EA2 Study Unit 7.1-7.5 Questions PDF

EA2 Study Unit 07 Practice Questions 1)On December 31, 2023, John sold an apartment building for \$243,500. He had purchased the building several years ago for \$192,500. The depreciation deducted as of December 31, 2022, was \$49,000. In 2023, the depreciation deducted was \$7,000. Under an accele...

EA2 Study Unit 07 Practice Questions 1)On December 31, 2023, John sold an apartment building for \$243,500. He had purchased the building several years ago for \$192,500. The depreciation deducted as of December 31, 2022, was \$49,000. In 2023, the depreciation deducted was \$7,000. Under an accelerated method, total depreciation would include \$27,000 of excess depreciation. What amount may John treat as a Sec. 1231 gain? A.\$80,000 Answer (A) is incorrect.\ Recapture does not apply to residential rental property. B.\$243,500 C.\$27,000 **D.\$107,000** **Answer (D) is correct.\ The sale of the apartment building resulted in a realized gain of \$107,000 (\$243,500 selling price -- \$136,500 adjusted basis). The adjusted basis equals the \$192,500 purchase price minus depreciation deducted of \$49,000 and \$7,000. The building is Sec. 1250 residential real property. The realized gain is recognized as Sec. 1231 gain since residential rental property uses the S-L method. No accelerated method would apply.** === 9)Chris, a tennis pro, has built a tennis facility to suit her business needs. During Year 1, Chris purchased five ball machines for \$3,500. Depreciation was correctly allowable on the ball machines as follows: Year 1 \$ 500; Year 2 \$1,250 Chris sold all of the ball machines in January of Year 3 for \$2,500. What is the amount and character of the disposition of the ball machines? Ordinary Income Sec. 1231 Gain A. Ordinary Income \$0 Sec. 1231 Gain \$750 Answer (A) is incorrect.\ Section 1245 requires the recapture of previously allowable depreciation as ordinary income. B. Ordinary Income \$1,750 Sec. 1231 Gain \$0 **C. Ordinary Income \$750 Sec. 1231 Gain \$0** **Answer (C) is correct.\ A gain on the sale or other disposition of Sec. 1245 property is taxed as ordinary income to the extent of all depreciation or amortization deductions previously claimed on the property. The amount treated as ordinary income is the excess of the lower of (1) the property's recomputed basis or (2) the amount realized or fair market value over the adjusted basis of the Sec. 1245 property. The recomputed basis is the property's adjusted basis plus previously allowed or allowable depreciation or amortization reflected in the adjusted basis. Chris realizes a \$750 gain on the sale, and her previously allowable depreciation was \$1,750. Therefore, Chris will recognize \$750 of ordinary income and not recognize a Sec. 1231 gain**. D. Ordinary Income \$500 Sec. 1231 Gain \$250 === 12)Karey bought a small shopping mall 10 years ago for a total price of \$2 million. Karey chose to use straight-line depreciation and deducted \$423,000 before the mall was sold for \$2.5 million on December 31 of the current year. The gain on the sale should be reported as **A.\$923,000 Sec. 1231 gain.** **Answer (A) is correct.\ Real property is classified as Sec. 1250 property. Under Sec. 1250, only depreciation in excess of straight-line is recaptured. Since real property must be depreciated under the straight-line method according to the MACRS rules, no Sec. 1250 recapture is required for real property held for more than 1 year.** **Original cost \$ 2,000,000** **Less: Depreciation (423,000)** **Adjusted basis \$ 1,577,000** **Sales proceeds \$ 2,500,000** **Less: Adjusted basis (1,577,000)** **Realized and recognized gain \$  923,000** B.\$500,000 capital gain. C.\$423,000 ordinary income and \$500,000 Sec. 1231 gain. Answer (C) is incorrect.\ For Sec. 1250 property, only depreciation claimed in excess of straight-line depreciation must be recaptured as ordinary income. D.\$923,000 ordinary income. === **Practice Exam Review --- Study Unit 7.1-7.5 (20 Questions selected). Passing Score: 70 %** 2)Canary owns a zinc mine for which he paid \$900,000. He has claimed \$410,000 in depletion in prior years. There were 750,000 tons of zinc when Canary acquired the mine. The beginning-of-the-year estimate indicated 350,000 tons of zinc remained. In the current year, he sold 90,000 tons of zinc. His gross income from the zinc was \$1.5 million, and his taxable income before depletion was \$380,000. The depletion rate for zinc is 22%. What is Canary's percentage depletion deduction for the current year? A.\$126,000 Answer (A) is incorrect.\ Percentage depletion, not cost depletion, is used. B.\$108,000 C.\$330,000 **D.