Module 10
Cost Recovery Deductions
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1. Art Devlin purchased a personal automobile in 1994 for $15,000. In May 1998, Art paid $3,500 to replace the engine in the car, and the car's value after this overhaul was estimated to be $13,000. In June 1999, Art contributed the automobile to PC Solutions, his closely-held consulting business, at a time when the car was worth $10,500. What is the cost recovery basis of the automobile contributed by Art Devlin to PC Solutions?
a. $10,500
b. $13,000
c. $14,000
d. $15,000
e. $18,500

2. Mayday Corporation, a calendar-year taxpayer, acquired two items of personalty in the current year: a mainframe computer costing $50,000 was acquired on April 12, and a drill press costing $40,000 was acquired on November 2. Reference to Rev. Proc. 87-56 reveals that the computer has a "class life" of 6 years; however, the drill press is not listed in the classes of assets. Assuming that Sec. 179 expensing is not elected, what is Mayday's total cost recovery deduction for a drill press and mainframe computer in the current year?
a. $12,861
b. $13,928
c. $15,716
d. $18,000
e. $19,500

3. Mills Corporation spent $211,000 for computers and printers (5-year MACRS class property) in 2000. Mills' taxable income before considering any possible Sec. 179 deduction is $10,000. Assume that Mills elects Sec. 179 expensing for the computers and printers in 2000. What is Mills Corporation's maximum Sec. 179 deduction?
a. $8,000
b. $9,000
c. $10,000
d. $11,000
e. $20,000

4. AP Corporation, a calendar-year taxpayer, acquired the following two assets in the current year: a new factory building (39-year MACRS life) on February 5th for $800,000, and new office desks (10-year class life, 7-year MACRS life) on March 6th for $20,000. What is AP Corporation's current-year cost recovery deduction if they elect ADS straight-line recovery?
a. $18,504
b. $18,928
c. $18,949
d. $20,358
e. $20,807

5. Jill Harris purchased portable communications equipment for $10,000 in May of the current year. The communications equipment is listed property and has a MACRS and ADS recovery period of 5 years. During the year, Jill used the equipment 45% of the time for business, 15% of the time in managing her bond investments, and 40% of the time for personal reasons. Assuming that Jill makes all necessary elections, what is her maximum cost recovery deduction for equipment purchased in the current year?
a. $0
b. $450
c. $600
d. $900
e. $1,200

6. Mary Wilguess purchased a business automobile for $30,000 in 1999. During 1999, she used the automobile 80% of the time in her sole proprietorship business, 10% of the time managing her rental property, and 10% of the time for personal reasons. What is Mary's maximum cost recovery deduction for the automobile in 1999?
a. $2,448
b. $2,754
c. $3,060
d. $4,800
e. $5,400

7. Crane Corporation owns and operates its own research facility. During the current year, Crane spent the following amounts on research and experimentation: $46,000 for salaries, $12,000 for utilities, $18,000 for materials, $10,000 for patterns and dies, and $37,500 for laboratory equipment (appropriate MACRS deduction - $4,000). Assume that the economic benefits of the research are first realized in December of the current year, and Crane makes the appropriate election to maximize the cost recovery deduction for R&E. What is Crane's maximum cost recovery deduction for R&E in the current year?
a. $0
b. $1,500
c. $1,800
d. $90,000
e. $123,500

8. Ackley Corporation paid $450,000 in the current year to acquire all oil and gas rights to North Property. The deposits contain an estimated 500,000 barrels of oil. During the current year, Ackley produced 150,000 barrels of oil and sold 100,000 barrels. What is Ackley's cost depletion deduction?
a. $90,000
b. $135,000
c. $300,000
d. $450,000
e. $675,000

9. Denson Company acquired rights to mine for sulphur (with a 22% statutory rate) on South Property. Denson's results for the current year were as follows:

Sales (100,000 tons @ $14)$1,400,000 
Royalty payments to property owners(112,000)
Gross income from property$1,288,000 
Direct expenses from operations(948,000)
Taxable income from property$   340,000 
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What is Denson Company's percentage depletion deduction?
a. $74,800
b. $170,000
c. $283,360
d. $308,000
e. $644,000



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