
business.
If the stock was not sold and the car was not purchased, your adjusted gross income would be
$198,000. If the stock was sold and the car was purchased, your adjusted gross income would be
$201,840. The supporting calculations follow.
No sale of stock and no purchase of car
Fees for services $912,000

Less: Business expenses
Building rental $ 36,000
Office furniture and equipment rental 9,000
Office supplies 2,500
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Cost recovery (Note 3):
Front-end loaders 30,000
Dump truck 48,000
Total business expenses (233,500)
Business income before § 179 deduction $678,500
Less: § 179 deduction (Note 1) (500,000)
Business income $178,500
Dividend income 9,500
Adjusted gross income $198,000
Notes
(1) Section 179 deduction of $500,000.
(2) The inheritance of IBM stock worth $110,000 from Aunt Mildred is excludible under § 101.
(3) Cost recovery

Front-end loaders
[($550,000 − $500,000) × .50] $25,000
MACRS cost recovery
[($550,000 − $500,000 − $25,000) × .20] 5,000
Dump truck
($80,000 × .50) $40,000
MACRS cost recovery
[($80,000 − $40,000) × .20] 8,000
Sale of stock and purchase of car

Building rental $ 36,000
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Dump truck 48,000
Car 11,160
Gain on stock sale (Note 2) 15,000
Notes
John’s recognized gain on the sale of the IBM stock is $15,000 ($125,000 amount realized −
$110,000 adjusted basis) and is automatically classified as a long-term capital gain.
(3) Cost recovery
Front-end loaders
[($550,000 − $500,000) × .50] $25,000
MACRS cost recovery
[($550,000 − $500,000 − $25,000) × .20] 5,000
Dump truck
($80,000 × .50) $40,000
MACRS cost recovery
[($80,000 − $40,000) × .20] 8,000
Total $48,000
Car
($75,000 × .50) $37,500
MACRS cost recovery
[($75,000 − $37,500) × .20] 7,500
Total potential deduction $45,000
Limited to ($3,160* + $8,000) $11,160

*The cost recovery limits are indexed annually. The 2014 amounts are used.
Should you want more information or need us to clarify our calculations, please contact us.
Sincerely,
John J. Jones, CPA
Partner
TAX FILE MEMORANDUM
December 20, 2015
FROM: John J. Jones
SUBJECT: John Smith: Calculation of adjusted gross income for (1) no sale of stock or purchase
of car versus (2) sale of stock and purchase of car
Facts. John is considering selling inherited IBM stock with an adjusted basis to him of $110,000 for
$125,000 on December 29, 2015. He would use $75,000 of the proceeds to purchase a car that would
be used 100% for business. John wants to know the effect these transactions would have on his
adjusted gross income.
No sale of stock and no purchase of car
Building rental $36,000
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Dump truck 48,000

Notes
(3) Cost recovery
Front-end loaders
[($550,000 – $500,000) × .50] $25,000
MACRS cost recovery
[($550,000 − $500,000 − $25,000) × .20] 5,000
Dump truck
($80,000 × .50) $40,000
MACRS cost recovery
[($80,000 − $40,000) × .20] 8,000
Sale of stock and purchase of car
Building rental $36,000
Utilities 4,000
Salaries ($34,000 + $42,000) 76,000
Payroll taxes 7,000
Fuel and oil 21,000
Dump truck 48,000
Car 11,160
Gain on stock sale (Note 2) 15,000
Notes
John’s recognized gain on the sale of the IBM stock is $15,000 ($125,000 amount realized −
$110,000 adjusted basis) and is automatically classified as a long-term capital gain.
(3) Cost recovery
Front-end loaders
[($550,000 − $500,000) × .50] $25,000
MACRS cost recovery
[($550,000 − $500,000 − $25,000) × .20] 5,000
Dump truck
($80,000 × .50) $40,000
MACRS cost recovery
[($80,000 − $40,000) × .20] 8,000
Total $48,000
Car
($75,000 × .50) $37,500
MACRS cost recovery
[($75,000 − $37,500) × .20] 7,500
Total potential deduction $45,000
Limited to ($3,160* + $8,000) $11,160
*The cost recovery limits are indexed annually. The 2014 amounts are used.
RESEARCH PROBLEMS
1. CLIENT LETTER
Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

Mason, OH 45040
April 1, 2016
Ms. Cassandra Martin, CFO

Dave’s Sport Shop
867 Broadway
New York, NY 10003
Dear Ms. Martin:

This letter is in response to your request to provide Dave’s Sport Shop with tax advice regarding the
tax treatment of the inventory management software purchased in 2015.
Generally, tax law provides that the cost of off-the-shelf software is recovered over 36 months, which
would mean that the full cost of the software could not be deducted in the year of purchase. However,
software is eligible for IRC Sec. 179 expensing. In 2015, this provision allows for up to $500,000 of
the cost of property other than real estate placed in service in the year to be immediately expensed. As
long as Dave’s Sport Shop has not exceeded this limit with other property acquired in 2015 and
expensed under Sec. 179, the full cost of the software can be deducted under the provisions of
Sec. 179.
If we can be of assistance in helping you to maximize your cost recovery deductions, please let me
know.
Sincerely,
Gayle B. Anders, CPA