\$190,000** **Answer (D) is correct.\ Section 611(a) authorizes a reasonable allowance for depletion of mines, oil and gas wells, other natural deposits, and timber. Percentage depletion rates (for property other than oil and gas wells) are provided in Sec. 613 as the specified percentage (22% for zinc) of the gross income from the property (excluding any rents or royalties paid or incurred by the taxpayer with respect to the property). This depletion allowance may not exceed 50% of the taxpayer's taxable income from the property computed before the allowance for depletion. Percentage depletion is the lesser of** 1. **22% of gross income, i.e., 22% × \$1,500,000 = \$330,000 or** 2. **50% of taxable income, i.e., 50% × \$380,000 = \$190,000.** **Canary's percentage depletion deduction is thus limited to \$190,000 (50% of his taxable income).** === 6)Allen purchased a trademark on January 1 of last year for \$150,000. On January 1 of this year, Allen sold the trademark for \$200,000. How much of Allen's gain on the sale of the trademark is **Sec. 1245 gain?** A.\$5,000 B.\$60,000 **C.\$10,000** **Answer (C) is correct.\ Under Sec. 197, a trademark is an intangible asset that is amortizable over a 15-year period, beginning in the month of acquisition. Total amortization for the period January 1 of last year through January 1 of this year equals \$10,000 (\$150,000 ÷ 15). Allen's realized gain is \$60,000 \[\$200,000 sales price -- (\$150,000 cost -- \$10,000 amortization)\]. Section 1245 requires the gain to be recognized as ordinary income to the extent of the amortization taken. Therefore, \$10,000 of the \$60,000 gain is Sec. 1245 gain \[Sec. 1245(a)(3)\].** D.\$50,000 Answer (D) is incorrect.\ Only the amortization is Sec. 1245 gain. === 9)An election to amortize is deemed to have been made for qualifying costs of organization for a partnership. Which of the following is **NOT** considered a qualifying cost? **A.The costs of acquiring assets for the partnership.** **Answer (A) is correct.\ A partnership can amortize an organizational cost only if it meets all of the following tests:** 1. **It is for the creation of the partnership and not for starting or operating the partnership trade or business.** 2. **It is chargeable to a capital account.** 3. **It could be amortized over the life of the partnership if the partnership had a fixed life.** 4. **It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business.** **Organizational costs include the following fees:** 1. **Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement.** 2. **Accounting fees for services incident to the organization of the partnership.** 3. **Filing fees.** **The cost of acquiring assets is included as part of the cost of the assets.** B.Legal fees for preparation of the partnership agreement.  C.Accounting fees for services incident to the organization of the partnership.  D.A cost incurred in the creation of the partnership and not for starting or operating the partnership trade or business. Answer (D) is incorrect.\ A cost incurred in the creation of the partnership and not for starting or operating the partnership trade or business is an organizational cost, which can be amortized. === 13)Donny owns and leases a coal mine to Brian. The lease agreement states that Brian will pay Donny \$4 per ton royalty on coal mined. *What is Brian's ***percentage depletion deduction*** for the current year from the information given below?* Gross income from coal \$250,000 Income from trucking coal \$20,000 Royalty paid Donny \$30,000 Taxable income on coal (excluding depletion) \$40,000 Coal depletion rate 10% A.\$25,000 B.\$22,000 **C.\$20,000** **Answer (C) is correct.\ Section 611(a) authorizes a reasonable allowance for depletion of mines, oil and gas wells, other natural deposits, and timber. Percentage depletion (for other than oil and gas wells) is provided in Sec. 613 as the specified percentage (10% for coal) of the gross income from the property (excluding any rents or royalties paid or incurred by the taxpayer with respect to the property). This depletion allowance may not exceed 50% of the taxpayer's taxable income from the property computed before the allowance for depletion. Percentage depletion is the lesser of** 1. **10% of gross income, i.e., (\$250,000 -- \$30,000 royalty) × 10% = \$22,000; or** 2. **50% of taxable income, i.e., \$40,000 × 50% = \$20,000.** **Brian's percentage depletion deduction is thus limited to \$20,000 (50% of his taxable income).** D.\$24,000 Answer (D) is incorrect.