Because businesses are generally not allowed to expense the cost of assets immediately, what do they do instead? correct answers - the must capitalize the cost of the assets (record cost on balance sheet) and depreciate the cost of the asset over the cost recovery period (the depreciable life of th...
ACCT 5400 Quiz 7 || A+ Graded Already.
Because businesses are generally not allowed to expense the cost of assets immediately, what do
they do instead? correct answers - the must capitalize the cost of the assets (record cost on
balance sheet) and depreciate the cost of the asset over the cost recovery period (the depreciable
life of the asset defined by tax laws)
What are the three types of cost recovery methods? correct answers - depreciation
- depletion
- amortization
What assets are depreciated? correct answers - tangible personal property and real property
(excluding land)
What assets are amortized? correct answers - intangible property
What assets are depleted? correct answers - natural resources
What is included in an asset's cost basis? correct answers - all expenses needed to purchase the
asset, prepare it for use, and begin using it
When does a firm start recovering the cost of an asset? correct answers - once the asset is placed
in service (used in the business)
When a business incurs additional costs associated with an asset after the asset has been placed
into service, do the additional costs affect the assets tax basis? correct answers - NO
- if the costs are for routine maintenance -> expense costs immediately
- if costs significantly extend the asset's useful life -> record a new asset separate from the
original asset
How does a business determine an asset's tax basis when it acquires multiple assets for one
purchase price? correct answers - the business must allocate a portion of the purchase price to
each asset based on the asset's value relative to the total value of all the assets acquired in the
same purchase
What is an asset's basis when the asset was converted from personal use to business use? correct
answers - the basis = lesser of
1) cost
2) FMV on the date of conversion
What is an asset's basis when the asset was acquired through a nontaxable exchange? correct
answers - the basis = basis of the assets transferred in the transaction
What is an asset's basis when the asset was received as a gift? correct answers - if FMV > Basis
on gift date, the basis carries over from the giftor
, - if FMV < Basis on gift date, the basis is the giftor's basis if sold for a gain AND the FMV on
gift date if sold for a loss (dual basis)
What is an asset's basis when the asset was acquired through inheritance? correct answers - the
basis = FMV on date of death or estate valuation
What must a taxpayer know to compute MACRS depreciation? correct answers - the asset's
original cost (i.e. starting basis)
- the applicable depreciation method
- the asset's recovery period (or depreciable life)
- the applicable depreciation convention
What depreciation methods can be used for personal property? correct answers - 200% (double
declining) method
- 150% declining balance method (AMT - won't calculate for this class)
- straight-line method
*- must select one depreciation method per asset class per year*
Double declining/200% depreciation method correct answers - default depreciation method for
personal property
- takes twice the straight-line amount of depreciation each year until switching to the straight-line
method in the year that the straight line method over the remaining life provides a greater
depreciation expense
Depreciation recovery periods for personal property under the double declining balance method
correct answers - office furniture, fixtures, machinery and equipment: 7 years
- cars, light-duty trucks, computers, and peripheral equipment: 5 years
- these recovery periods are predetermined by the IRS; there are 3/5/7/10/15/20 year personal
property assets
Depreciation conventions for personal property correct answers - conventions specify the portion
of a full year's depreciation the business can deduct for an asset in the year the asset is first
placed in service and in the year the asset is sold
- half year convention
- mid quarter convention
Half year convention correct answers - assumes the asset is put into service/sold on July 1st
- most common for tangible personal property
- 1/2 of a year's depreciation is allowed for in the first year of an asset's depreciable life
- 1/2 of a year's depreciation is allowed in the earlier of
1) the last year of an asset's depreciable life or
2) the year the asset was disposed of
- if asset is held until fully depreciated -> IRS tables automatically account for half-year
convention
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