Partner
TAX FILE MEMORANDUM
DATE: March 30, 2015
FROM: Gayle B. Anders
SUBJECT: Amortization of software costs

Cassandra Martin, CFO of Dave’s Sport Shop, has requested that we provide tax advice regarding the
immediate deduction of the cost of inventory management software purchased in the 2015 tax year.
Per IRC Sec. 167(a), off-the-shelf software that has not been substantially modified is amortized
over 36 months. (Note that software acquired as part of the purchase of a trade or business is an
IRC Sec. 197 intangible, subject to 15 year amortization. The client has not indicated that the
software was acquired as a part of the acquisition of a business.)
However, software is eligible for IRC Sec. 179 expensing as well as additional first year depreciation.
As long as Dave’s has not exceeded the maximum Sec. 179 limit in 2015 ($500,000) with other
property acquired, the full cost of the software can be deducted in 2015. I did not mention the
additional first year depreciation provisions to the client. If acquisitions qualifying for Sec. 179
exceed $500,000 for the year, we should contact the client to make her aware of this additional
benefit.
I have notified Cassandra Martin of the amortization and Sec. 179 provisions.
2. The facts of the case are similar to Chief Counsel Advice Memorandum 201234024, May 9, 2012. In
the memorandum, it was determined that a vineyard constituted § 179 property. Hence, taxpayers
were entitled to elect to expense the costs incurred when the vineyard was planted on the current
year’s income tax return. Therefore, Jed should be able to deduct the costs incurred in planting the
vineyard in 2011 on his 2015 income tax return. This is assuming that all of the other requirements
under Section 179 have been satisfied.
3. The facts of the case are similar to Bruce Selig, 70 TCM 1125, T.C. Memo. 1995–519. In this case,
the court ruled that a deduction was allowable. The Court found that over time, the exotic
automobiles would, because of those exotic features, become obsolete in the petitioner’s business.
The fact that petitioner failed to show the useful lives of the automobiles was irrelevant to the
decision.
Research Problems 4 and 5
The Internet Activity research problems require that students utilize online resources to research and answer
the questions. As a result, solutions may vary among students and courses. You should determine the skill and
experience levels of the students before assigning these problems, coaching where necessary. Encourage
students to explore all parts of the Web in this research process, including tax research databases, as well as
the websites of the IRS, newspapers, magazines, businesses, tax professionals, other government agencies,
and political outlets. Students should also work with resources such as blogs, Twitter feeds, and other
interest-oriented technologies to research their answers.
4. Market Watch provides such a calculator: www.marketwatch.com/tools/carleaseorbuy. Edmunds.com

also provides a helpful discussion of the costs and benefits of leasing versus buying:
www.edmunds.com/car-buying/should-you-lease-or-buy-your-car.html.
5. In a November 2013, tax reform proposal released by Max Baucus (formerly a senator from Montana
and the Chair of the Senate Finance Committee), a change to the current system of depreciation was
proposed. In theory, this change would generate additional tax revenue that would allow the corporate
tax rate to be lowered. Search on www.finance.senate.gov to find this proposal.
CHECK FIGURES
21. $11,432; $19,592. 43.a. $514,290.