\ The amount of \$24,000 is 60% of taxable income. === 18)In 2020, Ben purchased a truck for \$15,000. In 2020, he claimed a \$3,000 Sec. 179 deduction and began depreciating the truck. He sold the truck in 2023 for \$13,000. Prior to the sale, Ben claimed MACRS deductions of \$8,000. Had Ben claimed straight-line depreciation, he would have claimed \$6,000 prior to the sale. ****What amount of gain on the sale is treated as ordinary income in 2023?**** A.\$11,000 B.\$8,000 Answer (B) is incorrect.\ Section 179 deductions are treated as previously allowable depreciation. **C.\$9,000** **Answer (C) is correct.\ Since this property is depreciable business property that is personal in nature, under Sec. 1245, any realized gain must be recognized as ordinary income to the extent of any depreciation previously taken. Ben realizes a \$9,000 gain \[\$13,000 amount realized -- (\$15,000 basis -- \$11,000 depreciation)\]. He will recapture \$9,000 of this gain as ordinary income because the realized gain is less than the previously allowable depreciation (\$11,000).** D.\$2,000 === 19)Matthew acquired a Sec. 1250 residential rental building for \$200,000. He sold the building in 2023 for \$300,000. Matthew depreciated his building using the straight-line method, deducting \$120,000 in depreciation. What amount of Matthew's gain is treated as ordinary income? A.\$220,000 **B.\$0** **Answer (B) is correct.\ The amount of Sec. 1250 recapture is the lesser of the gain realized or the amount of additional depreciation (accelerated depreciation claimed in excess of straight-line depreciation). The property's adjusted basis is \$80,000 (\$200,000 -- \$120,000). The realized gain on the transaction is \$220,000 (\$300,000 selling price -- \$80,000 basis). Because residential rental property is depreciated under the S-L method, the additional depreciation is \$0. The recaptured amount (i.e., ordinary income) is the lesser of \$220,000 and \$0.** C.\$120,000 Answer (C) is incorrect.\ The amount of straight-line depreciation is not recaptured as ordinary income. D.None of the answers are correct. === 3)Which of the following statements about ADS (alternative depreciation system) is false? A.ADS can be used for some rental property, while GDS is used for some. **B.ADS is figured using the declining-balance method.** **Answer (B) is correct.\ The ADS method is straight line over longer ADS recovery periods. It is required for certain property but can be elected for any property. Once elected, the ADS method cannot be revoked. The election must be applied to all property in that class in that year except for residential rental and nonresidential real property, which can be done on a property-by-property basis.** C.ADS is required for any tax-exempt use property. D.The election to use ADS cannot be revoked. Answer (D) is incorrect.\ Once elected, the ADS method cannot be revoked. === 6)All of the following are considered Sec. 197 intangibles ****EXCEPT**** A.Covenant not to compete. B.Permit. **C.A right to receive tangible property or services under a contract or granted by a governmental agency.** **Answer (C) is correct.\ The following intangibles are Sec. 197 intangibles: goodwill, going-concern value, and covenants not to compete entered into in connection with a trade or business acquisition; workforce in place; information base; know-how; any customer- or supplier-based intangible; any license, permit, or other right granted by a governmental unit or agency; and any franchise, trademark, or trade name. A right to tangible property granted by a governmental agency is excluded from regulations for Sec. 197.** D.Workforce in place. Answer (D) is incorrect.\ A workforce in place is a Sec. 197 intangible. === 7)Which of the following statements concerning the alternative depreciation system (ADS) is ****true?**** A.The election must be made by the due date, not including extensions, for the tax return of the year in which the property was placed in service. Answer (A) is incorrect.\ The election by the due date includes extensions. B.The election to use the ADS can be revoked. **C.Excluding nonresidential real and residential rental property, the election of the ADS for a class of property applies to all property in that class placed in service during the tax year of the election.** **Answer (C) is correct.\ The ADS method is straight line over longer ADS recovery periods. It is required for certain property but can be elected for any property. Once elected, the ADS method cannot be revoked. The election must be applied to all property in that class in that year except for residential rental and nonresidential real property, which can be done on a property-by-property basis.