Depreciation And Cost-Recovery Concepts - Answer Key

1. C

Timber depletion is based on the cost of timber and does not include any part of the cost of land. Therefore, it must be computed using the cost depletion method.

2.
B

The maximum deduction under Section 179 in the first year is $500,000 for equipment purchased for $2 million or less.

3.
B

For new equipment purchased for more than $2 million, the $500,000 Section 179 equipment deduction is reduced dollar-for-dollar. $2,350,000 - $2,000,000 = $350,000

$500,000 - $350,000 = $150,000

4.
D

Since MACRS is a 200% declining balance depreciation method, it will achieve the highest allowable depreciation expense. Section 179 deduction should always be considered for immediate deduction if the property owner is seeking a maximum deduction, but it was not one of the answers for this scenario.

5.
C

Intangibles not included under Section 197 for amortization include: sports franchises, interests in land, certain computer equipment, interests under existing indebtedness, certain financial contracts and interests in a partnership, trust, estate or corporation.

6.
A

The Section 179 is deductible up to taxable income with a maximum of $500,000 in the first year. Any unused portion of the deduction can be carried forward into future tax years. Value Cola is eligible for a $500,000 deduction, but only $275,000 can be used in year one. The remaining $225,000 can be carried forward.

7.
D

MACRS = 20% (x) $30,000 = $6,000. The business use percentage is then applied to the MACRS figure. $6,000 (x) 75% = $4,500.

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