22. $3,570; $27,550. 43.b. $520,000.
23. $36,360; $25,640. 44. Cost recovery $155,000; § 179
24. $280; $560. carryforward $359,290.
25. $34,125. 45. 2014: $528,573; 2015: $6,123.
26. $5,600; $206,400. 46. $35,000.
27. $2,212; $3,570. 47. $1,000.
28. $7,250. 48. $11,160 in 2014; $3,200 in 2015.
29. $1,200,000. 49. $47,200.
30. $47,600. 50. Deduction in 2015 $2,528; deduction in
31. Loss $11,515. 2016 $2,800; recapture in 2016 $928.
32. $300,000 basis; $8,637 cost recovery. 51. $174.
33. $74,289. 53. Regular tax deduction $3,200; AMT
34.a. $38,839. deduction $2,400.
34.b. $6,457. 54. $3,192.
35.a. $40,000. 55. The first option produces a $12,617
35.b. $32,000. greater deduction.
36. $16,640. 56. $3,556.
37.a. $20,330. 57. $3,700.
37.b. $52,776. 58. $4,360,000 taxable income.
38. $38,640. 59. Capitalized $1,880,000; expensed
39. 2015: $173,340; 2025: $276,912. $1,024,000.
40.a. $25,610. 60. Refund for 2014 $64.
40.b. $41,360. 61. AGI without purchase $198,000; AGI
41. $16,065. with stock sale and car purchase $201,840.
42. $4,000.
SOLUTION TO ETHICS & EQUITY FEATURE
Section 179 Limitation (p. 8-13). Joe can expense $25,000 of the cost of the truck under §179. The income
limitation is the aggregate amount of taxable income derived from the conduct of any trade or business.
Although Joe reported a net operating loss from one business, the sale of his other business had a profit of
$300,000. Therefore, taxable income is not a limitation.
SOLUTIONS TO ROGER CPA REVIEW QUESTIONS
Detailed answer feedback for Roger CPA Review questions is available on the instructor companion site
(www.cengage.com/login).
1. a 4. b
2. c 5. d
3. b
60.
60. continued
60. continued
60. continued
60. continued
60. continued
60. continued
NOTES
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Customs revenue, which was returned for 1901 at more than one
million and a quarter yen (1,325,414 yen; £135,303 sterling at
exchange of 2s. 0½d.), and the proceeds of the various concessions,
monopolies, mines, and mint, and the sums derived from such
miscellaneous and irregular taxation as may suggest itself to that
keen-witted Minister Yi Yong-ik.
Taxation is heavy and relentless. The list of the more important
objects, upon which an impost is levied, includes, in addition to the
land, customs and house taxes, salt, tobacco, fish, fur, lumber lands,
minerals, ginseng, minting, cargo-boats, guilds, licences, paper,
cowhides, pawnbroking, &c. In more recent times certain taxes have
become obsolete. But this list, however, does not by any means
exhaust the means by which the Emperor contrives to make his
subjects “pay the piper.” Quite subsidiary to the regular cases, but of
great value in themselves, are the donations which are sent up from
various parts of the country for the gratification of the Throne. These
gifts are very comprehensive, and embrace the fruits of the land as
well as the products of the sea. Little escapes the schedule of
donations, and no intervention can bring about the discontinuation of
the custom, while a failure on the part of a prefect to attend to this
matter would result speedily enough in the loss of his office.
The Budget for the year 1901 was assessed at nine million yen
odd, of which one million yen odd was dedicated to Imperial
expenditure, and a trifle more than this sum paid to the Imperial Privy
Purse. The estimated difference between the revenue and the
expenditure of the same year was the small sum of 775 dollars. The
Budget for 1902 provided for seven and a half million yen; the
estimated revenue was placed approximately at the same figures,
the balance between expenditure and revenue being 653 yen. It will
be seen, therefore, that there is little reason for the financial
difficulties in which the Throne is placed. If it were not that his
Majesty frittered away his income upon the purchase of land, the
adornment of his Palaces and his person, his relatives, his women,
and the perpetual entertainment of his Court, this chronic
impoverishment of his exchequer would not exist. Moreover, at least
one quarter of his revenue is appropriated by the native officials
through whose hands it passes. Under these circumstances he has
never been averse from accepting the assistance of interested
parties; but this ill-omened relief does not free the country from its
burden of mortgage and taxation.
The disbursements upon the different departments engage the
revenue to a degree which is out of all relation to the precise utility or
importance of any of these fantastic bureaux. The War Office
claimed in 1901, in round figures, more than three and one half
million yen, and the Foreign Office a quarter of a million yen, the
Finance Department three-quarters of a million yen, the Palace a
little more than one million yen, and the Home Department a little
less than that amount. One million yen is roughly £100,000. The
amount paid to the War Office for 1902 was, in round figures, very
nearly three million yen; to the Foreign Office, something in excess
of a quarter of a million yen; to the Finance Department, rather more
than half a million yen. The Departments of Law, Agriculture, Police,