** D.The ADS is figured using straight line, no salvage value, and the class life of the asset or 15 years if no class life is assigned. === 9)For a taxpayer to claim a deduction for depletion, (s)he must possess an "economic interest" in the natural resource. For an economic interest to be considered present, the taxpayer is only required to A.Have acquired by investment any interest in the mineral in place. B.Look solely to the extraction and sale of the mineral for a return of capital. **C.Have acquired by investment any interest in the mineral in place, and look solely to the extraction and sale of the mineral for a return of capital.D.Possess an ownership interest in the land containing the mineral in place prior to extraction.** **Answer (C) is correct.\ Regulation 1.611-1(b)(1) states that a taxpayer possesses an economic interest when (s)he has acquired by investment any interest in the mineral in place and secures income derived from the extraction of the mineral to which (s)he must look for a return of capital. The courts have said that an actual cash investment in the property is not necessary. The investment can be in the form of land in a controlling position over the natural resource or in nonmovable equipment used for the extraction and production of the mineral.** Answer (D) is incorrect.\ Ownership of the land is different from ownership of the mineral rights and is not required. --- *why?* *===* 11)In 2020, Ben purchased a truck for \$15,000. In 2020, he claimed a \$3,000 Sec. 179 deduction and began depreciating the truck. He sold the truck in 2023 for \$13,000. Prior to the sale, Ben claimed MACRS deductions of \$8,000. Had Ben claimed straight-line depreciation, he would have claimed \$6,000 prior to the sale. What amount of gain on the sale is treated as ordinary income in 2023?A.\$2,000 **B.\$9,000** **Answer (B) is correct. Since this property is depreciable business property that is personal in nature, under Sec. 1245, any realized gain must be recognized as ordinary income to the extent of any depreciation previously taken. Ben realizes a \$9,000 gain \[\$13,000 amount realized -- (\$15,000 basis -- \$11,000 depreciation)\]. He will recapture \$9,000 of this gain as ordinary income because the realized gain is less than the previously allowable depreciation (\$11,000).** C.\$8,000 D.\$11,000 Answer (D) is incorrect.\ The realized gain is less than the previously allowable depreciation. === 12)In 2023, your construction company bought and placed in service dump trucks that cost \$1,058,000 and equipment that cost \$111,000. Section 179 expensing was elected and applied \$111,000 to the equipment and \$1,049,000 to the dump trucks, for a total of \$1,160,000. ****What is the depreciable basis in each item for 2023?**** A. None of the answers are correct. B. Equipment \$111,000 Trucks \$1,058,000 Answer (B) is incorrect.\ The basis of both items is reduced by the Sec. 179 election. **C.Equipment \$0 Trucks \$9,000** **Answer (C) is correct.\ Section 179 expense is treated as depreciation. It reduces basis in the property (but not below zero) prior to computation of any other depreciation deduction allowable for the first year but only if and to the extent that the Sec. 179 deduction is elected. It is subject to recapture under Sec. 1245 as depreciation. The equipment has a depreciable basis of \$0 (\$111,000 cost -- \$111,000 Sec. 179 expensing), and the trucks have a basis of \$9,000 (\$1,058,000 cost -- \$1,049,000 Sec. 179 expensing).** D. Equipment \$111,000 Trucks \$9,000 === 17)With regard to the modified accelerated cost recovery system (MACRS), which of the following statements is ****false?**** A.ADS must be used for tangible property used predominantly outside the United States during the year. Answer (A) is incorrect.\ *ADS must be used for tangible property used predominantly outside the United States during the year.* **B.Under GDS, a 20-year property includes certain depreciable improvements to land, such as shrubbery, fences, roads, and bridges.** **Answer (B) is correct.\ Depreciable improvements to property are treated as separate property items for depreciation purposes. Under GDS, depreciable improvements to land are 15-year property. Twenty-year property includes utilities and farm buildings.** C.The alternative depreciation system (ADS) uses a straight-line rate based on longer recovery periods. D.One of the depreciation methods used under the general depreciation system (GDS) is the 200%-declining-balance method over the GDS recovery period. === 19)An election to amortize is deemed to have been made for qualifying costs of organization for a partnership. Which of the following is ****NOT considered a qualifying cost?**** A.A cost incurred in the creation of the partnership and not for starting or operating the partnership trade or business. Answer (A) is incorrect.\ A cost incurred in the creation of the partnership and not for starting or operating the partnership trade or business is an organizational cost, which can be amortized. B.Legal fees for preparation of the partnership agreement. C.Accounting fees for services incident to the organization of the partnership.  **D.The costs of acquiring assets for the partnership.** **Answer (D) is correct.\ A partnership can amortize an organizational cost only if it meets all of the following tests:** 1. **It is for the creation of the partnership and not for starting or operating the partnership trade or business.** 2. **It is chargeable to a capital account.** 3. **It could be amortized over the life of the partnership if the partnership had a fixed life.** 4. **It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business.** **Organizational costs include the following fees:** 1. **Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement.** 2. **Accounting fees for services incident to the organization of the partnership.** 3. **Filing fees.** **The cost of acquiring assets is included as part of the cost of the assets.** === 1)On August 1, 2023, Bruce opened a framing and art supply store. Prior to opening the business, he incurred the following costs: Legal fees related to setup \$25,000 Office equipment 15,000 Interest expense for funds borrowed prior to opening 5,000 Market analysis 7,500 Travel expense to secure supplier 30,000 **Total \$82,500** What is Bruce's amortization expense for start-up expenditures on his 2023 income tax return? **A.\$1,736** **Answer (A) is correct.\ Section 195 allows a taxpayer to elect to amortize start-up expenditures over a period of not less than 180 months (beginning with the month in which the business begins). A taxpayer is deemed to have made the election. Start-up expenditures are those that are paid or incurred in connection with investigating the creation or acquisition of an active trade or business or with creating an active trade or business, and that, if paid or incurred in connection with the expansion of an existing business, would be allowable as a deduction in the year paid or incurred. Interest expense does not qualify as a start-up expenditure. Office equipment would not be allowed as a deduction if incurred in connection with an existing business and is therefore not a start-up expenditure. The first \$5,000 of start-up costs are not allowed since start-up costs exceeded \$50,000 by at least \$5,000. Therefore, the permitted amortization is \$1,736 \[(\$25,000 + \$7,500 + \$30,000) × (5 ÷ 180)\].** B.\$1,875 Answer (B) is incorrect.\ The interest expense is not a start-up expenditure and is therefore not amortizable. C.\$4,167 D.\$4,500 === +-----------------------------------+-----------------------------------+ | []{#anchor}[]{#anchor-1}During | | | the current year, Ted Smith sold | | | equipment used in his diner. | | | Information about the sale of | | | equipment is as follows: | | | | | | How much of the gain should be | | | reported under Secs. 1231 and | | | 1245?[]{#anchor-2} | | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ === -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -- []{#anchor-3}[]{#anchor-4}[]{#anchor-5}Matthew acquired a Sec. 1250 residential rental building for \$200,000. He sold the building in 2023 for \$300,000. Matthew depreciated his building using the straight-line method, deducting \$120,000 in depreciation. What amount of Matthew's gain is treated as ordinary income?[]{#anchor-6} -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -- -- -- -- -- ------------------------------ --------------------------------------------------------------------------------------------------------------------------------------- 5)[]{#anchor-7}[]{#anchor-8} []{#anchor-9}Which of the following is NOT a transaction that results in a gain or loss subject to Sec. 1231 treatment?[]{#anchor-10} ------------------------------ --------------------------------------------------------------------------------------------------------------------------------------- -------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 6)[]{#anchor-11}[]{#anchor-12} []{#anchor-13}The Bearcat Corporation purchased an apartment building in October of the current year. The cost of the building was \$4,000,000 and its estimated life was 40 years. Corporate management wants to know the alternative methods of deducting the cost of the building for tax purposes. The company may use the straight-line method over 27.5 years or can elect to use the[]{#anchor-14} -------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 