Education, and Communications in this highly expensive and totally
inefficient administration, all make good their claims upon the
Budget, until there is nothing left and very little to show for this lavish
distribution of the public moneys.
The Budget for 1903 I give in detail:—
The total revenue is estimated at $10,766,115. The total
expenditure is estimated at $10,765,491. This leaves a balance of
$624.
REVENUE
Land Tax $7,603,020
House Tax 460,295
Miscellaneous 210,000
Balance from 1902 (including surplus from loan) 1,142,800
Customs Duties 850,000
Various Imposts 150,000
Mint 350,000
10,766,115
EXPENDITURE
The Emperor’s private purse $817,361
Sacrifices 186,639
1,004,000
The Imperial Household
Railway Bureau $21,980
Palace Police 118,645
Police in Open Ports 69,917
North-west Railway 22,882
Ceremonial Bureau 17,608
Mining Bureau 10,000
261,022
The Old Man Bureau 24,026
Bureau of Generals 65,853
The Cabinet 38,730
The Home Department
Office 34,624
Mayor’s Office 6,144
Provincial Governments 91,862
Prefectural Governments, 2nd class 52,674
Quelpart 4,222
Prefectures 778,325
Imperial Hospital 7,632
Vaccination Bureau 3,354
Travelling Expenses 730
Prefectural Sacrifices 866
980,533
The Foreign Department
Office 26,024
Superintendents of Trade 51,154
Foreign Representatives 201,020
278,198
The Finance Department
Office 53,910
Tax Collectors 141,600
Mint 280,000
Payment on Debt 989,250
Pensions 1,956
Transportation 200,000
1,666,716
War Department
Office 50,651
Soldiers 4,072,931
4,123,582
Law Department
Office 31,603
Supreme Court 15,686
Mayoralty Court 8,162
Prefectural Courts 1,251
56,702
Police Bureau
Office 252,857
Seoul Prison 32,650
Policemen 51,462
Border Police, &c. 23,762
Travelling Expense, &c. 600
361,331
Educational Department
Office 24,822
Calendar 6,022
Schools in Seoul 89,969
Schools in Country 22,580
Subsidies for Private Schools 5,430
Students Abroad 15,920
164,943
Agricultural Department
Office 38,060
General Expense 8,240
46,300
Council
Office 18,580
Imperial Body-Guard
Office 58,099
Bureau of Decorations
Office 20,993
Telegraph and Post
Office 23,640
General Expense 438,295
461,935
Bureau of Surveys
Office 21,018
Surveys 50,000
71,018
Incidentals
Road and other Repairs 35,000
Repairs in Country 10,000
Arrest of Robbers 500
Relief Work 5,000
Burial of Destitute 300
Miscellaneous 480
Police at Mines, &c. 1,840
Shrinkage 3,120
56,240
Emergency Fund 1,015,000
Steps have been taken from time to time by the Foreign
Representatives to improve the finances of the country. Upon one
occasion seven reforms were recommended, and the report
subsequently presented to his Majesty. In the course of an inquiry it
transpired that, in addition to nickels which were minted by the
Government, there were more than twenty-five separate and distinct
brands of nickels then circulating in Korea. Until recent years the
counterfeiting of Korean currency has not been remunerative. The
old time cash was of such small value, and the combined cost of the
metal and work together so nearly equalled the face value of the true
token, that the risk was not commensurate with the profit. A single
nickel of the present currency, however, is equivalent to twenty-five
of the old coinage, and as the net cost of their manufacture is less
than a cent and a half a-piece, it will be seen that there is some
incentive to the production of false money. The number of counterfeit
nickels is rapidly increasing, and permits to coin were at one time
freely issued by the Government to private individuals. Nickel is
openly imported through the Customs; spurious coins in large
quantities are brought by almost every steamer from Japan and
smuggled into the country. The Government care only for the profit
which they derive from their illegitimate transaction, and, ignoring the
permanent injury which they are doing to the solvency of the country,
adopt every means to circulate these depreciated coins. Until quite
lately the circulation of nickel pieces was confined to the capital and
the vicinity of two or three Treaty ports, the old copper cash being
current elsewhere. With a view to extending their use, however, the
magistrates throughout the Empire were ordered to accept
redemption of taxes only in this currency. But as wages are generally
paid in the nickel currency, and as the purchasing power of the nickel
Korean dollar is less than half it was with copper cash, while the
standard of payment remains the same, the bulk of the nation is paid
no better than formerly, while the purchasing power of their earnings
is infinitely less. There appears no prospect of any immediate
improvement, since the Government contracted for the issue of a
further forty million nickels. With this accomplished, the face value of
the coinage in circulation, as against the Japanese gold yen, will be
fourteen million yen, or nearly one million and a half pounds sterling.
There is, of course, no gold or silver reserve with which to redeem
this gigantic sum.
To such a pitch has this condition of affairs attained that in
Chemulpo quotations are current for:—
(1) Government nickels;