9)[]{#anchor-15}[]{#anchor-16} []{#anchor-17}Karey bought a small shopping mall 10 years ago for a total price of \$2 million. Karey chose to use straight-line depreciation and deducted \$423,000 before the mall was sold for \$2.5 million on December 31 of the current year. The gain on the sale should be reported as[]{#anchor-18} -------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------ 10)[]{#anchor-19}[]{#anchor-20} []{#anchor-21}All of the following statements are true regarding Sec. 197 intangible assets EXCEPT[]{#anchor-22} --------------------------------- ------------------------------------------------------------------------------------------------------------------ -- -- -- -- ​ --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 11)[]{#anchor-23}[]{#anchor-24} []{#anchor-25}In 2019, you purchased a candy-making machine for your business. The machine cost \$50,000, and you claimed a \$20,000 Internal Revenue Code Section 179 deduction for that machine. In 2023, you sold the machine for \$52,000. Your accumulated depreciation from 2019 through 2023 was \$18,974 (not including the Section 179 deduction). How much is your taxable gain, and what portion of that gain must be reported as ordinary income under Internal Revenue Code Section 1245? []{#anchor-26} --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 12)[]{#anchor-27}[]{#anchor-28} []{#anchor-29}In 2023, Mary Jane placed in service a machine that cost \$3,570,000. If she placed no other Sec. 179 property in service during the year and forgoes additional first-year depreciation, how much is her Sec. 179 maximum dollar limit?[]{#anchor-30} --------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -- -- -- -- +-----------------------------------+-----------------------------------+ | 13)[]{#anchor-31}[]{#anchor-32} | []{#anchor-33}Chris, a tennis | | | pro, has built a tennis facility | | | to suit her business needs. | | | During Year 1, Chris purchased | | | five ball machines for \$3,500. | | | Depreciation was correctly | | | allowable on the ball machines as | | | follows: | | | | | | Chris sold all of the ball | | | machines in January of Year 3 for | | | \$2,500. What is the amount and | | | character of the disposition of | | | the ball machines?[]{#anchor-34} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | 15)[]{#anchor-35}[]{#anchor-36} | []{#anchor-37}On July 1, 2023, | | | Susan opened a business supply | | | store. Prior to opening the | | | business, she incurred the | | | following costs: | | | | | | What is the maximum amount Susan | | | may deduct for 2023 if she | | | amortizes start-up costs using | | | the shortest allowed amortization | | | period?[]{#anchor-38} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | 16)[]{#anchor-39}[]{#anchor-40} | []{#anchor-41}On November 1 of | | | the current year, Karen opened a | | | business supply store. Prior to | | | opening the business, she | | | incurred the following costs: | | | | | | What amount of the start-up costs | | | may Karen amortize for the year | | | if she uses the shortest allowed | | | amortization period (ignoring any | | | immediate expensing | | | allowed)?[]{#anchor-42} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 17)[]{#anchor-43}[]{#anchor-44} []{#anchor-45}Intangible property may be depreciated (or amortized) if its use in the business or in producing income is definitely limited in duration. Which one of the following may NOT be depreciated (or amortized)?[]{#anchor-46} --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 18)[]{#anchor-47}[]{#anchor-48} []{#anchor-49}On December 31 of the current year, Willis sold an apartment building for \$500,000. He had purchased the building, and placed it in service 10 years ago, for \$742,500. The depreciation deducted as of December 31 of the previous year was \$243,000. In the current year, the depreciation deducted was \$27,000. What amount may Willis treat as a Sec. 1231 gain (loss)?[]{#anchor-50} --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -- -- -- -- +-----------------------------------+-----------------------------------+ | 19)[]{#anchor-51}[]{#anchor-52} | []{#anchor-53}On May 1 of the | | | current year, Grace, Laura, and | | | Ann opened a business called | | | Three Gals. Prior to opening | | | Three Gals, they incurred the | | | following costs: | | | | | | What amount of the start-up costs | | | may Three Gals amortize if they | | | use the shortest amortization | | | period (excluding any immediate | | | expensing allowed)?[]{#anchor-54} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ -- -- --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 20)[]{#anchor-55}[]{#anchor-56} []{#anchor-57}Which of the following transactions or events (after reduction for ordinary gain attributable to depreciation recapture) will not result in gain or loss from Sec. 1231 property? Assume all property has been held for more than 1 year and the transaction or event occurs in the current year. []{#anchor-58} --------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------- ---------------------------------------------------------------------------------------------------------------------------- 21)[]{#anchor-59}[]{#anchor-60} []{#anchor-61}A gain on the disposition of Sec. 1245 property is treated as ordinary income to the extent of[]{#anchor-62} --------------------------------- ---------------------------------------------------------------------------------------------------------------------------- +-----------------------------------+-----------------------------------+ | 22)[]{#anchor-63}[]{#anchor-64} | []{#anchor-65}Donny owns and | | | leases a coal mine to Brian. The | | | lease agreement states that Brian | | | will pay Donny \$4 per ton | | | royalty on coal mined. What is | | | Brian's percentage depletion | | | deduction for the current year | | | from the information given below? | | | | | | []{#anchor-66} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ --------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 23)[]{#anchor-67}[]{#anchor-68} []{#anchor-69}In 2023, Walt Sheen purchased and placed in service a packaging machine at a cost of \$2,990,000. He had \$6,000 taxable income from his business before considering the deduction allowed under Sec. 179. What is Walt's allowable Sec. 179 deduction for 2023?[]{#anchor-70} --------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- +-----------------------------------+-----------------------------------+ | 24)[]{#anchor-71}[]{#anchor-72} | []{#anchor-73}On July 1 of the | | | current year, Sybil opened a | | | business supply store. Prior to | | | opening the business, she | | | incurred the following costs: | | | | | | What amount of the start-up costs | | | may Sybil amortize for the year | | | if she uses the shortest allowed | | | amortization period (excluding | | | any immediate expensing allowed)? | | | | | | []{#anchor-74} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | 25)[]{#anchor-75}[]{#anchor-76} | []{#anchor-77}Mr. Skiles | | | purchased the following business | | | equipment: | | | | | | How much of his purchase is | | | considered listed property for | | | depreciation | | | purposes?[]{#anchor-78} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | 25)[]{#anchor-79}[]{#anchor-80} | []{#anchor-81}Mr. Skiles | | | purchased the following business | | | equipment: | | | | | | How much of his purchase is | | | considered listed property for | | | depreciation | | | purposes?[]{#anchor-82} | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ --------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------- 26)[]{#anchor-83}[]{#anchor-84} []{#anchor-85}In order to determine the MACRS deduction using the percentage tables, all of the following must be determined EXCEPT[]{#anchor-86} --------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 27)[]{#anchor-87}[]{#anchor-88} []{#anchor-89}On July 1, 2023, Ms. K, who is single and owns and operates a specialty shop, paid \$17,500 for a new automobile which she uses 60% of the time for business purposes. She purchased no other business assets in 2023. The taxable income of the business before the Sec. 179 deduction is \$100,000. If she elects not to claim any bonus depreciation, what is the maximum allowable Sec. 179 deduction that Ms. K may elect to take in 2023?[]{#anchor-90} --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 28)[]{#anchor-91}[]{#anchor-92} []{#anchor-93}In 2021, Paige signed a 6-year lease for a building to use in her business. In 2023, she installed shelves and made other leasehold improvements to the building for a total of \$8,000. She can[]{#anchor-94} --------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- 29)[]{#anchor-95}[]{#anchor-96} []{#anchor-97}All of the following statements with respect to the disposition of Sec. 1245 property are true EXCEPT[]{#anchor-98} --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- ---------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 30)[]{#anchor-99}[]{#anchor-100} []{#anchor-101}Most tangible depreciable property falls within the general rule of MACRS. However, the law requires use of the ADS for certain property. ADS must be used for all of the following EXCEPT[]{#anchor-102} ---------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------