(2) First-class counterfeits;
(3) Medium counterfeits; and
(4) Those passable only after dark.
There is little wonder, therefore, that the currency question is

engaging the earnest attention of the foreign representatives.
Awakening at last to some sense of its responsibilities in this matter,
the Japanese Government issued, on November 7th, 1902, an
Imperial ordinance, which came into force on the 15th, with a view to
deterring Japanese from making spurious coins or despatching such
nickels of Japanese manufacture to Korea. The punishment to which
offenders against the ordinance are liable is imprisonment for a
period not exceeding one year or a fine of not more than 200 yen
(£20 8s. 4d.). This enactment gave the Japanese customs officers
power to prevent the counterfeit coins from being shipped abroad,
and enabled the Korean customs authorities to institute proceedings
against Japanese found guilty of importing nickels of this description.
From January 22nd, 1902, when the first seizure of the year took
place, until the close of December, 3,573,138 pieces (coins and
blanks), the total face value being £18,191, were confiscated by the
Chemulpo customs officers. The largest quantity taken at one time
was 739,000 pieces, face value £3772, detected on August 19th
aboard a Korean junk, the second largest haul was made on
September 8th in a cargo-boat, and consisted of 530,090 pieces,
with a face value of £2512.
With a view to provide a remedy against the deplorable condition
of the Korean currency, a Japanese Bank, Dai Ichi Ginko (No. I.
Bank), which is under direction of Baron Shibusawa, decided, with
the support of the Japanese Government, to undertake the issue of
notes by which a promise was made to pay the bearer on demand in
Japanese currency at any of its branches in Korea. The Dai Ichi
Ginko possesses branches at all the larger Treaty ports, as well as in
Seoul, and is, perhaps, the most important commercial agent in the
country. The Japanese Consular officers are authorised to supervise
the issue and to receive statements of the circulation and reserves
twice a month. They are also entrusted with certain discretionary
powers as to limiting the number of notes in use. The denomination
of the notes are 1 yen (2s. 0½d.), 5 yen (10s. 2½d.), 10 yen (£1 0s.
5d.), and on May 10th, 1902, there appeared the first issue of notes
of 1 yen value. Those of 5 yen were put in circulation on September
20th following. The 10 yen notes were not issued until a later time.
On February 28th, 1903, the circulation of Dai Ichi Ginko notes
and the reserves held for their redemption stood as follows:
Amount.
Branch. In circulation. Reserves.
Chemulpo 18,927 18,927
Fusan 24,568 19,701
Seoul 1,894 1,894
Mok-po 14,406 12,250
Total 59,795 52,772
This action upon the part of the Dai Ichi Ginko gave rise to
vehement opposition from the Korean Government. Although the
issue of the notes was duly authorised by the Emperor, the Minister
of Foreign Affairs persistently obstructed the circulation of the notes.
Upon September 11th, 1902, an order was issued from the Foreign
Office, upon the authority of the Acting Minister of Foreign Affairs,
prohibiting the use of the notes by Koreans upon grounds which
impugned the credit of the entire proceeding. This order was
inspired, of course, by Yi Yong-ik, and when a few months later, on
January 8th, 1903, Cho Pyöng-sik—then Foreign Minister—removed
the prohibition, Yi Yong-ik at once contrived the dismissal of his too
complaisant colleague. The Foreign Office was now without its
Chancellor, and Yi Yong-ik immediately set himself to revoke the
charter of the bank. After declaring that the Japanese paper-money
would be the ruin of the country and alleging that the compensation
claims against the Seoul-Fusan Railway Company were purposely
paid in those notes with a view to an ultimate declaration of
bankruptcy upon behalf of the bank, Yi Yong-ik summoned on
January 24th a meeting of the Pedlar’s Guild, at which he forbade
their acceptance of this paper-money. A few days later, February 1st,
the Mayor of Seoul posted an edict throughout the city giving effect
to this prohibition and, at the same time, threatening with most
severe penalties any one who used the notes or in any way assisted
to circulate them. The Finance Department then circulated the edict
throughout the provinces, whereupon an immediate run upon the
bank ensued. Three days later, upon February 4th, the Acting
Japanese Minister threatened the Government with the demand of
an indemnity and a number of mining and railway concessions in
compensation for the injury occasioned the bank, unless the
obnoxious measure was withdrawn. After considerable discussion
and various meetings, the Korean authorities agreed to withdraw all
obstruction and to publish throughout the Empire their recognition of
the existence of the bank. From that day the validity of the position of
the Dai Ichi Ginko has been unquestioned.
The exactions and dishonesty of the officials impose a perpetual
drain upon the national exchequer. In the removal of this one great
evil, another serious obstacle to a more flourishing financial condition
would be surmounted. Unfortunately, the drought and famine of
1901, added to the decrease in the revenues of 1902, created a
discrepancy of five million yen. If this deficit may be considered
extraordinary, no extenuating circumstances can excuse the
supplementary losses of revenue attributable to the personal
peculations of the officials. The stringency of the financial situation
created by the famine drew attention to the very large deficits, with
which many of the more important metropolitan and chief provincial
officials were debited. The inability of any of these gentry to disgorge
their ill-gotten gains resulted in their immediate prosecution at the
instigation of the Finance Minister, Yi Yong-ik. Ministers of State,
governors of provinces, prefects and inspectors were brought
sharply to account by the execution, banishment, or imprisonment of
many offenders.
In such a moment the peculiar astuteness of Yi Yong-ik becomes
conspicuous. While he visited any official who was compromised
with the full penalties of the law, he himself executed, in his capacity
of Minister of Finance, a bluff by which he netted almost half a million
yen for the Imperial Treasury at one stroke. Yi Yong-ik arranged to
buy the ginseng crop from the ginseng farmers. This is a
Government monopoly, and the price was arranged at eight dollars a
pound for sixty-three thousand pounds’ weight, dried and undried.
When the time came to pay, and he had secured possession of the
ginseng, Yi Yong-ik refused to give more than one dollar a pound,
alleging that the ginseng growers had misrepresented the condition
and weight of the consignment. In the meantime the ginseng was
sold; the money was appropriated, and the balance in the Treasury
correspondingly increased.
Upon another occasion, at a time when the discount of nickel
against yen gold was very low, Yi Yong-ik was instrumental in
promoting the presentation of a gift of two million dollars Korean to
the Emperor. By careful adjustment the value of the exchange, nickel
currency as against yen gold, hardened twenty points the day after
the presentation. It is, perhaps, unnecessary to point out that Yi
Yong-ik occupied the interval in disposing of the difference to the
advantage of his master.
A SEOUL GATE.
CHAPTER IX
Education—Arts and graces—Penal code—Marriage and divorce—The rights of
concubines—Position of children—Government
Until the introduction of foreign methods of education, and the

establishment of schools upon modern lines, no very promising
manifestation of intellect distinguished the Koreans. Even now, a
vague knowledge of the Chinese classics, which, in rare instances
only can be considered a familiar acquaintanceship, sums up the
acquirements of the cultured classes. The upper classes of both
sexes make some pretence of understanding the literature and
language of China; but it is very seldom that the middle classes are
able to read more than the mixed Chinese-Korean script of the
native Press—in which the grammatical construction is purely
Korean.
Despite the prevailing ignorance of Chinese, the Mandarin dialect
of China is considered the language of polite society. It is the
medium of official communication at the Court: the majority of the
foreigners in the service of the Government have also mastered its
intricacies. It has been estimated by Professor Homer B. Hulbert,
whose elaborate researches in Korean and Chinese philology make
him a distinguished authority, that only one per cent. of the women of
the upper class, who study Chinese, have any practical knowledge
of it. Women of the middle and lower classes are ignorant of
Chinese. Again, the proportion of upper class women who can read
the Chinese classics is very small. It is probable that, out of an
unselected assembly of Koreans, not more than five per cent. would
be found who could take up a Chinese work and read it as glibly as a
similar gathering of English might be expected to read ordinary Latin
prose.
In relation to the ön-mun, the common script of Korea, there is,
however, no such ignorance; the upper and middle classes study
their native writing with much intelligence. The language of Korea is
altogether different from that of China and Japan; it possesses an
alphabet of its own, which at present consists of some twenty-five
letters. It has been ascribed by certain Korean annals to the fifteenth
century, a.d. 1447, when the King of Korea, resolving to assert his
independence by abandoning the use of Chinese writing as the
official medium of correspondence, invented an alphabet to suit the
special requirements of the vernacular. Conservatism proved too
strong, however, and the new script was gradually relegated to the
use of the lower classes, and of women and children. There is an
extensive literature in the vernacular. It includes translations from the
Chinese and Japanese classics; historical works on modern and
mediæval Korea, books of travel and hunting, of poetry and
correspondence, and a range of fiction, dealing with those phases of
human nature that are common to mankind.
Many of these books are regularly studied by Korean women,
ignorance of their contents being regarded with disdain by the
women of the upper classes, and, in a less pronounced degree, by
those of the middle classes. The female attendants in the Palace are
the readiest students and scholars of the vernacular, their positions
at Court requiring them to prepare ön-mun copies of Government
orders, current news, and general gossip, for Imperial use. Books in
native script are readily purchased by all conditions of Koreans, and
taken out from circulating libraries. Many of the works are written in
Chinese and in Korean upon alternate pages for those who can read
only one or the other; those who are quite illiterate learning the more
important chapters by ear. A work, with which every woman is
supposed to be intimate, is entitled The Three Principles of Conduct,
the great divisions being (1) The Treatment of Parents; (2) The
Rearing of a Family; (3) Housekeeping. Companion books with this
volume, and of equal importance to Korean women, are the Five
Rules of Conduct and the Five Volumes of Primary Literature, which,
in spirit and contents, are almost identical. They deal with the
relations between (1) Parent and Child; (2) King and Subject; (3)
Husband and Wife; (4) Old and Young; (5) Friend and Friend. They
contain also exhortations to virtue and learning.
Apart from the direction and scope of female education in Korea,
which I have now suggested, the theoretical study of the domestic
arts is an invariable accompaniment of the more intricate studies. It
is supplemented with much actual experiment. As a consequence,
while the education of men of certain rank is confined to the books to
which they are but indifferently attentive, a wide range of study exists
for women apart from the writings and teachings of the accepted
professors and classical authorities. Ornamental elegances, the
tricks and traits of our drawing-room minxes, are ignored by the
gentler classes, vocal music and dancing being the
accomplishments of dancing-girls and demi-mondaines. The arts of
embroidery, dressmaking, sewing, and weaving absorb their
attention until they have gone through the gamut of domestic
economy. Occasionally women of the upper class learn to play the
kumungo, an instrument some five feet long and one foot wide,
bearing a faint resemblance to a zither and emitting a melancholy
and discordant wail. There is one other stringed weapon, the
nageum, but the awful screech of this unhappy viol overwhelms me,
even in recollection. The usual and most simple amusement for the
middle classes is the gentle, aimless stroll, for the purpose of “look
see.” Swinging, rope-games, dice, dominoes, and dolls find some
favour as distractions.
If some little improvement has become noticeable in educational
matters under the enlightening influence of the missionaries, great
fault must be found with the condition of the law. It is, of course, not
always possible to graft upon the legal procedure of one country a
system of administration which works well in another. Specific
outbursts of violence, arising from identical causes, assume different
complexions when considered from the point of view of those who
are proceeding to institute reforms. It may be submitted, further, that
a certain element of barbarism in punishment is rendered necessary
by the conditions of some countries, imposing a restraint upon a
population which would scoff at punishment of a more civilised
description. If exception may be taken to the penal code of Korea, it
must be remembered that in the Far East the quality of justice is not
tempered with mercy. Many punishments are still openly and frankly
barbarous, while others are distinguished by their exceptional
severity. Death by decapitation, mutilation, strangulation, or poison is
now less frequent than formerly.
Until within quite recent years it was the custom of Korean law to
make the family of the arch-criminal suffer all his penalties with him.
They are now exempted, and with the reforms introduced during the
movement in 1895, some attempt was made to abolish practices
opposed to the spirit of progress. The table, which I append, shows
the punishments dispensed for certain crimes.
Treason, Man Decapitated, together with male relatives to

the fifth degree. Mother, wife, and daughter
poisoned or reduced to slavery.
Treason, Woman Poisoned.
Murder, Man Decapitated. Wife poisoned.
Murder, Woman Strangled or poisoned.
Arson, Man Strangled or poisoned. Wife poisoned.
Arson, Woman Poisoned.
Theft, Man Strangled, decapitated, or banished. Wife
reduced to slavery, confiscation of all
property.
Desecration of graves Decapitated, together with male relatives to
the fifth degree. Mother, wife, and daughter
poisoned.
Counterfeiting Strangulation or decapitation. Wife
poisoned.
Under the Korean law, no wife can obtain a legal dissolution of her
marriage. The privilege of divorce rests with the man; among the
upper classes it is uncommon. The wife, however, may leave her
husband and accept the protection of some relative, when, unless
the husband can disprove her charges, he has no redress. Should
the wife fail to establish her case against her husband, the cost of
the marriage ceremony, a large sum usually, is refunded by her
relatives. The law does not force a wife to cohabit with her husband;
nor, so far as it affects the woman, does it take any cognisance of
the matter. A man may divorce his wife, retaining the custody of the
children in every case, upon statutory grounds, and upon the
following additional counts: indolence, neglect of the prescribed
sacrifices, theft, and shrewishness. There is no appeal against the
charges of the husband for women of the upper classes, domestic
disturbances being considered entirely reprehensible. Much greater
latitude prevails among the lower orders, irregular unions of a most
benign elasticity being preferred. Concubinage is a recognised
institution, and one in which the lower, as well as the higher, classes
indulge.
JUSTICE IS NOT TEMPERED WITH MERCY
The rights of the children of concubines vary according to the

moral laxity of the class in which they are born. Among the upper
classes they possess no claim against the estate of their progenitors;
entail ignores them, and they may not observe the family sacrifices.
In the absence of legitimate issue, a son must be adopted for the
purpose of inheriting the properties of the family and of attending to
the ancestral and funeral rites. Great stress is laid by the upper
classes upon purity of descent; among the middle and lower orders
there is more indulgence. Save in the lowest classes, it is usual to
maintain a separate establishment for each concubine. The fact that
among the lower classes concubine and wife share the same house
is responsible for much of the unhappiness of Korean family life. In
every case the position of the children of concubines corresponds
with the status of the mother.
Within recent years, considerable changes have taken place in the
Government and in the administration of the law. Under the old
system the despotic thesis of divine right was associated with many
abuses. Justice was not tempered by mercy, and, in the suppression
of crime, it was not always the guilty who suffered. The old system of
government was modelled upon the principles of the Ming rule in
China. The power of the sovereign was absolute in theory and in
practice. He was assisted by the three principal officers of State and
six administrative boards, to whom, so soon as the country was
brought into contact with foreign nations, additional bureaux were
added. Modifications in the spirit, or in the letter of the law have
taken place from time to time at the instance of reformers. Before the
ascendency of the Japanese came about, the principles and
character of Korean law presented no very marked deviation from
that which had been upheld in China through so many centuries. For
a long time the intense conservatism of China reigned in Korea. The
authority of the sovereign is more restricted to-day; but in the hands
of a less enlightened monarch it would be just as effective as ever
against the interests of the country. Happily, however, the era of
progressive reform, which illustrated the inauguration of the Empire,
continues.
CHILDREN OF THE LOWER CLASS
The Government is now vested in a Council of State, composed of

a Chancellor, six Ministers, five Councillors, and a Chief Secretary.
The will of the sovereign is, however, supreme. The Departments of
State are conducted by nine ministers, chief of whom is the Prime
Minister, assisted in his Cabinet by the President of the Privy
Council, the Ministers of the Household, of Foreign Affairs, Home
Affairs, Finance, War, Law, Education, and Agriculture. With
improved internal administration many of the abuses which existed
under the old system have disappeared. There are still many
grievances, and the working of the new machine of State cannot be
said to give unalloyed satisfaction. Justice is still hedged about with
bribery; official corruptness admits of the venal purchase of office.
Much outcry accompanies the sweeping of the Augean stables; and,
at present, the advantages of the improvements hardly justify the
ecstatic jubilation by which their introduction was greeted. It is early
yet to prophesy; but, if the honourable administration of the public
departments can be obtained, there is no reason why success
should not attend the innovation. The responsibility for the working of
the administrative machine, however, rests, in the interval, entirely
upon the shoulders of the foreign advisers. It remains to be seen,
therefore, if the united services of these distinguished people can
prolong in any degree the era of honest government in Korea.
CHAPTER X
Farmers—Farming and farm animals—Domestic industries—Products—Quality
and character of food-stuffs
The Koreans are an agricultural people, and most of the national

industries are connected with agriculture. More than seventy per
cent. of the population are farmers; the carpenter, the blacksmith,
and the stonemason spring directly from this class, combining a
knowledge of the forge or workshop with a life-long experience of
husbandry. The schoolmaster is usually the son of a yeoman-farmer;
the fisherman owns a small holding which his wife tills while he is
fishing. The farming classes participate in certain industries of the
country; the wives of the farmers raise the cotton, silk, linen, and
grass-cloth of the nation, and they also convert the raw material into
the finished fabrics. The sandals, mats, osier and wooden wares
which figure so prominently in Korean households, are the work of
the farming classes in their leisure moments. The officials, the
yamen runners, the merchants, inn-keepers, miners, and junk-men
are not of this order, but they are often closely connected with it. The
Government exists on the revenue raised from agriculture; the
people live upon the fruits of the soil; Korean officials govern whole
communities given over to agricultural labour. The internal economy
of the country has been affiliated for centuries to the pursuits and
problems of agriculture. Koreans are thus instinctively and intuitively
agriculturists, and it is necessarily along these lines that the
development of the country should in part progress.
It is impossible not to be impressed by a force which works so
laboriously, while it takes no rest save that variety which comes with
the change of season. The peaceable, plodding farmer of Korea has
his counterpart in his bull. The Korean peasant and his weary bull
are made for one another. Without his ruminating partner, the work
would be impracticable. It drags the heavy plough through the deep
mud of the rice-fields, and over the rough surface of the grain lands;

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DEPRECIATION, COST RECOVERY, AMORTIZATION, AND DEPLETION

SOLUTIONS TO PROBLEM MATERIALS

3. (LO 1) Land improvements have a MACRS class life of 15 years.

4. (LO 2) The relevant issues for Henry:

9. (LO 2) The following issues are relevant for Jim.

19. (LO 7) The following issues are relevant for George.

• Are all of the expenditures qualifying expenditures?

2015: $2,800 × .10 = $280.

2016: $2,800 × .20 = $560.

Diana’s $34,125 ($32,500 + $1,625) deduction is computed as follows.

Year MACRS Amount Recovery Limitation Deduction Allowed

Furniture (7-year class property)

Computers (5-year class property)

2015: $3,800,000 × .00535 (Exhibit 8.9) = $20,330

b. 2019: $3,800,000 × .02564 (Exhibit 8.9) × 6.5/12 = $52,776

$1,500,000 × 2.576% (Exhibit 8.9) = $38,640

2015: $10,800,000 × .01605 (Exhibit 8.9) = $173,340

2025: $10,800,000 × .02564 (Exhibit 8.9) = $276,912

b. 2021: $1,300,000 × .03636 (Exhibit 8.9) × 10.5/12 = $41,360

42. (LO 2) MACRS cost recovery (straight-line method)

b. 7-year class property

Section 179 amount of $500,000 (limited to $140,710) 140,710

46. (LO 3, 4) Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

TAX FILE MEMORANDUM

MACRS cost recovery:

Deduction for 2015

So the deduction for 2014 is $11,160; for 2015, it is $3,200.

§ 179 expense $25,000

Deduction for 2016

Cost recovery recapture in 2016

52. (LO 2, 4, 9) Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

TAX FILE MEMORANDUM

55. (LO 2, 7, 9) Hoffman, Young, Raabe, Maloney, & Nellen, CPAs

October 15, 2015

Mr. Mike Saxon

Dear Mr. Saxon:

John J. Jones, CPA

October 15, 2015

FROM: John J. Jones

SUBJECT: Mike Saxon: Calculations of amount of recovery depending on the allocation of

Additional deductions in first year under alternative 1

*Startup expenses do not include interest expense.

60. Net income from Writers Anonymous (Note 1) $ 17,500

Tax on $4,613 from 2014 Tax Table $ 463

(1) The net income of Writers Anonymous is calculated as follows.

(3) Furniture and fixtures:

(4) The self-employment tax is calculated as follows (see Chapter 13).

1. Net earnings from self-employment. $17,500